How the 40 billion/month in bonds could WORK!

[barrytrot]

I just realized that if it weren't the bumbling "keystone cops" Government doing this move it would be pretty brilliant.

Here's a quick explanation why:

1. US buys 40 billion in bonds, average interest rate is probably 6% or so. I'm talking A paper.

2. They offset this with 40 billion in bond sales. US bonds pay the lowest interest. I didn't look it up but probably 3.5% or so.

Therefore every month the US (were it smart, which it isn't) would be netting a tidy near-risk free profit of $82.4 million.


How many think that they will play it smart?

[barrytrot]

Actually it is $82.4 million the first month, then $164.8 million, then $247.2 million, etc. since they are buying another 50 billion every month.

[68Camaro]

It's called money printing Barry, since the Fed is buying the bonds with nothing.

[brian0918]

The Fed can't create wealth, they can only create money - no different from a counterfeiter. So they may net a "profit" in nominal terms, but in terms of purchasing power, we all lose out.

[barrytrot]

The Fed can't create wealth, they can only create money - no different from a counterfeiter. So they may net a "profit" in nominal terms, but in terms of purchasing power, we all lose out.

But actually if they net the purchase out they can do this without printing money.

I know they *won't*.

I'm just saying that they *could* do this with a total NET GAIN and NO NEW MONEY.

[68Camaro]

Regardless (which I won't argue, though I disagree, since they are the only ones buying their bonds - thus creating money out of nothing) their entire purpose is the creation of massive added liquidity for the purpose of supposed stimulation.

The actually total money printing bill, when combining other activities they have on-going or planned, is supposed 2x the $40B/month - more than $80B/month.

[Sheikh_yer_Bu'Tay]

Actually it is $82.4 million the first month, then $164.8 million, then $247.2 million, etc. since they are buying another 50 billion every month.

It sounds good on paper. Buying "A" bonds is a great idea, but who is going to buy our mortgaged backed security bonds? Those things are toxic, are they not??

I hope you are right, Barry. This thing is starting to look really shaky to me.

[barrytrot]

Sheikh, I'm not saying they will do this. They definitely will NOT. I'm just saying that if the country was run like a *real company* they could do this successfully.

[ScrapMetal]

The big question is , who are they buying these from? Big banks that want to get rid of them? Also, I listened to Bernanke's explanation how all this was going to work. All I can say is "yeah right". This will not stimulate the economy, people are living paycheck to paycheck, on credit, or just doing without. Most households do not have extra money laying around to spend. The price of gasoline and the expected rise in food prices due to the drought, will soon eat up any extra money anyone managed to save.
Many people also depend on savings to generate money, this will drive interests down to virtually nothing. They tell people to save, so they do, and in the end, they are the ones that are hurt the most listening to these "experts".
I have a feeling this move by the Feds will once again only benefit the fat cats on Wall Street, the average Joe will get screwed in the end.

[IdahoCopper]

Recently judges in foreclosure suits are ruling in favor of the homeowner. This move confirms that a lot of mortgages cannot be foreclosed upon, thus the .gov is once again bailing out the big boys who hold those mortgages.

[mbailey1234]

I think the bond buying could help since they have massive inflation that is going to be on their side. If they borrow 1 trillion today, in 30 years that won't seem like much (or near as much anyway). Not to mention they will only pay a fraction of a percentage point in interest.

This could work well if.... income was equal to or preferably greater than the money going out. Don't see this happening anytime soon with our government though. Until they get spending under control, it's over.

If they could get the spending under control I think they could inflate the nations way out of debt but this is all going to come at the expense of the citizens, mainly the older generation on fixed income.

It will all come to an end one day. Didn't used to think it would in my lifetime but now I'm not so sure. Major culture shock is coming, it has to. We can either ignore it until it hits up side the head or accept it and try our best to prepare for it. I kind of feel we have been shaking the hornet's nest and we are just about out of bug spray!

[brian0918]

But actually if they net the purchase out they can do this without printing money.

And people would be trading actual wealth for government IOUs, resulting in further wealth destruction. The irresponsible benefit from the Fed overpaying for their toxic assets, and the Fed benefits from the destruction of capital from trading government IOUs for actual wealth.

There is no such thing as a free lunch -the Fed and government cannot create wealth, nor obtain a real profit without resulting in malinvestment and capital destruction in the rest of the economy. It's easy to point to the Fed and see the potential profit they could make; it's hard to see the effect of that scheme on the rest of the economy, i.e. the Forgotten Man.

[brian0918]

I think the bond buying could help since they have massive inflation that is going to be on their side. If they borrow 1 trillion today, in 30 years that won't seem like much (or near as much anyway). Not to mention they will only pay a fraction of a percentage point in interest.

They are overpaying for worthless toxic assets, which encourages the creation of more MBS's, and results in further malinvestment and destruction of capital. And they are giving the money to the companies and people who created these risky loans in the first place, and are likely to use the money in other risky ways in the future (since they were saved from the consequences of their past mistakes), resulting in yet further malinvestment and destruction of capital, all while our purchasing power increasingly erodes. Not a good thing.