Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

When it was teetering toward five grand land every right wingnut was eager to call it "The Obama Recession".
If it shoots to ten grand tomorrow, or in a week, or a year, the same jackasses will attribute it to the sound fiscal policies of the GOP.
I'll bet twenty bucks cash on it.

Not sure who this person is, numan - the author of your cited article. What are his credentials?

In the current fiscal year alone, the US is expected to issue somewhere between US$2 trillion and $2.5 trillion in new debt. It could conceivably exceed that amount if the crisis worsens....

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The huge deficit would not immediately lead to inflation, since banks were likely to curb lending as the financial system remained weak, Zuo said. "It might be two or three years before the huge deficit leads to serious inflation." Analysts noted that if the stimulus plan didn't accomplish its goal of restarting growth, the US government would have to ease its large fiscal burden by borrowing more and issuing more dollars, instead of relying on economic growth.
Huge Treasury bond issues would exacerbate the depreciation of the US dollar and world wealth....

It certainly appears likely that as new Treasuries flood the market, the point could soon be reached where supply outstrips demand, causing yields to rise. The Fed is trying to keep yields as low as possible so as to attract big buyers that already have large holdings of Treasuries, such as China. For such holders of Treasuries, rising yields would ravage the value of their holdings, making the purchase of yet more Treasuries distinctly unattractive. Yet, lower yields tend to be less attractive for new buyers....

There is mounting evidence that China's central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones.

There is also...evidence that China's...campaign of capitalizing on the global crisis by making resource buys across the globe may be (1) helping its central bank to decrease exposure to the dollar, while (2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while (3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it.

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....the US is engaged in...dollar-debasing policies, making a loss of global confidence in the dollar...a virtual certainty. Even if the massive spending does restore economic growth, the US economy is likely to remain very weak for some time.

When the Fed attempts to tighten, the US economy will likely be plunged into a second-round recession or depression, with obviously awful effects upon the dollar. But if the Fed fails to tighten sufficiently and quickly, runaway inflation will ravage the currency anyway.

Fed policy makers said yesterday they plan to buy up to $300 billion of U.S. government bonds and step up purchases of mortgage bonds, expanding the central bank’s balance sheet by as much as $1.15 trillion. The extra supply of dollars threatens to overwhelm investors just as the budget deficit swells.

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“Sell the dollar!”.... “This is huge, huge.... This is the last thing they have in the closet, and they used it a bit early.”

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“The Fed is basically financing our deficit by buying the debt issued by the Treasury,” she said. “If the Obama administration pushes through another stimulus package, the dollar is done.”

The U.S. dollar rebounded Friday but remained in line for a huge weekly loss against major rivals following the Federal Reserve's decision this week to massively pump up the supply of dollars in a bid to jumpstart the economy and avert a deflationary spiral.

That worm has certainly turned; the US in January, the last month data is available, was actually net drained of foreign capital, to the tune of $150 billion....

Obviously, the concern is that those with still the capital to lend to the US, primarily China, seeing the huge increase in US government demand for borrowed funds with its now huge and ever-burgeoning budget deficits being used to finance the economic crisis recovery programs, will fear that the US dollars they use to buy US debt will depreciate in value, devastating the value of their investments.

So Ben Bernanke decided to give America's Chinese and other foreign investors a good swift kick in the keyster as they headed out the door....

In other words - foreigners, we don't need your money; we'll print our own!...

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A key factor currently holding down inflation in the face of the incredible monetary expansion recently has been a decline in what is called monetary velocity, the rate of which money circulates in the economy. Nothing will ramp up velocity faster than a falling dollar....

A significantly worsening economic outlook forced the Federal Reserve's hand in mid-March, leading the Federal Open Market Committee to commit to buy up to $1.25 trillion in long-term assets to goose the economy and prevent a slide into deflation, according to minutes of the March 17-18 meeting released Wednesday.

The summary of the meeting indicates little debate among the FOMC members on the question of buying longer-term Treasurys, with the major disagreement coming over how much to buy.

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Almost all members of the policy-setting committee of the U.S. central bank said risks were rising that the economy would worsen more than forecast, and they all agreed that inflationary pressures would remain subdued for some time, according to the heavily edited minutes [Numan's emphasis].