Wednesday, December 17, 2008

Flywheel - Budget - American Greenbacks

This information was forwarded to me by Laurie Baird of Okanagan

The Cupboard is almost bare

For the first time in its history, the U.S. Federal Reserve is effectively giving away money
· TSX +262.28pts (Reuters) TSX index surged more than 3% in a broad rally after the U.S. Federal Reserve cut its target for overnight interest rates to a record low range of zero to 0.25% and said it would do everything it can to chase away the economic gloom.

· DOW +359.61pts

· Dollar +2.02c to $83.21US. as sentiment toward the US dollar darkened with the Fed’s gloomy announcement that it will stop at nothing to flood the financial system with greenbacks

· Oil -$.91 to $44.51US per barrel.

· Gold +$6.30 to $841.70US per ounce Canadian bond prices

The net worth of Canadian households fell by about $191 billion in the third quarter, and it's likely to have gotten worse as stock prices tumbled in the current three-month period. Bank of Montreal economist Doug Porter said that, although people don't tend to adjust their consumer spending in direct relation to their net worth, a decline in net worth will negatively impact the economy as ordinary Canadians tighten their wallets.

"As the stock market continued to weaken, it became obvious that it would have an effect, not just on consumer behaviour but also on business behaviour,'' Porter said in an interview. "I do think it was the intense financial market turmoil we saw over the fall that really played a big role in tipping the global economy into a full-fledged recession.''

Fed tries to steer economy out of long recession

Alia McMullen, National Post For the first time in its history, the U.S. Federal Reserve is effectively giving away money.

The central bank took the unprecedented step yesterday of slashing its benchmark interest rate to an extraordinarily low range of zero to a quarter per cent on Tuesday in an attempt to prevent the world's largest economy from suffering a long and painful recession.

"This is an historic move and it will go down in the annals of Fed history as the most aggressive attempt ever to reverse a deep recession, prevent deflation and spur financial-market re-normalization," said Sherry Cooper, the chief economist at BMO Capital Markets.

Stock indexes surged on the Fed action, with the Dow Jones industrial average up 4.2% to 8,924.14 and the S&P500 up 5.1% at 913.18. This helped to boost the S&P/TSX Composite Index 3.1% to 8,724.11.

The move had immediate benefits for fixed mortgage rates, with the long-term bond rates on which they are set tumbling on the Fed's signal that it would keep interest rates at an exceptionally low level for some time.

The Fed cut the Federal Funds Rate, at which the banks lend to each other, from 1% to a range of 0% to 0.25%. The reduction surpasses the previous low of half a per cent set during the Second World War, a sign of just how serious the current U.S. recession is.

"With every layoff announcement and stock market decline, consumer confidence drops," Ms. Cooper said. "It will take a mighty effort by central banks and government authorities to drag the global economy out of this ditch, but with the stimulus we are likely to see in coming months [from central banks and governments], the economy will hopefully bottom around midyear 2009 followed by a sluggish recovery in the second half and moderate growth in 2010."

But with no more room to cut rates, the Fed will embark on a new strategy to stimulate the economy by pulling "all available tools" out of its box. For the first time in its 95-year history, the Fed plans to buy debt from mortgage insurers Fannie Mae and Freddie Mac as well as mortgage-backed securities to help reduce mortgage rates. It also plans to provide additional funds for households, homeowners and small businesses.

For now, the Fed's efforts appear to be working. Yields on Fannie Mae and Freddie Mac 30-year fixed mortgage bonds as well as government 10-year and 30-year Treasuries -- which have a direct impact on fixed mortgage rates -- declined to record lows on Tuesday. These rates had been surging, despite official interest rate cuts, because investors had been looking for a safe haven to park their money and ride out the financial crisis.

Michael Englund, the chief economist at Action Economics in Boulder, Colo., said the Fed's plan to purchase mortgage-backed securities and possibly government Treasuries as well as their pledge to keep interest rates low would continue to put downward pressure on fixed mortgage rates and eventually help to stimulate the U.S. housing market.

However, problems in the U.S. economy stretch further than the deep housing slump. Economists expect the Fed to also begin to print money in an effort to prevent consumer prices from falling into a dangerous downward spiral. This alternative method of boosting the flow of money in the economy is known as quantitative easing, a strategy developed by the Bank of Japan during its lost decade of zero interest rates and price deflation.

Joshua Shapiro, chief U.S. economist at MFR in New York, said the Fed was clearly trying to fight off deflation, which is a persistent decline in consumer prices that comes hand in hand with job losses, wage cuts and a devaluation of money.

"The action taken [Tuesday] and the quantitative easing moves to come speak volumes about just how petrified policymakers are that the economy is in danger of sliding into a deflationary spiral that would be disastrous considering the highly leveraged condition of the economy," said.

The risk of deflation was evident just hours before the Fed's announcement. The Bureau of Labor Statistics reported that consumer prices for November fell a record 1.7% from the previous month, taking the annual rate to the 43-year low of 1.1% equalled in 1986 and 2002.

Mr. Shapiro expects the Fed to ultimately beat inflation, but he had a very pessimistic outlook for the U.S. economy. He predicted the economy to remain in a recession that could possibly extend past 2010.

Laurie Baird


1405 A Richter St, Kelowna, BC, V1Y 2L9

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