Tuesday, April 28, 2009

Monetary Base resuming the sharp rise? And negative interest rate coming? (update)

Looks like adjusted monetary base is spiking up again, after a brief dip. If this is unleased onto the market, don't tell me it won't have any effect on inflation.
And here's an update to a nutty idea by the Harvard economist about a week ago on how to encourage spending (or how to make money unattractive to hold). Well, he wasn't so nutty after all.

According to Financial Times, the Federal Reserve's internal analysis prepared for the last policy meeting says "The ideal interest rate for the US economy in current conditions would be minus 5 per cent." Of course a central bank cannot technically cut the rate below zero. The actual plan based on the analysis would include expansion of asset purchase by the Fed well beyond the amount that has been authorized so far (over $1 trillion) and types of assets authorized, in order to intentionally cause inflation so that individuals and corporations who hold money would see their holdings decrease by 5% each year - so that they would spend money as soon as possible before it further loses value.

If you have $100 today, it will be effectively worth $95 in a year. In 3 years, it will be about $85. In 5 years, $77. In 10 years, $59. If they overshoot their target and we end up having -7% effective rate, $100 today will be only $80 in 3 years, $69 in 5 years, $48 in 10 years.

It would be a terra incognita for sure. Not even the Weimar Republic inflated intentionally.

Peter Schiff's take is on his blog. Here's the link.


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