Friday, September 14, 2012

Nothing has changed

Joe Weisenthal thinks the Fed's recent announcement is a Game changer.

It's not.

Think of debt as a lot of arrows pointing at the people who get income from debt. The other end of the arrows, the tails, start at the people making payments on debt.

Each tail is a drain pipe, draining money out of the spending stream. (That's why deflation is a concern when deleverage is a priority.)

Here's part of the Fed statement quoted by Joe Weisenthal:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.

There are guys in Ben Bernanke's office holding the pointy ends of those arrows. Bernanke, sitting at his desk, reaches into the empty cardboard box behind him, pulls out fistfuls of money and hands them out in exchange for the pointy ends.

When it's over, Bernanke is holding lots of pointy ends. And the people who were holding the pointy ends are now holding fistfuls of money. But for the people making the payments, for the people holding arrow tails, nothing has changed.

The problem is not who's holding arrowheads. The problem is too many tails.

1 comment:

Greg said...

I agree about the too many tails but payments are not now going to be made to the fed. The fed just paid them for their tips (in case we didnt) AND they keep the tips and the income streams from them.

Absolutely despicable if you ask me. A third party comes in cuz you think Im gonna default on my loan and pays you the money I owe you, then I continue to make my payments to you, and if I dont I get prosecuted for not respecting the system.

After all what lesson would I learn if after you paid off my debts I didnt have to pay any more...... shameful!

What lessons do banks learn when their bad debts are made good....... virtuous!