Outright Treasury Coupon Purchase (percentage, credit, debt, mortgage rates)

[jtur88]

Where does the Fed get all this money to invest in the market, whose money is it, and why are they investing in the market?

Tentative Outright Treasury Operation Schedule - Federal Reserve Bank of New York

$97 billion in the next month. That's almost $1,000 per household in the USA.

Is this just the exercise of fiat printing to raise asset prices in order to trick us into thinking that the equities market is solvent?

[HappyTexan]

This is QEII and will go on through June.
The Fed is printing money and buying Treasuries passing that money to the US Treasury.
Only it's not really physical money but "credit"....aka DEBT.

With no backing to a fiat currency they can just issue money "credit" out of thin air.
They are devaluing the dollar in doing so. This is good for foreign countries not on the dollar as their own currency buys more. This is not so good for Americans as now our dollar buys less so it takes more dollars.

[floridasandy]

Originally Posted by jtur88

Where does the Fed get all this money to invest in the market, whose money is it, and why are they investing in the market?

Tentative Outright Treasury Operation Schedule - Federal Reserve Bank of New York

$97 billion in the next month. That's almost $1,000 per household in the USA.

Is this just the exercise of fiat printing to raise asset prices in order to trick us into thinking that the equities market is solvent?

yes, bernanke even said so.

unfortunately for us, he has been wrong about QE2, the housing bubble, and unemployment-to name a few.

QE2 was supposed to drop long term interest rates and the reverse happened. mortgage rates have risen above 5 percent.

as an interesting side note, china has been a net seller of treasuries the last 2 months.

as far as japan being a net buyer, it has been said of japan that "japan's economy is like a bug looking for a windshield". it is interesting to note that japan, after their own housing and stock market collapsed, instituted their own QE2 and now look at their debt load- the highest in the world as a percentage of government revenue.

[eskercurve]

the difference between Japan and the US are numerous:

1) Japan has a deflation problem. People are reluctant to do anything but save money because the money will be worth more next year. This causes economic stagnation.

2) The cost of having children, traditional macho/male dominant culture, and unwillingness of women to simply kowtow to the men and be stay at home moms has caused a population decline that is the worst in the industrialized world. This will only guarantee that deflation continues.

3) The deflation of their currency guarantees that their purchasing power will increase and their ability to export will be constrained. Their businesses are aggressively expanding overseas, notably China, and keeping their money overseas because of this problem.

4) Japan's debt is mostly owed to domestic companies and individuals, unlike the US debt, which is mostly owned by foreign entities.

5) By virtue of their deflating and contracting economy, outside companies see no reason to buy into debt more than a few times as time goes on, whereas countries and foreign entities who invest in US debt have no choice but to cut their losses and keep investing in US debt. The US economy is the most stable and robust industrialized economy out there with remarkable freedoms for those who do choose to invest here. Let me expand on this:

a) The US population is expanding. Need more dollars to go around for more people, and more resources will be consumed, and those people gotta live, eat, and do something with their free time. Japan's by contrast, is imploding.

b) China has an overly restrictive market, they have their own long term population issues, and not to mention a ticking time bomb of pollution and waste and drought

c) India has similar issues with infrastructure and a crushing caste system that is taking a VERY LONG TIME to die.

d) Russia has a history of nationalizing foreign investments, so foreign companies are rightfully afraid of building with Russia (with some notable exceptions out of necessity, like Boeing and Airbus with their need for titanium)

e) Brazil has rampant inflation and similar infrastructure problems, though I do see Brazil as a long term play for becoming the next industrial and economic power.

f) Africa and the ME are reeling from domestic unrest and brutal dictatorships and stupid historical religious arguments that have more to do with emotion than logic.

g) Europe is in a quagmire of debt and a shrinking population guarantees deflation over the long term. They can't do much about this because Europe is the second most overcrowded region in the world, after eastern China and Japan (Europe is 3/4 the size of the continental USA and yet has roughly 750 million people living there ... the UK for example is the size of Georgia and has 60 million people in it).

h) That leaves us with North America. Canada is a pretty stable economy, and if you take a look at the macro view, the US is too. We will recover. There's no doubt about that.

Now I do agree that the Fed has been irresponsible in their policies with QE and QE2. I do not think that merely printing money will help. What I think should happen is letting zombie banks fail, and fail hard. Smaller banks will pick up the pieces and the mortgage-backed securities, treasuries, etc. Smaller banks are more efficient in local markets anyway. As these smaller banks grow, you'll see a less polarized world of mega-banks.

Sure, it would be painful, but the pain would only let out the gas of over-exuberance of easy money from the pre-Bernanke era.

Sadly I do not think this will happen because Congress is in the back pocket of the big banks and the big banks constitute the Fed, so there's no way they'd let themselves fail.