Quantitative Easing II - FED will inject 900.000 million public debt dollars

The USA. The president of the Federal Reservation (FED), Ben Bernanke, is determined to relaunch the North American economy by means of printing green tickets. Even although that supposes an increase of the inflation that beats in the pockets of the wage earners and the American thifty persons. The Bernanke target is to increase the economic activity and to have a lot of ready cheap money so that the market of the credit is reactivated. The problem is that, till now, only the public sector benefits, financing his excesses with the successive Bernanke stimuli. The Federal Reservation American (FED) was announced on Wednesday, the 03-11-2010th, the plan of monetary stimulus of buy of bonds of the Treasure by the USA that will allow to inject into the system 600.000 million dollars to try to refloat the North American economy. The Committee of open Market of the FED, which has been discussing the measurement in last 2 days, said that the buy, which takes as an object to revitalize the economy, will develop from now on until June, 2011, because of approximately 75.000 million dollars per month.

In practice, this initiative of the FED, which is named “a quantitative expansion” (Quantitative Easing), will suppose that the FED will inject into liquidity approximately 600.000 million dollars to acquire public debt, with the target to lower the long-term interest rates so that there is stimulated the consumption and the companies be able to get into debt and hire personnel.

When there is great public debt demand, there takes place an increase of the price of the bonds and a descent of his profitability.

Precisely, the yield of the bonds is cited as an example for the long-term loans, for what reverberates in the price reduction of the financing of the companies and the families.

Some experts have been alert of that this measurement will have little I affect the growth of the economy, because the interest rates are already in levels historically low, and it will only serve to shoot the inflation and, perhaps, to create speculative bubbles on some markets, like that of values.

In his bulletin the Committee of the FED, which approved the measurement with a vote in against, indicated that it will check regularly the rhythm and the volume of the program “as it is necessary to promote the maximum of the employment and the stability of the prices”.

The dissident vote was that of the president of the Bank of the Federal Reservation of Kansas City, Thomas Hoenig, who warned that in his opinion the risks associated with the new buys of bonds of the Treasure overcome the benefits.

Nevertheless, with the short-term interest rates below 0,25 %, to the Fed he has not left many other weapon to stimulate the growth, therefore for weeks it was giving sure to him that it would approve this measurement.

In this meeting, the Committee of the FED supported the interest rate of reference below 0,25 %, where it has been from December, 2008, and in his bulletin it did not modify the phrase that it has used per months and according to which it will continue with this monetary policy “of types exceptionally low for an extensive period”.

To 600.000 million announced dollars, they will join between 250.000 and 300.000 million dollars that the FED has obtained like yield of its own portfolio of property assets, therefore in whole the number injected into the system might place between 850.000 and 900.000 million dollars, because of approximately 100.000 million dollars per month, indicated the Bank of the Federal Reservation of New York in an attached declaration.

Consequences

The Federal Reservation resorted already to this monetary stimulus at the beginning of 2008 when he acquired approximately 2 trillion dollars in bonds of the Treasure. The target of this operation is to increase the prices of the debt of between 2 and 10 years, and to reduce in parallel the profitability, which moves of inverse form at the price.

The profitability of the debt is cited as an example for the long-term loans, so that if it diminishes, it usually cheers the families to spend up and to the companies to invest, since it lows the price of the financing.
The idea is that this increase of investments and expenses stimulates the economic recovery initiated in the middle of 2009, after the recession deepest and prolonged in the United States from the decade of 1930.

The Fed needs to act as rapid since the country is growing to an annual valuation of 2 %, and it is anticipated that to generate employment it must grow close to 5 %.

At present, the valuation of official unemployment is in 9,6 %, a high number in a country where a big coverage does not exist for the one that has no work.

Also, the inflation valuation is so low, below 2 %, that there is enclosed deflation risk, that is to say, of a landslide of prices.
The deflation has pernicious effects in the economy, because the perspective of a fall of prices paralyzes completely the expense in consumption.

That's why many experts think that this gigantic plan of monetary stimulus can have negative effects.

The experts are not sure completely of the initiative that the Fed has announced, and that it is named in English “Quantitative Easing 2 ″ and which few central banks have proved in the past, except the Federal Reservation and the Bank of England.

In practice, warn the experts, the application of this measurement is as to give to the machine of printing tickets, that is to say, increases the money supply in circulation and it can go so far as to generate a big inflation.

In principle, the fact that there is inflation it cheers the consumers to spend up, because they think that if they wait they will raise even more prices, what can suppose an economic stimulus.

But the real risk is if the inflation enters an increase without control and if this effect ends up by generating speculative bubbles, what it would damage to the economy.

Effects on the employment?

Also, the experts doubt that it has effects on the employment.

The recent Nobel Prize winner of Economy, Christopher Pissarides, said in declarations to The Wal Street Journal:
“Quantitative Easing is not going to do anything for the employment, because really already there is many liquidity in the economy.”

And recently Nobel Prize, Stiglitz, was affirming:
“The Fed is not solving anything with the quantitative, and this relaxation creating the chaos on a global scale. A very strange politics is the one that they are following.”

Others warn that increasing the money supply will depreciate more the dollar, what will favor the American exports but it will damage the production of the commercial associates of the USA.

Also, the fact that they fall down the profitability of the debt of the USA will intensify the flight of the investors towards countries that offer major yields, especially emergent economies as the Latin Americans.

These economies, and especially Brazil, have complained for the pressure that the capital flows are exercising towards his coins, which tend to be appreciated, an effect that they do not wish.
In Brazil the Government has imposed control panel to the foreign flows, but in other countries one has chosen to manipulate straight the quotation of the coins to avoid his appreciation, a protective measurement criticized by the International Monetary Fund (IMF) and the G-20.

In any case, the Fed is determined to prove again the medicine of the monetary stimulus and to see the effect that it has in the slow recovery of the USA.

04-11-2010

Linkage to related articles:

18-10-2010 LD
The new round of monetary stimulus of Bernanke will fail
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04-11-2010 Bolságora
The Federal Reservation expires, but do to be surprised
The good news is that the investors do not seem to be disappointed by the profile politics low of the Fed. The bad one is that it is possible that they do not have any more gasoline now when Bernanke communicated his intentions for the next months. So the question is if Wall Street can support the momentum and overcome what there look like medium-term critical levels. The things become more dangerous now when the news has happened and that the investors look at the real world.

04-11-2010 the Economist
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04-11-2010 the Economist / Washington Post
Bernanke in The Washington Post: "The measurements of the Fed will not feed the inflation”
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04-11-2010 Kike Vazquez
QE2 in march, Bernanke admits that his target is to make to raise the bag
On November 3, 2010, a historical day not only for the results of the North American elections but also for being the date chosen by the Federal Reservation to publish a number enormously awaited, the magnitude of Quantitative Easing 2.
For any case all this has been valued by Bernanke, and if the intervention is to shortly it will be that it is what is wished.
In fact there is the one who thinks that if it is not bought by installments major, as it would seem to indicate the economic logic to lower the types and to impel the credit, it is because this way one benefits the bank margin.
Since you see there are the people very badly thought-out, the FED helping to the financial institutions and not to the citizens: what will the next thing be? ;)
“The virtuous circle” the same deceit that he was transcribing to them yesterday, they want that we think that they make raise the bag for our good, to improve our confidence, so that we are happy: They do everything for us! Unfortunately it is an argument that does not bear reply, the smoke does not generate confidence as it has already remained clear. In any this case it is his target, and it is necessary to say that it they does not go badly at all.

04-11-2010 Invertia-Blogs - Gonzalo Perez-Seoane, President of WM
Will the Fed save the world economy?
In this problems quagmire the attention on the Fed and his future actions increases every day. Nobody is foreign in that we are in the only ship. If it brings in USA in the double recession, the world economy will sink again, and vice versa.
Is hit the monetary policy that the Fed is carrying out?: will the Fed save the world economy?
Before entering the debate, it is necessary on the Fed to comment on an interest aspect on.
This way, that stakes this Institution in a crisis that born under his feet it has put in war foot to the economy of the balloon. The Fed is an institution of private nature (1913), which along with the proper functions of Banco Central USA delegated by the North American Congress, takes as a target fundacional to avoid the systemic crises.
The Fed was created by the essential target to prepare the financial bubbles and/or systemic crises in another time called “banking panics” (1907 Bankers’ Panic).
But the current world crisis has been born, bloomed and exploited in the very same garden of the Fed, before his astonished eyes and the cautious unbeliever of the North Americans.
This way, the crisis suboccupies first place, generated largely of the excesses and lacking in control financier - bank employee in USA joined to the laxness of the agencies of qualification, it has put the Fed in the eye of the hurricane.
But the criticism against the Fed does not come already only from intelligentsia as in last epochs (Nobel Prize Friedman and others) but from the proper North American middle class, which after the abrupt loss of wealth, today it suspects of the set of the financial system of his country (this way of the Firelighter Party and of the fall of the President Obama).
In view of it, it is difficult not to know by intuition that with this crisis perhaps this one in game anything any more than the stability of the system.
The success of the current monetary policy of the Fed, not only it is key for the world economic recovery but also, possibly, for its own survival.