Re: The Fed Has Wrecked the Stock Market

On Nov 11, 6:58 am, "J(ohn|ane) Doe" <x...@xxxxxxxxxxxx> wrote:
On 11/11/07 13:03, in article 30rdj3trq2hn3f8u4c3v8b8oakfjrtc...@xxxxxxx, "Gary" <n...@xxxxxxx> wrote:

I listened to a few minutes of Bernanke testifying in Congress last
week. One congressman implied -- although he never said it --- that
the Fed had kept interest rates artificially low in order to drive
people out of savings account and into the more dangerous stock
market.

I don't see it that way. I think the facts are that there is
an enormous quantity of liquidity in the world, mostly due
to the accumulation of the US trade deficits. This was
paying out money to those out of the country for goods
imported into the country. That money has to find an
investment home and indeed the US was able to convince
foreign dollar holders to invest in US bonds as well as
other types of investment. Some of those funds were used
to drive the US stock market up, some were invested in
what appeared to be safe sub-prime bond holding agencies.

More and more money continued to be exported and this
continued to provide more world liquidity. That pressure
was bound to drive US interest rates down, without any
intervention by the Federal reserve. The Fed has no
effect on long term interest rates.

So I ask you. What would you do with 100 billion dollars
investment wise? You can let it lie dormant. Some of is
used to buy US bonds. Some goes into the stock market
and helps drive it up. As interest rates drop you
buy riskier assets. Getting 4% for you money is
not great if the inflation rate is 3%. And money becomes cheap
to borrow. The stock markets become too risky to
stay in as they go up. Eventually the dollar becomes too risky
to keep so you sell the dollars and buy other currencies.
But those dollars remain floating around. Eventually
when they become too cheap people will buy them again.

-> What we need is a huge bond fire to burn the
-> damn things. Outside the country that is.

I'm not an economist, but that makes sense to me. If a country is
borrowing a lot of money from it's own citizens for a big deficit and
national debt, interest rates will go up and the value of the dollar
will go up relative to other currencies. If a country tries to solve
the problem by printing money, inflation will go up.

The situation we have now, on the other hand, where a foreign
country(s) finances your debt in order to sell you it's products,
strikes me as being unnatural or artificial and temporary. In other
words, it looks like a free lunch scenario where the chickens will
eventually come how to roost.

The world has a financial tiger by the tail and can't
let go.



.

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