Practically Speaking

Kyle and her husband moved to Brookfield in 1986. She became active in local politics and started blogging in 2004. Her focus is primarily on local issues but often includes state and national topics, too. Kyle looks at things from the taxpayers' perspective in a creative, yet down to earth way, addressing them from a practical point of view.

Save for $1 menu: We're printing $1Trillion, China & U.N. ditch dollar?

President Obama, TAXES, THE ECONOMY, Unintended consequences

 Soros sees end to US $ as world currency Soros also said the U.S. dollar is under selling pressure and may eventually be replaced as a world reserve currency, possibly by the IMF's Special Drawing Rights, a synthetic currency basket comprised of dollars, euros, yen and sterling.

"I think the dollar is now under question and I think the system will need to be reformed, so that the United States will be subject to the same discipline as is imposed on other countries," said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992. "Being the main issuer of international currency, we have been exempt and we have abused that because we have effectively consumed 6.5 percent more than we have produced. That is now coming to an end." world currency, who is real Geithner? A Recent Alert - Fed Prints a Trillion March 20 2009

In a shocking development that I frankly hoped we’d never actually see, the Federal Reserve dropped a bombshell yesterday and announced that it is going to create an extra $1 trillion dollars out of thin air to support the spending desires of the US government and to drive down interest rates for mortgage borrowers.

Of course, this will continue to punish savers and pension plans, but those, frankly, are of no concern to the Fed.

Below I explore this outrageous turn of events. Please note that I have not had much time to digest this incredible news and that I reserve the right to add to (or amend) my thinking over the next few days.

Fed to Buy $1 Trillion in Securities to Aid Economy

WASHINGTON — Saying that the recession continues to deepen, the Federal Reserve announced Wednesday that it would pump an extra $1 trillion into the mortgage market and longer-term Treasury securities in order to revive the economy.

As expected, the Fed kept its benchmark interest rate at virtually zero. But in a surprise, it dramatically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike.

The dollar took a massive hit. US Fed buys $1 Trillion in Treasury securities March 18 2009

The announcement was made at the end of a two-day meeting by the Federal Open Market Committee, which kept its base lending rate in a range of zero to 0.25 percent.

The Fed, which had been expected to keep its federal funds rate unchanged, said it "anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

The US central bank will be printing massive amounts of money for these purchases to help foster recovery in the recession-mired economy, which shrank at a 6.2 percent pace in the last quarter of 2008.

On Wednesday, the dollar plunged over the Federal Reserve plan.

Geithner gaffe roils markets "Open" view to world currency recanted 

An unguarded comment by Treasury Secretary Timothy F. Geithner on Wednesday set off a sudden drop in the dollar and contributed to a chain of market-rocking events that included a setback in the stock market and a sharp uptick in interest rates.

Mr. Geithner appeared to lend his support to a proposal by China's central bank governor to replace the dollar as the world's reserve currency with a basket of currencies that would be managed by the International Monetary Fund. In an appearance before the Council on Foreign Relations in New York on Wednesday morning, Mr. Geithner raised eyebrows by saying that "we're actually quite open to that," only a day after both he and President Obama had vehemently rejected the idea and affirmed their strong support for the U.S. currency.

The dollar plummeted by as much as 1.3 percent against the euro within 10 minutes of his remarks. But then the greenback quickly recouped most of its losses after Mr. Geithner retracted his statement and said, "I think the dollar remains the world's dominant reserve currency." Later in the day, as concern weighed down the dollar again, White House spokesman Robert Gibbs chimed in to the now universal chorus from top officials that the administration expects the dollar to be the world reserve currency for "a long, long time."

But the damage may already have been done. By afternoon, a poor showing of buyers at a Treasury bond auction sent interest rates sharply higher, raising fears about the U.S. ability to sell a massive load of $2.5 trillion of debt this year. Buyers may have been spooked not only by the Treasury secretary's remarks but also by the unveiling of budget plans on Capitol Hill that would double the amount of debt the Treasury has to sell in the next five years to nearly $12 trillion.

"They are opening the spigots and flooding the market, and there is no end in sight to the deluge of supply" of Treasury bonds, said Louise Purtle, analyst at CreditSights.

"The poor communication from the Treasury Department has complicated the market for Treasuries," said Jeffrey Caughron, chief market analyst at the Baker Group investment firm.

The mounting worries about the debt also snuffed out a rally in the stock market that had been fueled by reports showing the U.S. economy may be stabilizing after a free fall this winter. The Dow Jones Industrial Average plummeted from a gain of nearly 200 points to a 108-point loss within minutes after Treasury announced the auction results. But by the end of a day of big swings in trading, muted optimism about the outlook for the economy had returned and enabled the Dow to eke out a 90-point gain.

The day of tossing and turning in global markets illustrated the risks for the Treasury secretary, who like his predecessors, has to be careful about what he says about the dollar as global markets follow his every word. It also shows the dangers for the United States as it goes deeply into debt to try to stimulate the economy out of a severe recession and rescue its ailing banking sector.

Mr. Geithner has tangled with markets before in his short two months in office, sparking a plunge in global stocks last month when he unveiled a bank cleanup plan that was vague and unconvincing, while spawning a nearly 500-point surge in the Dow on Monday when he offered a more detailed and credible plan.

James McCormick, Citigroup´s global head of foreign exchange, said he was surprised that Mr. Geithner expressed openness to the proposal by People´s Bank of China Governor Zhou Xiaochuan after acknowledging he had not read it. Mr. Zhou proposed creation of a "super-sovereign reserve currency" that is disconnected from any nation by increasing the use of special drawing rights at the IMF, a kind of currency the fund offers to its members.

"If I´m running the Treasury, I would want to have been briefed on that" before commenting on it, Mr. McCormick said. Markets have been particularly sensitive to any discussion of the Chinese proposal in the run-up to the Group of 20 meeting in London next week. IMF Managing Director Dominique Strauss-Kahn on Wednesday added his voice to the debate by calling the Chinese proposal "legitimate," although he said he doesn't expect the dollar to be replaced any time soon.

Investors were stunned by Mr. Geithner's remarks in light of a strong defense of the dollar given by Mr. Geithner and Federal Reserve Chairman Ben S. Bernanke on Capitol Hill on Tuesday. President Obama, in a Tuesday night news conference, also rejected calls for a new global currency in proclaiming that "the dollar is extraordinarily strong" because investors are confident in the ability of the U.S. to lead the world out of recession.

The value of the dollar is as important to global investors as it is to U.S. citizens, particularly those who buy Treasury bonds. Any fall in the dollar immediately erases some of the value of their holdings - a concern raised earlier this month by China, which is the biggest investor in Treasury bonds.

China and other investors recently have taken to worrying about whether the United States may debase its currency in its drive to address economic problems. Borrowing to counter the recession and finance the economic stimulus and bank bailouts is expected to peak at $2.5 trillion this year and start to decline under budget outlines offered by Mr. Obama and Congress. But investors worry about the lingering effects of the legacy of debt and the inflationary impact of the Federal Reserve's program to help finance that debt with $300 billion of Treasury bond purchases.

Apprehension about these matters is apparently what led to the Treasury's difficulty in selling $24 billion of five-year notes Wednesday afternoon.

To attract buyers, the Treasury had to pay interest rates that were significantly higher than its previous auction, touching off fears about the nation's ability to finance ever bigger loads of debt in the future.

It didn't help that Britain on Tuesday experienced its first failed bond auction in nearly seven years - a bad portent since Britain, like the United States, has gone deeply into debt to finance large economic stimulus and bank bailout programs. The poor showing came despite the Fed's move to help Treasury by purchasing $7.5 billion of the notes just before the auction.

But CreditSights' Ms. Purtle said the most serious problem the Treasury faces is the lack of buyers worldwide for its growing mountain of debt. In particular, countries like China and Japan that invested their trillions of dollars in export earnings in the Treasury market have been hit by plummeting exports, which means they have less money to invest in Treasury bonds, she said.

Also, nations that generated huge surpluses from exports of oil and other commodities, including Brazil, Russia and Saudi Arabia, were major buyers of U.S. debt during the commodity boom last year. But they now are earning much less on those commodities and have less money to invest, she said.

"Trade surpluses are being turned into trade deficits on the back of a global recession, and the funds simply aren't available to continue the purchases," she said.

U.N. panel says world should ditch dollar Mar 18 2009

By Jeremy Gaunt, European Investment Correspondent

LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

"It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.

"Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar's slide between 2002 and mid-2008," CMC Markets said in a note.

Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

It has significantly reduced the dollar's share in its own reserves in recent years.


Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar.

"There is a moment that can be grasped for change," he said.

"Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances."

Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations.

The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and indeed against those inside the basket.

Persaud said there were two main reasons why policymakers might consider such a move, one being the current desire for a change from the dollar.

The other reason, he said, was the success of the euro, which incorporated a number of currencies but roughly speaking held on to the stability of the old German deutschemark compared with, say, the Greek drachma.

Persaud has long argued that the dollar would give way to the Chinese yuan as a global reserve currency within decades.

A shared reserve currency might negate this move, he said, but he believed that China would still like to take on the role.


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