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Discussion Starter #1 (Edited)
Can someone explain how the Fed buying 600 Billion in US Treasury bonds is good for the stock market or will help the ailing US economy?

The US is just buying debt from themselves because no one else will buy it.

From what I understand, the Fed is owned by the banks and they are buying debt from the US Government, who lent the money to the banks.

Reminds me of the sidewalk shell game...........can this ponzi game go on indefinately?
 

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I will help if it keeps deflation away. But that help will only kick the can down the road. The US will have to address all that debt at some point and it may be a near hyperinflation scenario that gets us there.

Realistically with all this money thrown around why not try to make America stronger like rebuilding the school system and so on instead of bailing out banks.
 

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It means that some people will have $600 billion in cash that they need to spend elsewhere, in other debt securities, stocks, real assets, consumption, whatever. That will increase prices, and the name of the game is prevent prices from falling.
 

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Well done guys. Also I would like to add an simple explanation I read on yahoo finance news today:

"Here's how it's supposed to work this time: The Fed buys Treasury bonds from banks, providing them cash to lend to customers. Buying so many bonds also lowers interest rates because demand for Treasurys leads to higher prices and lower yields. Interest rates are linked to yields. Lower rates encourage people to borrow money for a mortgage or another loan."

Source
 

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the question is: will it make a difference ?...the banks are all-ready flush with cash...and they refuse to lend to small businesses who can't seem to get loans

large businesses are borrowing money at record low interest rates but they can't sell their products

it all depends on whether the american consumer will start spending again and i have serious questions about that if home prices keep falling

the more interesting question to me is: what happens after everyone realizes it isn't working ?
 

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If mortgage rates fall, it will enable a lot of homeowners to continue making payments and keep foreclosure at bay.
It will also drive investment dollars out of bonds and into the stock market.
At least that's the idea.
 

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Discussion Starter #8
Some spot on answers.......I watched a segment on CNBC this morning and one trader/analyst put it into a little more perspective.

The Fed now owns 7 out of every 10 short term US Treasury bonds and 110% of long term bonds. This appetite for their own debt means that the yield on the bonds is going down from already low rates. Everybody else is piling into the stock market. There was also a question of "double commissions" as the US Treasury sell to the banks who then sell again to the Fed. Good income for the traders but a waste of taxpayer money.

The problem is that the banks have lots of money........or they say they do and get away with it, as long as they aren't forced to price their portfolio of mortgage bonds at market value, and they aren't lending.

Big corporations are full of cash and don't need or want to borrow.

The consumer is up to their eyeballs in debt, have had their credit limits lowered, are in bankruptcy, have lousy credit records, owe more on their homes than they are worth, can't take out home equity loans anymore, are unemployed or are afraid they soon will be. All of these factors means the consumer would like to borrow.......but can't get anyone to lend to them.

If the purpose of this QE2 is to drive the dollar lower.......it will work. If the purpose is to chase stock market prices higher......it will work. But, all it is accomplishing is driving investors into assets that are no less risky than they were before. Joe Sixpack who lives in Detroit, or Phoenix, or Seattle and is or has run out of his 99 weeks of unemployment isn't going to benefit from this. The school teacher about to get laid off from a bankrupt school board isn't going to get helped out.

Millions of people who have permantly lost their jobs because of structural changes in the US economy won't be getting any help.

The US, and Canada as well, should be investing money into building up new industries in agriculture, energy, and a return to basic manufacturing.

I think the only way that is going to happen is to close the doors on free trade.

I can see protectionism forced on the politicians by the people.
 

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The US, and Canada as well, should be investing money into building up new industries in agriculture, energy, and a return to basic manufacturing.
It will happen...it's coming.
Whether that is really the hidden agenda of the Fed or not is a matter for the conspiracy theorists among us.
But whether they like it or not, whether they want it or not, that will be the logical outcome at some point.
Nature (and economics) usually has a way of sorting itself out in the end, and during the process, cause a lot of pain to those who caused the imbalance.

For several years now, the US has been trying (by covert and overt means) to get China to appreciate its currency.
India should do the same.
The US has not been successful in that attempt, even after unveiled threats.

It's this entire imbalance between the developed and developing world, with its cheap outsourcing, cheap manufacturing, cheap labour, etc. that has brought about this imbalance.
The wastage of 4 wars in the last 20 years have exacerbated the situation.

Once the USD devalues enough that outsourcing (goods as well as services) becomes expensive and the real GDP growth type jobs return to North America and Europe, this imbalance will begin correcting itself.
Inflation will force borrowing rates higher and that will eliminate the production and consumption of junk, consumer goods.

I'm sure the policy makers in the US realize this and know it is inevitable.
So there is a larger plan and strategy behind this forced devaluation of the USD.
 

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It helps the markets (check the gains today). The only slightly negative side-effect of USD devaluation is that the standard of living of US working class will get closer to that of the Chinese working class. However, the rich will get richer and, on average, US will continue to have the highest GDP, lol.
 

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The side effects could be enormous if inflation really kicks in as threatened by the rise in commodity prices. And this inflation will be coupled with consumers that do not have a lot of money to spend. Also there is the other minor problems like massive debt and competitive devaluation of other world currencies.

Also because this is an artificial build up of risk this can reverse in a very ugly way with all the hot money flowing. I remember someone saying that bubbles are invisible when you are in them.
 

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If inflation starts to get out of hand, don't underestimate the ability of central banks to slam on the brakes. But, the CBs would be much happier worrying about inflation being too high than too low. Inflation expectations are still well rooted in the low single digits per year. The reason inflation was so hard to tame in the '80s and early '90s was because expectations for inflation were much too high and the CBs had to convince people that they were deadly serious about achieving an inflation target.
 

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This "quantitative easing" confuses me too..I understand how its supposed to work..but the logic escapes me.

Try getting spending under control.....and control the spending you are making,,,as in, try keeping track of hundreds of billions of dollars of TARP money.

( a shout out to Rob Ford here)


The US may be strong "militarily",,,,( although blowing money all over the world this way can't be too smart.)

But they seem to me to be patsies when it comes to negotiating trade deals.

Even Donald Trump said that the US negotiators were, and are, useless at business deals, and are getting their asses kicked.

I can believe it as I have watched the US get poorer and poorer over the years, and become more of a borrower every year.

This is somewhat problematic for me, as I hold lots of US dollars and assets...
but the tides will turn, as they always do...( and many of my US stocks are actually global players)

Socialists in power down there dont help either,...hope they got the message in this weeks elections.

One thing I know for sure...

No society in the history of the world has EVER taxed or spent itself into prosperity. EVER!

( hope Mcginty reads this.)
 

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Socialists in power down there dont help either,...hope they got the message in this weeks elections.
If those are socialists, our conservative government is communist as its policies are to the left of the Democrats in US.
 

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OSC,

To a point I agree with you.
Canada has a certain left leaning tilt, no doubt about it.

One of my biggest regrets is that I must confess to actually voting for Mulroney, thinking he was conservative, ( including his idiot fiance minister Michael Wilson, the father of teh GST, every penny of which was promised to be used to pay down the national debt,,,what a joke!!)

Mike Harris in Ontario was conservative in trying o lower taxes,,but s usual he put no rein on spending, leading to yet anther fiscal mess. Of course his mistakes pale in any comparison to our NDP premier Bob Rae...another joke.
Lets not even talk about Mcginty, who was elected with the promise to not raise taxes, and has been doing nothing else since getting elected.

In the end all these guys, probably including PM Harperare the same.....they just cant bring themselves to stop spending, reduce government, tackle the UNBELIEVABE amount of waste at all govt levels, and try to stop buying votes with the taxpayers own money.

Why they dont institue a "flat tax" system is beyond me.

Only hope that Rob Ford, our new mayor, will really "stop the gravy train" here in Toronto , finally.......I'll wait and see.
I actually did talk to him, as I was considering running for city council, as a "Rob Ford" candidate...and he told me he wasnt going to change now, as he has been trying to do this for the last 10 years.

anyway, this seems to have become more rant than answer....
but I hope you readers get my drift,,,and respond with your thoughts.
 

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Slacker:

I met Preston Manning once at a political function, late 1990's
Remember him??
He was the leader of the Alliance Party..a very conservative western party, ( later sort of merged into the federal PC party

Anyway he was a big proponent of going to a "flat tax" system,,,,,,but it sort of died down'
When I asked him why he wasn't pushing for it, he replied much like you, ( with that Preston Manning drawl) :

"well we couldn't figure out how it wouldn't cost the middle class more"

Seems like a silly answer to me.....at worst you could have two tax brackets..
remember ''flat tax= no deductions!

So first $20K tax free....helps the poor.

Second $80K ....12-15% period

Anything above that 25%

thats just a simplistic example....Im sure we could get a system like that to work.

Make the penalties for cheating very severe= less cheating, or black market work.

Also there could be diff inclusion rates

Capital gains...50%
rent...............50%
divs...............50%

etc etc

All in all though, we absolutely should be able to come up with a better and efficient system than what we have now,,,full of mumble jumble , which the majority of the population has no idea about or understands.

Also the wife of finace minister Jim Flaherty ran for the leadership of the OC party here in ontario recently...and one of her main ideas was going to a flat tax in Ontario.

I hope she convinces JIm...( by the way , I once had lunch with him for an hour and a half in Toronto, when he was running to lead the Ont PC party...I was the president of my local riding association and he needed my votes)
 

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The problem with the existing system is that it plays to minority voter groups and politicians love that.
 

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I'm against flat tax and actually against the current tax system, which I think is not progressive enough and favors the rich. I wish someone making $200k would not be taxed at the same rate as someone making $2M (usually by exploiting the work of the poor).
But I agree that the government waste should be reduced. However, all big corporations have the same waste problem and I don't see anyone talking about that.
 
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