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The intention of The
Golden Chalkboard is to feature a focused selection of data
or rare commentary that I think will be useful to enhance your
insights into the gold market and the monetary system.
The Fed's Post-September 11 Open Market Operations vs. Monetary Policy
site steward (9/21/01; 01:12:44MT - usagold.com
msg#: 62067)
Received a "cyber reaming" via e-mail
Three posters at the forum yesterday (Wednesday, 19th) called
attention to commentary by investment manager Donald Luskin, and
at least one anonymous website visitor took umbrage with my input
on the matter -- input that was intended to draw out additional
discussion of this topic, but sadly, there were no takers. Here
again are the brief words I offered in response to Mr. Luskin's
commentary:
----------
Great commentary in general, but he has a serious flaw in his interpretations -- particularly stemming from this comment:"...the NY Fed's open market desk is in the market every day with its big, swinging billions -- doing what? Why? Consider: in the wake of the horrors of last Tuesday, the market is so hungry for the safety of dollar deposits that it will accept any interest rate no matter how low -- even zero! -- in order to get them."
Anyone here who hasn't been thoroughly put to sleep by my posts over the months and years knows the real score. By keeping just HALF an eye open to the USAGOLD forum would allow anyone to correct Mr. Luskin on this account. The actual case is FAR more disconcerting than his [Mr. Luskin's] misinterpretation allows.
Preserve your wealth with an ample diversification into gold metal. You need it now more than ever.
-------------------
My comeuppance via e-mail was based on the writer's notion that nobody reads my comments with any day to day comprehension. He said when he visits our site he expects to be given the COMPLETE picture regarding whatever elements of news are relevant to the day.
Well, I'm sorry to say that that level of spoonfeeding each day would not only become redundantly tiresome to most of our very bright visitors, but it would also require a level of resources for the tremendous daily effort of typing and dictation here in "The Tower" which I am not prepared to commit. I am willing, however, to attempt to make greater use of the "Golden Chalkboard" in the presentation of fundamental building blocks that can be anticipated as having a need to stand apart for future reference or elaboration as warranted by the economic news or focus of the day.
But for now, I'll provide the elaboration that was being angrily sought regarding my indication of disagreement with Mr. Luskin's interpretation of the meaning behind the low interest rates in the fed funds market. (At this point, I'll assume everyone has made themselves familiar with his commentary.)
Again, he errs where he builds his conclusions upon his wrongful interpretation of the meaning of the low interest rates at which fed funds are being traded in the open market among financial institutions. This fed funds market is generally non collateralized short-term (overnight) lending/borrowing among depository institutions to either earn a return (through lending) upon excess funds, or else to acquire necessary funds (through borrowing) to satisfy reserve requirements. The open market rate balancing these lending and borrowing desires is known as the federal funds rate (or fed funds rate).
When excess funds are dear, the fed funds rate climbs as many borrowers compete for the available money. When funds are ample, the fed funds rate falls as most institutions are entering the market as willing lenders simply to earn any manner of overnight interest.
(It is through the Federal Reserve System's daily open market operations that it acts to nudge the market fed funds rate toward the FOMC target rate. If funds are in short supply as indicated by a high fed funds rate, the Fed will accept collateralized bids from among the market participants, providing additional funds (inject reserves) through repurchase agreements above a self determined stop out rate -- thus nudging the market rate toward the Fed's desired target for the day.)
Now look again at the Luskin comment that I highlighted. It is patently the opposite interpretation of the truth of the matter.
In fact, the banks are swimming with excess liquidity. And what's more disconcerting in all this is that we see the Fed is actually utilizing this bizarre opportunity to pump ever more funds into the banking system -- even though they must accept sub-target stop out rates on bids to do it. After all, what bank is going to make a bid on funds from the Fed at a rate of 3% (the current FOMC target) when they can get some of the ample reserves being offered more cheaply by their fellow institutions on the open market?
Yesterday, for example, not only did the Fed accept all bids for funds via overnight repurchase agreements ($27.6 billion at 0.75 percent stop out rate), but it also provided longer term funds through 14-day, 21-day, and 28-day repos totaling $22.75 billion at stop out rates between 2 and 2.3 percent...well below the current target suggested by the policy-setting Federal Open Market Committee. And today the Fed provided another $7 billion at 1.7 percent s.o. via overnight repos.
Clearly, even though the market's fed funds rate is signaling that the banks have ample reserves, the Fed obviously wants them to have more. In light of this behavior, I am inclined to think that the Fed did nothing off market to sterilize any funds that were created through activation of the $90 billion in special swap facilities arranged this past week with the European Central Bank, the Bank of England, and the Bank of Canada.
This is the stuff that hyperinflations are made of. Experience tells that the Fed would not be taking this inflationary action unless something much more dire were looming in the shadows. It seems to me there is more going on here than the flooding of a machine with oil to ensure that the one little part that might be lacking gets its vital lubricant.
To my e-mailer, please use this public elaboration to now think for yourself. Whichever effect comes to rule the day, will you have the gold necessary to protect yourself from EITHER the hidden crisis OR the Fed's cure? Call Centennial. They can help.
Best advice for the COMPLETE picture? "Get you some."
regards,
Randy
 Centennial Precious Metals Gold coins & bullion since 1973 Denver, Colorado 80246-0009 We educate first-time investors! |
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