The Real Reason Behind Fed Rate Hike

Discussion in 'Economics' started by schizo, Feb 20, 2010.

  1. schizo

    schizo

    As opposed to the smorgasbord of reasons given by the Fed that the higher discount rate should be construed as a signal that financial markets have stabilized rather than an attempt to tighten monetary policy, I say this is more of a smokescreen trying to placate the concerns of foreign investors like China who holds a buttload of our debt. For one thing, the discount rate, which we all know as the rate Fed charges its member banks, is nearly meaningless because there's no real need for the banks to borrow funds since they're sitting on a pile of cash anyway (better known as excess reserves). Check out for yourself how much these banks are hoarding:

    AGGREGATE RESERVES OF DEPOSITORY INSTITUTIONS

    So what the hell is the real intention? The real reason in my mind is to clearly send a signal, albeit mixed, to the largest U.S. Treasury debt holders, especially China, that everything is under control. It's no surprise that the sudden announcement by the Fed was made following the looming threats made by China that it would dump U.S. treasuries. China is by far the largest foreign creditor with nearly $800 billion in U.S. Treasury debt (it would be well over $1 trillion if stakes in other investments are considered), of which $34.2 billion was sold in December.

    Foreign Holders Of U.S. Debt

    Let's also not forget another critical factor. On his visit to China last summer, Geithner reassured his host by promising that "the United States is committed to a strong and stable international financial system. The Obama administration fully recognizes that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home." But Chinese aren't stupid. They know that we have unsustainable debt levels and, above all, we lack a policy to deal with it. So the REAL question that shouldn't escape the mind of Bernanke and his cronies is just what would happen should China decide to dump in en-masse? No doubt, it's crystal clear by now that the Treasury can no longer sell their debt so easily as in the past, especially at record low interest rates.

    [​IMG]
    (Courtesy of Seeking Alpha)

    To better understand how our huge debt is being monetized, I highly recommend that you read up on How The Federal Reserve Is Monetizing Debt by chris Martenson from Seeking Alpha:

    http://seekingalpha.com/article/158330-how-the-federal-reserve-is-monetizing-debt
     
  2. the1

    the1

    What, no responses to this yet? This has interesting thread written all over it. Oh wait, I just realized how long that article is. No doubt you guys are still reading. See you in a few hours.
     
  3. Great Post, great read as well.
     
  4. China is constantly threatening to dump treasuries. Nobody pays any attention to them as they simply cannot do it without cutting their own throats.

    IMO the reason the rate went up an inconsequential amount is simply that the Fed hasn't done anything in a while and wants to maintain and aura of being in control.
     
  5. Taking the political position that China is currently enjoying into consideration, I do not believe China would want to change that by dumping US Treasuries. China is viewing the US Treasuries as a BIG bargaining chip, and not just an investment. (It's a country we are analyzing here, not a business.) Whenever US mention anything about democracy in China or Taiwan as a country, China will then use the chip. In addition, since China is the largest holder of US Treasuries, if China decided to dump treasuries, who do you think will get hurt the most (beside US)?

    Given that China is pretty much stuck with the debt and may have to take on more (due to the political factors and the geography of China [completely surrounded by other countries]), China will need to team up with the US in order to continue to prosper.

    USD is going up in the long run. US and China will make that happen.


    PA
     
  6. great post
     
  7. Good post.

    My ideas about the real reason.

    One of the only Fed critics that the Fed feels threatened enough to respond personally to, is Ron Paul and his threatening audit of the Fed.

    Ron Paul recently issued a statement about the threat of a weak dollar and low Fed interest rates. (I got this in an email yesterday, and believe it to be on YouTube, but can't find it now - please post, if you find it).

    The Fed says they don't want to be politically influenced, but now I believe they are trying to counter Ron Paul.
     
  8. blox87

    blox87 Guest

    http://www.youtube.com/watch?v=qjsik5o0AEI
     
  9. Personally, that's what I immediately thought. I mean with China raising their rates, there was even LESS of a reason to stay in the US.
     
    #10     Feb 21, 2010