Monday, September 20, 2010

No Bogus Triple-A Bonds Anytime In The Near Future


Yesterday, I was reading my Sunday New York Times, the Sunday Business Section, and what do I find? A professor of economics suggesting that the best way out of the recession is for the Federal Reserve Bank to inflate the money supply and that they should shoot for a target of a 3% annual inflation rate. Naturally, this professor acknowledged that seniors and others on a fixed income would most likely protest this idea. Hell, yes, I would protest this idea because it is pure stupidity.

Either this economics professor has never done anything other than being a student or a professor because if he had spent just a little time working in the capital markets, he would realize what a suggestion of 3% inflation would mean.

Why not fix that which is broken instead of coming up with cures that only compound the disease? The last thing we need is 3% inflation, as this is not going to facilitate the movement of credit from borrowers to investors.

Why not fix the credit system? This is where the problem is, in my opinion. Because Wall Street minted billions of dollars of bogus triple-A bonds before the financial crisis and the market meltdown, the rest of the civilized world is not in a hurry to buy anything more than our U.S. Treasury notes and bonds. This move by investors to buy quality has driven down nominal interest rates, and with inflation at a low point, interest rates on Treasuries have reach some very low numbers. But, reigniting inflation is not an answer in my book, and if this professor understood the responsibility of a central bank to all the participates of the monetary system, he would not be throwing the idea of 3% inflation around so cavalierly. I have written in the past that monetary policy should not be carried out with only the banks in mind, but there should be consideration for all members of the monetary system.

Fix the credit rating agencies and be surprised what that would do to open up the movement of credit again. But, the investors around the world and especially the large pension funds here at home must believe in the ratings that are placed on the new bond issues. No one is going to be investing in bogus triple-A bonds anytime in the near future.

Stay tuned.

6 comments:

Robert said...

Fixing the bond rating system is needed for sure.

As for having the Federal Reserve print more money, I can see the appeal. A 3 percent inflation rate doesn't seem that bad when we have already endured double digit inflation rates in house values = house costs during many years of the bubble. This has occurred in some regions of the country at least. Also other costs such as medical care, executive salaries and college tuitions have been going up double digit. With this in mind, people can likely ask, "what's the big deal about a mere 3 percent?

Problem is, of course, when the money supply is expanded, inflation is seldom uniform. Like before, some things will inflate significantly while other things hardly change. If one's wages are in a non inflating sector, watch out.

I can see another reason why printing more money may be necessary. Basically to keep the government solvent. Federal government debt is big and there is little political will to raise taxes. Little will to raise taxes even on the wealthy due to fear that this could put a drag on the economy. Printing money could help fund the government thus avoiding a future of drastic and destabilizing cuts. Printing money for the government to spend might even keep Uncle Sam from being forced to admit to bankruptcy.

Also there is this factor. Printing money could bring a devalued US dollar thus helping American export industries and putting some people back to work that way. Problem is, other countries may join in a race to the bottom for their currencies as well. I just heard about Japan wanting to do this.

US may need to print money just for our government to avoid drastic cuts, but I admit it would hurt those of us, including me, who have savings in the bank and in conservatively invested retirement plans. I don't have much money, but I do have some savings.

Still most of my retirement income will likely be from Social Security and that can rise with a modest inflation rate as younger people's incomes rise, thus increasing their Social Security taxes.

Robert said...

Fixing the bond rating system is needed for sure.

As for having the Federal Reserve print more money, I can see the appeal. A 3 percent inflation rate doesn't seem that bad when we have already endured double digit inflation rates in house values = house costs during many years of the bubble. This has occurred in some regions of the country at least. Also other costs such as medical care, executive salaries and college tuitions have been going up double digit. With this in mind, people can likely ask, "what's the big deal about a mere 3 percent?

Problem is, of course, when the money supply is expanded, inflation is seldom uniform. Like before, some things will inflate significantly while other things hardly change. If one's wages are in a non inflating sector, watch out.

I can see another reason why printing more money may be necessary. Basically to keep the government solvent. Federal government debt is big and there is little political will to raise taxes. Little will to raise taxes even on the wealthy due to fear that this could put a drag on the economy. Printing money could help fund the government thus avoiding a future of drastic and destabilizing cuts. Printing money for the government to spend might even keep Uncle Sam from being forced to admit to bankruptcy.

Also there is this factor. Printing money could bring a devalued US dollar thus helping American export industries and putting some people back to work that way. Problem is, other countries may join in a race to the bottom for their currencies as well. I just heard about Japan wanting to do this.

US may need to print money just for our government to avoid drastic cuts, but I admit it would hurt those of us, including me, who have savings in the bank and in conservatively invested retirement plans. I don't have much money, but I do have some savings.

Still most of my retirement income will likely be from Social Security and that can rise with a modest inflation rate as younger people's incomes rise, thus increasing their Social Security taxes.

Robert said...

Fixing the bond rating system is needed for sure.

As for having the Federal Reserve print more money, I can see the appeal. A 3 percent inflation rate doesn't seem that bad when we have already endured double digit inflation rates in house values = house costs during many years of the bubble. This has occurred in some regions of the country at least. Also other costs such as medical care, executive salaries and college tuitions have been going up double digit. With this in mind, people can likely ask, "what's the big deal about a mere 3 percent?

Problem is, of course, when the money supply is expanded, inflation is seldom uniform. Like before, some things will inflate significantly while other things hardly change. If one's wages are in a non inflating sector, watch out.

I can see another reason why printing more money may be necessary. Basically to keep the government solvent. Federal government debt is big and there is little political will to raise taxes. Little will to raise taxes even on the wealthy due to fear that this could put a drag on the economy. Printing money could help fund the government thus avoiding a future of drastic and destabilizing cuts. Printing money for the government to spend might even keep Uncle Sam from being forced to admit to bankruptcy.

J. Kwiatkowski said...

If you listen to the conversations between banks, Wall St. and Washington, you'd never guess the rest of us are here at all.

moneythoughts said...

Inflating the currency is not the way to run a railroad, or in my opinion, a monetary system. I don't think the German Central bankers would ever say, let's try 3% inflation to get our economy moving.

Inflation is great for the big borrowers as they can pay back what they owe in inflated dollars. But what about those that have chosen not to borrow, but save their money in a savings account. How fair is inflating the currency to them? What incentive is there to save if your purchasing power is being eaten by inflation?

The bottom line for me is that inflating the currency is not the way out of a recession.

moneythoughts said...

Yes, I agree with you. Wall Street and Washington almost operate in their own sphere because few of us take an interest in monetary policy. For the most part, few in Congress understand anything about our monetary system or how it works. My little blog, MONEYTHOUGHTS, tries to discuss monetary policy and asks, "for whose benefit is monetary policy carried out?" We all are part of our monetary system, but unfortunately, while people understand taxes, they don't pay very much attention to the way monetary policy is conducted.