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Fed's Move to Buy $600 billion worth of U.S. government bonds

Disputatious71

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Monetizing the debt can be used as a component of quantitative easing strategies, which involve the creation of new currency by the central bank, which may be used to purchase government debt, or can be used in other ways.

However, there can be an insidious effect. As Nouriel Roubini, aka Dr Doom, noted:

When governments reach the point where they are borrowing to pay the interest on their borrowing they are coming dangerously close to running a sovereign Ponzi scheme. Ponzi schemes have a way of ending unhappily. To get out of the Ponzi trap, governments will have to increase tax revenues, or cut spending, or monetize the debt--or most likely do some combination of all three.
 

washunut

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Interesting article today in Barrons. They talk about the Chinese government investing more in hard assets and less in U.S. government securities. As their economy moves to more of a supporting internal demand versus exports to America, they can stop propping up our economy by buying our government debt. As China and the other countries see the Fed moving to devalue the U.S. dollar it would be foolish to think that they will continue to absorb loses on their treasury investments. So it seems there is a race in this devaluation game. Can we crater the dollar before the Asian countries that hold trillins of dollars of government debt pull out.

Who can seriously say this is an action of the world's superpower.
 

Missed AB

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Bernanke defends new Fed plan to boost economy - Yahoo! News

German Finance Minister Attacks Fed Move Again : Report - ABC News

What will this do to the U.S. economy? Will it cause inflation or stagflation? If so, what is the best way to prepare for it?

An increase in monetary supply will cause a decrease in the dollar purchasing power. However, depending on what other countries and the EU do with their currency, the effect may be minor.

Germany does not want to see a weak dollar because this makes German exports to the US less favorable in the US market.

The best way to prepare for it depends on what you mean. If you are looking to make money, run a business, sell property, buy assets... My specialty is on investing specifically with stock.

Assuming you want to take advantage of the best and worst case situation here. Personally I feel gold is in a bubble formation, so I would stay away from gold right now. If you have to own metals, platnium or silver are better plays. There is a new precious metal ETF GLTR which has gold, silver, copper, and a few other metals. Mix that with international currency such as FXE or a mutual fund which specializes in multinational government bonds. As these currencies will see the benefit of a lower USD, and pay dividends.

My opinion:

Go long with DIA, SPY, QQQ, DVY, OMC, XOM, MO, KO, PEP, APPL, and hedge by buying some out of the money LEAP put options on DIA, SPY, QQQ.

If you think inflation is going to be a long term problem look into funds that short the US Tbills.
If you think that things will really crash, buy VIX or DOG.
IF you want to play it safe and just store your wealth, buy TIPS from the US government, or in and ETF or Mutual fund.
 

Lord Tammerlain

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Interesting article today in Barrons. They talk about the Chinese government investing more in hard assets and less in U.S. government securities. As their economy moves to more of a supporting internal demand versus exports to America, they can stop propping up our economy by buying our government debt. As China and the other countries see the Fed moving to devalue the U.S. dollar it would be foolish to think that they will continue to absorb loses on their treasury investments. So it seems there is a race in this devaluation game. Can we crater the dollar before the Asian countries that hold trillins of dollars of government debt pull out.

Who can seriously say this is an action of the world's superpower.

The Chinese have been investing in hard assets for the last few years, they knew this was coming, just not exactly when

As for being the action of the worlds superpower, Britain did the equivalent of it a couple of times during its prime time, the US did the equivalent in the early 70s when Nixon took the US off the gold standard.
 

washunut

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The Chinese have been investing in hard assets for the last few years, they knew this was coming, just not exactly when

As for being the action of the worlds superpower, Britain did the equivalent of it a couple of times during its prime time, the US did the equivalent in the early 70s when Nixon took the US off the gold standard.

Not sure your point. Is it that Britain is still a world superpower?? The U.S. was not the largest debtor nation in the world in the 70's.

As to the Chinese, while they have been investing in hard assets in previous years, those investments were still materially smaller than their investments in U.S. debt. Unless the Arab oil producers and Asian exporters buy our debt the Fed will have to be the buyer of last resort of our trillion dollar deficits.

You are wrong to equate the financial position of the U.S. today and 40 years ago. When you look at the debt to GDP ratio back then we had a relatively clean balance sheet.
 

Lord Tammerlain

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Not sure your point. Is it that Britain is still a world superpower?? The U.S. was not the largest debtor nation in the world in the 70's.

As to the Chinese, while they have been investing in hard assets in previous years, those investments were still materially smaller than their investments in U.S. debt. Unless the Arab oil producers and Asian exporters buy our debt the Fed will have to be the buyer of last resort of our trillion dollar deficits.

You are wrong to equate the financial position of the U.S. today and 40 years ago. When you look at the debt to GDP ratio back then we had a relatively clean balance sheet.

China still has a around 800 billion in US agency debt, they just have not been increasing it much over the last few years, but this is something the chinese government has been concerned about for at least 4 years.

The US in the 70s was still a creditor nation, during the Reagan admiin it became the worlds largest debtor nation.

And yes in the 70s the debt to GDP was far better then it is now or was in the 80s.

The point is yes a superpower can do the above actions and still remain a superpower, the UK remained one for decades after it started to fail economically, the US will remain a superpower albit a diminished one after this crisis is over
 

washunut

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China still has a around 800 billion in US agency debt, they just have not been increasing it much over the last few years, but this is something the chinese government has been concerned about for at least 4 years.

The US in the 70s was still a creditor nation, during the Reagan admiin it became the worlds largest debtor nation.

And yes in the 70s the debt to GDP was far better then it is now or was in the 80s.

The point is yes a superpower can do the above actions and still remain a superpower, the UK remained one for decades after it started to fail economically, the US will remain a superpower albit a diminished one after this crisis is over

Well call it what you will. I do not know many who considered Britain a superpower after WWII. The U.S. due to it's military superiority will remain a superpower of sorts for some time as well. But unless they are willing to have wars all over the world they will be materially less able to impose their will.

The Chinese have dome a good job of feeding the U.S. beast as they needed it to export their growing manufacturing base. As they come to rely more on domestic comsumption and that of other Asian nations the U.S. market will come to be of less importance. Even the fact that they are investing less is hurting the U.S. economy currently.

Do you really believe that the Fed can keep this ponzi scheme of monetarizing the federal deficit for decades? What exactly would be the meaning of the value of the dollar if we print an additional trillion dollars of paper with numbers on it.
 

Lord Tammerlain

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Well call it what you will. I do not know many who considered Britain a superpower after WWII. The U.S. due to it's military superiority will remain a superpower of sorts for some time as well. But unless they are willing to have wars all over the world they will be materially less able to impose their will.

The Chinese have dome a good job of feeding the U.S. beast as they needed it to export their growing manufacturing base. As they come to rely more on domestic comsumption and that of other Asian nations the U.S. market will come to be of less importance. Even the fact that they are investing less is hurting the U.S. economy currently.

Do you really believe that the Fed can keep this ponzi scheme of monetarizing the federal deficit for decades? What exactly would be the meaning of the value of the dollar if we print an additional trillion dollars of paper with numbers on it.

As for Britain I was thinking more along the lines of pre WW2 not post.

As for the US

It still will have the most powerful military, by a long shot, the largest economy for at least 15 years, a GDP per capita a few multiples that of the China (I am using China as it would be the only country to form the largest economy other then the US. Meaning no matter what the US will still be the most power nation on earth. It will not have the same level of dominance that it has had over the last 15 years of course.\

No the fed can not keep the ponzi scheme operating for too long. Never stated it could. What will happen of course (best case in my opinion) the standard of living for the majority of americans drops by about 15-20% within 10 years, and most likely within 5-7. The dollar will be replaced as the world reserve currency by something issued from the IMF (not enough gold to allow it to become the worlds reserve currency)
 

washunut

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As for Britain I was thinking more along the lines of pre WW2 not post.

As for the US

It still will have the most powerful military, by a long shot, the largest economy for at least 15 years, a GDP per capita a few multiples that of the China (I am using China as it would be the only country to form the largest economy other then the US. Meaning no matter what the US will still be the most power nation on earth. It will not have the same level of dominance that it has had over the last 15 years of course.\

No the fed can not keep the ponzi scheme operating for too long. Never stated it could. What will happen of course (best case in my opinion) the standard of living for the majority of americans drops by about 15-20% within 10 years, and most likely within 5-7. The dollar will be replaced as the world reserve currency by something issued from the IMF (not enough gold to allow it to become the worlds reserve currency)

I do agree with your last paragraph about the US standard of living moving down. Probably impossible to try and quantify.

Perhaps one way to look at it would be to look at the realative worth of the average factory worker here or in China. Probably a decent cost per hour in the U.S. would be about $30/ hour fully loaded ( all benefits and taxes). In China someone manning the same machine probably gets paid no more than $2 per hour. So it might take several generations but not sure what the rationale is for the 15:1 ratio. Thus over time that will come closer in balance, then taking into account the added layer of costs to have a factory in China versus the U.S.

The trick will be for those who do have assets to find a safe place to invest to mitigate the devaluation of the dollar which has to happen.
 
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