But why the fed is worried about secure investments? No mather how much they lose, they can print more. Why did they bought the toxic assets then? I think the reason the fed is buying treasuries is because no one else wants them at that interest.
Bonds are pretty risky right now. Not because the risk of default, but because of the inflation risk. Sure they can print a ton of usd and pay all the debts, but if you pay your debts with hyperinflated dollars, your lenders are going to feel scammed the same.
But what gives value to the dollar is people using it, not some magic property that the feds puts in it.
It's the credability give dollar value, and that credability depends on how good FED is at creating/spending dollars
What gives value to the dollar is the goods and services you can purchase with it. If the dollar is not "credible", less people would will it.
If you are the FED chairman, you want each dollar you create (and spend) will corresponding to the increase of goods/services traded in the whole economy. In this way, you can avoid inflation
Well, it seems to me that Bernanke has no interest in avoiding inflation, on the contrary he's avoiding deflation at all costs, even the risk of hyperinflation.
Whatever quantity of debt the market destroys to burst bubbles, it is equaled with M0 to avoid deflation. But the banks can multiply the base 10 times. They're not doing it now, but they can.
And FED can not consume anything directly (Actually, they do not have the right to consume since they are just money printers), so they have to sell what they bought to others to get the money back, thus complete a cycle of the money flow
That's why I cannot understand how it should demand something specific from the market.
But we prefer the private sector to invest rather than the public one. The public sector doesn't have the same incentive to invest wisely: if the investment is bad, the whole country will pay through taxes/ inflation.
We know who Keynes is, but I suggest you to not use an appeal to authority
with him here.
I mentioned Keynes since he have a very good description of "effective demand is not enough because of saving action", which I also proved after a number based analysis of a simple economy model
I don't remember any prove of that quote nor I heard a definition of "effective demand" but I don't think that many people in this forum think the statement is true.
Also, what kind of saving are you talking about? Only hoarding or also lending/leave your money in your bank account so it can be lent?
Are the banks the ones who are "saving"?
I agree that in general private sector have higher efficiency than government. But in a post-recession era, private sector tends to save more and invest less (due to uncertain economy conditions/dropping demand/lack of cash reserve, etc...). At such a time, only government can do investment without hesitation (backed by the FED), even those investments are bad, it will stop the downward spiral, and will buy private sector some time to accumulate enough cash and restore confidence to invest again
Since it doesn't matter where the resources are put, we just need to move them, maybe you agree with Paul Krugman
But if in such situation government can not get the enough money from the FED to drive those spendings, the total recession could be longer, since even in a very easy business condition like low interest rate and low tax, cash reserve is still low for many private companies, they will continue cost cutting and save until they had enough cash
If they want to rise taxes and cut spending is precisely to pay the interest on the debt they acquired to "stimulate the economy".
And if businesses don't have cash revenue, I wonder where all the printed money is and why they rise prices.
Why the bread is more expensive each day if the baker is so desperate for cash? Isn't he supposed to offer more bread for less cash?
Too many aspects I don't know which one to discuss first, but it is very interesting to be a bitcoin miner and looking at all these problems from a money provider point of view
In general FED do not want to provide more money (inflation thus destroy the currency credibility), but in a recession they would more care about the deflation (the total money supply never reduced, but the money in circulating dramatically reduced due to panic saving and tougher loaning condition). But since all the monetary action have a delaied effect, they are also careful to prevent the inflation before it worsens (in the latest FED meeting, 3 of them already started to worry about the inflation)
Saving's effect illustrated:
In mystisland, A catch 2kg fish per day and exchange for 2 shells at market, B pick 2kg fruits per day and exchange for 2 shells at market, and both of them using 2 shells to buy 1kg fish and 1kg fruit from market
As long as they are doing this, the total demand for currency is 4 shells (maximum 4 shells are needed to faciliate all the trades everyday)
Now A start to save, he save 1 of the shell of his income and use only 1 shell to buy 0.5kg fish and 0.5kg fruit, the market will accumulate 0.5kg fish and 0.5 fruit and lose 1 shell
The second day after A started to save, A and B come back to market to sell their 2kg fish and 2kg fruits, just find that market now have only 3 shells... Then the market (central bank) have to create 1 more shell to facilitate the trading
If A continously to save 100 days, then market will create 100 shell and accumulate 50kg fish and 50kg fruit (Of course these fish and fruits are not consumable after 1 day, so they were trashed)
So, with saving in action for 100 days, the total money supply of the island will be 104 shells, magnitudes higher than it normally requires (4 shells)
And later, when A start to spend these 100 shells, he will bid up the price of everything on the island