Thursday, February 21, 2013

How Is Bernanke Going to Ever Land His Helicopter?

U.S. mortgage rates for 30-year fixed loans rose to their highest level in six months, as of today.

The average rate for a 30-year fixed mortgage this week was 3.56 percent as of today, up from 3.53 percent last week, according to Freddie Mac.

This is with Bernanke in the mortgage backed securities market buying $40 billion per month. How does he stop now? How high will rates then climb? Can Ben ever land his helicupetr?

6 comments:

  1. The dollar will crash, and then Bernanke's helicopter.

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  2. "Highest in six months" during a time of historically low interest rates isn't all that significant.

    M2 growth has slowed in recent months actually.

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  3. Actually George, if you had any idea what you were talking about (and subscribed to the EPJ Daily Alert) you would know that M2 has been growing by double digits for the last 3 months and M2 "growth" only started slowing a week ago.

    Regarding this article, the Fed can never land this helicopter. The only options remaining are 1: soaring interest rates to hold off a dollar collapse but implode the economy until the restructuring; or 2: keep interest rates as low as possible and set off an inflationary holocaust.

    At least with option 1 credit will still exist and people will save money allowing a meaningful rebuilding from a sound base. Going with option 2 will impoverish everyone and destroy entrepreneurial calculation along with it.

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  4. "Regarding this article, the Fed can never land this helicopter. The only options remaining are 1: soaring interest rates to hold off a dollar collapse but implode the economy until the restructuring; or 2: keep interest rates as low as possible and set off an inflationary holocaust."

    The above comment makes sense to me but I'm still confused. Somebody mentioned the dollar index is where it was 4 or 5 years ago and the last time we has bad inflation (during the 1970's and early 80') interest rates were above 14%. If inflation is so bad right now then why hold cash or buy Treasuries at 1% or less?

    Others have mentioned that the money the banks have is sitting at the Federal reserve because they are either too capital impaired to lend it out or they have no good credit risks....

    I'm way confused.

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    Replies
    1. You need to be careful with the dollar index. As an index you need to always bear in mind what the dollar is being indexed against. Here's what the dollar index is:

      Euro (EUR), 57.6% weight
      Japanese yen (JPY) 13.6% weight
      Pound sterling (GBP), 11.9% weight
      Canadian dollar (CAD), 9.1% weight
      Swedish krona (SEK), 4.2% weight and
      Swiss franc (CHF) 3.6% weight

      So depending on what is going on relative to those currencies the dollar may rise or fall. If all currencies are losing value at the same time the 'strength' of the dollar relative to the others will remain the same. Gold would tell another story however.

      In the early 1980s, interest rates at the peak were closer to 18%.

      Regarding why buy Treasuries? I have no idea, but recall that China is now a net seller. Also the Federal Reserve is buying up a majority of the new issuance to the tune of 70% of new debt. Not directly mind you, but through it's obfuscation mechanisms.

      You are correct regarding the banks holding dollars at the Fed. I haven't checked the excess reserves in a while but it's over $1.5T. It's possible there are too many credit risks out there, and all the banks are without doubt impaired fundamentally. The Fed is also paying a small amount of interest on the excess reserves which is also keeping that money bottled up.

      You made it to EPJ, so keep following this site and try www.mises.org as well. It will become clearer once you build a foundation of how the Fed works, fractional reserve banking, cronyism, regulatory capture and Austrian business cycle theory. Keep reading and good luck.

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