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Carl
4th April 2010, 09:30 AM
http://www.financialsense.com/Experts/ewave/2010/0331.html

Recent history proves that the Fed's "control" is just an illusion.

by Editorial Staff, Elliott Wave International | March 31, 2010

Think back to the fall of 2007. The deflationary "liquidity crunch" that over the next year-and-a-half cuts the DJIA in half, decimates commodities, real estate and world markets is only starting. Almost no one believes that the crash is coming -- to a large degree, because everyone is convinced that the U.S. Federal Reserve Bank, with Ben Bernanke at the helm, will never allow deflation to happen: It can just print money!

The excerpt you are about to read is from EWI president Robert Prechter's October 19, 2007, Elliott Wave Theorist. If you find it insightful, read more of Bob's writings in the free Club EWI resource, "Robert Prechter's Most Important Writings on Deflation." (Details below.)

You cannot pick up a newspaper, turn on financial TV or read an economist’s report without hearing that the Fed’s latest discount-rate cut is bullish because it indicates the Fed’s decision to “pump liquidity” into the system. This opinion is so completely wrong that it is hard to believe its ubiquity.

First of all, the Fed does not “decide” where it wants interest rates. All it does is follow the market. Figure 17 proves it. Wherever the T-bill rate goes, the Fed’s “target rate” for federal funds immediately follows. That’s all there is to it.

http://www.financialsense.com/Experts/ewave/2010/images/0331_clip_image001.jpg

If you refuse to believe your eyes, then listen to the chairman; Alan Greenspan is very clear on this point. On September 17, a commentator on CNBC asked, “Did you keep the interest rates too low for too long in 2002-2003?” Greenspan immediately responded, “The market did.” Rates were not “too low” or the period “too long,” either, because the market, not the Fed, made the decision on the level and the time, and the market is never wrong; it is what it is. If investors in trillions of dollars worth of U.S. Treasury debt worldwide had demanded higher interest, they would have gotten it, period.

Second, falling interest rates are almost never bullish. All you have to do to understand this point is look at Figure 18.

http://www.financialsense.com/Experts/ewave/2010/images/0331_clip_image002.jpg

Interest rates fell persistently through three of the greatest bear markets in history: 1929-1932 in the Dow, 1990-2003 in the Japanese Nikkei, and 2000-2002 in the NASDAQ. The only comparably deep bear market in the past 80 years in which interest rates rose took place in the 1970s when the Value Line index dropped 74%. Economists all draw upon this experience, but they ignore the others. Today’s environment of extensive investment leverage and an Everest of debt in the banking system is far more like 1929 in the U.S. and 1989 in Japan than it is like the 1970s. Why is a decline in interest rates bearish in such an environment? Because it means a decline in the demand for credit. When people want less of something, the price goes down.

The recent drop in rates indicates less borrowing, which means that the primary prop under investment prices -- the expansion of credit -- is weakening. That’s one reason why stock prices fell in 2000-2002 and why they are vulnerable now. This is the opposite of “pumping liquidity”; it’s a slackening in liquidity.

Read the rest of this important 63-page report, "Robert Prechter's Most Important Writings on Deflation" online now, free! All you need is to create a free Club EWI profile. You'll learn:

When Does Deflation Occur?
What Triggers the Change to Deflation
What Makes Deflation Likely Today?
How Big a Deflation?
Why Bernanke Has Been Powerless Against Deflation
The Big Bailout Bluff
MORE
Read more about the Deflation Survival Guide here.

Copyright © 2010 Editorial Staff

techguy
4th April 2010, 03:30 PM
Dead on Carl..

The fed doesn't set rates, it merely acknowledges the actual market rates.

Carl
4th April 2010, 04:22 PM
I don't like economics threads that are stuck off by themselves out of the mainstream conversation, they never are any good and nobody pays any attention to them.

You want to kill a subject line quick on a forum, stick it off by itself.

philo beddoe
4th April 2010, 04:25 PM
I don't like economics threads that are stuck off by themselves out of the mainstream conversation, they never are any good and nobody pays any attention to them.

You want to kill a subject line quick on a forum, stick it off by itself.
I hedged myself either way....if housing crashes another 50%, I might buy
have a karma cookie

Gknowmx
5th April 2010, 06:45 PM
I don't like economics threads that are stuck off by themselves out of the mainstream conversation, they never are any good and nobody pays any attention to them.

You want to kill a subject line quick on a forum, stick it off by itself.


Carl, normally I would agree, but until the startup chatter settles down, I actually prefer this. I knew I could find you here. Thanks for getting things started.

Gknowmx
5th April 2010, 06:53 PM
http://www.reuters.com/article/idUSN0518898620100405

TREASURIES-10Y yield hits 4 pct on signs economy picking up

Deflation?

Horn
5th April 2010, 07:07 PM
I don't like economics threads that are stuck off by themselves out of the mainstream conversation, they never are any good and nobody pays any attention to them.

You want to kill a subject line quick on a forum, stick it off by itself.


Well, I was wondering where all these threads were going myself?

Spectrism
6th April 2010, 06:16 AM
Doesn't this argument require the federal reserve to follow the rules? If they introduce credit without it being borrowed, they can overcome the deflation. Yes, the cost is destruction of the dollar, but that is part of the plan anyway. They will be setting up a world bank / world currency and a single world government.

Expecting them to follow rules of the past could be a dangerous thing.

madfranks
6th April 2010, 06:51 PM
Carl thanks for the charts, I've never seen that before. This may be a stupid question, but if the Fed merely follows the market and does not direct the market, what's the point of the Fed? Can't the Fed interest rate simply float and respond to the market rather than have to be strong-armed one way or another?

And also, in the 70s under Nixon I believe, the Fed went rogue with the interest rates, severely hurting the economy. Why should the Fed even have this power? It doesn't seem like they need it.

Gknowmx
6th April 2010, 07:06 PM
Carl's got nothing but pretty pictures until the FED, BIS, and Ft. Knox are audited. We have been down this road before.

MadFranks, excellent question. The Emporer has no clothes.

Carl
7th April 2010, 08:32 AM
Carl thanks for the charts, I've never seen that before. This may be a stupid question, but if the Fed merely follows the market and does not direct the market, what's the point of the Fed? Can't the Fed interest rate simply float and respond to the market rather than have to be strong-armed one way or another?

And also, in the 70s under Nixon I believe, the Fed went rogue with the interest rates, severely hurting the economy. Why should the Fed even have this power? It doesn't seem like they need it.
I didn't write the article, I just posted it. You ask some good questions and I would be curious to know how the author would respond.

About the 70's/80's; if you follow the author's reasoning then that bout of high interest rates was the result of market demand and all Volcker did was match and talk smack.

Spectrism
8th April 2010, 12:06 PM
Carl's got nothing but pretty pictures until the FED, BIS, and Ft. Knox are audited. We have been down this road before.

MadFranks, excellent question. The Emporer has no clothes.


Hahaha... think they will ever open their books to the public? If they did, people would be lining up with ropes, pitchforks & torches.

I am surprised wome enterprising hacker hasten risked his life for the thrill of getting some scoop out of their computers. That would be an interesting piece of information.