http://www.reuters.com/…

U.S. Treasury Secretary Timothy Geithner on Monday reassured the Chinese government that its huge holdings of dollar assets are safe and reaffirmed his faith in a strong U.S. currency.

A major goal of Geithner’s maiden visit to China as Treasury chief is to allay concerns that Washington’s bulging budget deficit and ultra-loose monetary policy will fan inflation, undermining both the dollar and U.S. bonds.

China is the biggest foreign owner of U.S. Treasury bonds. U.S. data shows that it held $768 billion in Treasuries as of March, but some analysts believe China’s total U.S. dollar-denominated investments could be twice as high.

“Chinese assets are very safe,” Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

Next time may I recommend a rotten tomato or two? Just for theatrics. Don’t hit the man. He’s sad enough.

http://krugman.blogs.nytimes.com/…

The big policy news this week has been the Fed’s decision to buy $1 trillion of long-term bonds, going beyond the normal policy of buying only short-term debt. Good move — but it’s probably worth pointing out that yes, this does expose the Fed, and indirectly the taxpayer, to some risks. And in so doing, it blurs the line between fiscal and monetary policy.

Now, the Fed isn’t taking on any serious default risk — Treasuries are backed by the full faith etc of the US government, and agency debt is de facto backed by the same, although the market doesn’t seem to believe that. Anyway, the Fed is for these purposes a government agency itself, so all this is debt between different parts of USG.

The Fed is, however, creating a new liability: the monetary base it creates to buy these bonds. In effect, it’s printing $1 trillion of money, and using those funds to buy bonds. Is this inflationary? We hope so! The whole reason for quantitative easing is that normal monetary expansion, printing money to buy short-term debt, has no traction thanks to near-zero rates. Gaining some traction — in effect, having some inflationary effect — is what the policy is all about.

The problem may come when the economy recovers, and inflation starts to become a problem rather than a hoped-for outcome. Basically, there will come a time when the Fed wants to withdraw that extra $1 trillion of money it created. It will presumably do this by selling the bonds it bought back to the private sector.

But here’s the rub: if and when the economy recovers, it’s likely that long-term interest rates will rise, especially if the Fed’s current policy is successful in bringing them down. Suppose that the Fed has bought a bunch of 10-year bonds at 2.5% interest, and that by the time the Fed wants to shrink the money supply again the interest rate has risen to 5 or 6 percent, where it was before the crisis. Then the price of those bonds will have dropped significantly.

And this also means that selling the bonds at market prices won’t be enough to withdraw all the money now being created. So the Fed will have to sell additional assets; if the rise in interest rates is at all significant, it will have to get those assets from the Treasury. So the Fed is, implicitly, engaged in a deficit spending policy right now.

My back of the envelope calculation looks like this: if the Fed buys $1 trillion of 10-year bonds at 2.5%, and has to sell those bonds in an environment where the market demands a yield to maturity of more than 5%, it will take around a $200 billion loss.

I’m not complaining; I think quantitative easing (it’s really qualitative easing, but I give up on trying to fix the terminology) is the right way to go. But we should go into it with our eyes open.

Good lord. Would someone sit this man down and explain to him Austrian economics?! Or just correct his misunderstanding of the Austrian business cycle theory?! Bill Anderson says:

Hey, Krugman, you don’t have to worry about that, as there is not going to be a recovery, or at least not a recovery anyone can recognize. With the government trying to further distort the structure of production (something Keynesians like Krugman fail to acknowledge as even existing) via inflation, and with the tax and regulatory policies forcing up business costs, the economy will have a difficult time rising to meet former levels of production.

Still, I find it absolutely pathetic that the supposed star of the economics world has no concept at all about the destructive nature of inflation. The guy really believes that debasing the currency is a good thing. That must be the upshot of an MIT education these days.

If you’ve got the time check out Steve Horwitz’s “The Costs of Inflation” from FEE. Roger Garrison’s “The Continuing Relevance of Austrian Business Cycle Theory” and Peter Lewin’s “Capital and Its Structure”.

Check out the comments to the main story. When I last looked not one of them disagreed fundamentally with Krugman’s statements.

http://rawstory.com/…

Rep. Ron Paul (R-TX) yet again went against the grain in Congress when he
stood up in the House and argued against a proposal that would tax 90
percent of AIG executive bonuses, saying that it was a “disgrace,” a
“distraction” and an “outrage” that undermined the Constitution.

Despite the protestations of Paul and a few others, the House voted
overwhelmingly to pass the bonus tax legislation Thursday afternoon.

Roll Call reports the vote was 328-93 to impose a 90 percent tax on
employee bonuses at companies that received federal bailout funds.

“While the vote was bipartisan, the GOP was split on the bill, with
Minority Leader John Boehner (Ohio) voting against it and Minority Whip
Eric Cantor (Va.) voting in favor of it,” reported Roll Call.

CNN notes that the measure, which now heads to the Senate for
consideration, would tax individuals on any bonuses received in 2009 from
companies getting $5 billion or more in money from the Troubled Asset
Relief Program. Those with incomes more than $250,000 would see their
bonuses taxed at the 90 percent rate.

“We can’t have any concept of we’re getting even, but we must have a
concept that we’re trying to show that Congress … cannot tolerate that,”
said Charlie Rangel (D-NY), chairman of the House Ways and Means Committee
on Wednesday.

Said House Speaker Nancy Pelosi, “We must also protect the American
taxpayer from executives who would use their companies’ second chances as
opportunities for private gain. Because they could not use sound judgment
in the use of taxpayer funds, these AIG executives will pay the Treasury
in the form of this tax.”

It’s just sad. As Paul said it’s just a distraction. They are worrying about a minute amount of money which was unconstitutionally allocated and not earmarked. Then they go and pass this unconstitutional bill of attainer while they sit back and watch as the Federal Reserve System tosses billions of dollars around, debases the currency and further destroys the economy.

http://news.yahoo.com/…

With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy. To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Fed Chairman Ben Bernanke and his colleagues wrapped a two-day meeting by leaving a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most — if not all — of next year.

The decision to hold rates near zero was widely expected. But the Fed’s plan to buy government bonds and the sheer amount — $1.2 trillion — of the extra money to be pumped into the U.S. economy was a surprise.

“The Fed is clearly ready, willing and able to be the ATM for the credit markets,” said Terry Connelly, dean of Golden Gate University’s Ageno School of Business in San Francisco.

Wall Street was buoyed. The Dow Jones industrial average, which had been down earlier in the day, rose 90.88, or 1.2 percent, to 7,486.58. Broader indicators also gained.

And government bond prices soared. Heralding a coming drop in mortgage rates, the yield on the benchmark 10-year Treasury note dropped to 2.50 percent from 3.01 percent — the biggest daily drop in percentage points since 1981.

The dollar, meanwhile, fell against other major currencies. In part, that signaled concern that the Fed’s intervention might spur inflation over the long run.

When the FED buys government bonds that is directly inflationary. If they don’t offset the printing of money through other means Wall Street will directly gain from this injection and we will all lose. Unless you are looking to get a mortgage.

http://finance.yahoo.com/…

Citigroup’s chief economist is being tapped for a job at the short-staffed Treasury Department, which is at the center of the Obama administration’s efforts to battle the financial crisis.

Lewis Alexander will become a counselor to Treasury Secretary Timothy Geithner, according to a government official who spoke on condition of anonymity because a formal announcement has not been made. Alexander will work on domestic finance matters, the official said.

Alexander had worked at the Federal Reserve and also served as the Commerce Department’s chief economist in the 1990s.

Geithner so far has battled the crisis with no key deputies in place. That’s made for a rocky start for the man President Barack Obama put on the front lines of the financial crisis.

Treasury’s handling of a $700 billion financial bailout fund has drawn fierce criticism from Congress and the American public. The government has put up hundreds of billions of taxpayers’ dollars to rescue troubled financial companies, including American International Group, Bank of America and Lewis Alexander’s own Citigroup Inc.

In late February, the government said it will exchange up to $25 billion in emergency bailout money it provided Citigroup for as much as a 36 percent ownership stake in the struggling bank, a move that could put taxpayers at greater risk. The deal represented the third rescue attempt for Citigroup in the past five months. It’s contingent on private investors agreeing to a similar swap.

As a Wall Street insider from a bank that has been one of the largest recipients of government rescue funds, Alexander’s appointment could raise some eyebrows. In December 2007, he was quoted as saying that while he believed the housing market would remain weak well into 2008, it was more likely that the economy would keep growing than head into recession, adding that the housing bubble was “correcting on its own.”

The same Citigroup which is now partially nationalized? The one that made lots of bad business decisions on his watch? He’s now going to work for an institution with even more economic power?

And yet people are pissed over some AIG bonuses?

http://www.foxnews.com/…

The House of Representatives passed a measure Wednesday that supporters are calling the most sweeping reform of nationally-backed volunteer programs since AmeriCorps. But some opponents are strongly criticizing the legislation, calling it expensive indoctrination and forced advocacy.

The Generations Invigorating Volunteerism and Education Act, known as the GIVE Act — sponsored by Reps. Carolyn McCarthy, D-N.Y, and George Miller, D-Calif. — was approved by a 321-105 vote and now goes to the Senate.

The legislation, slated to cost $6 billion over five years, would create 175,000 “new service opportunities” under AmeriCorps, bringing the number of participants in the national volunteer program to 250,000. It would also create additional “corps” to expand the reach of volunteerism into new sectors, including a Clean Energy Corps, Education Corps, Healthy Futures Corps and Veterans Service Corps, and it expands the National Civilian Community Corps to focus on additional areas like disaster relief and energy conservation.

It is the first time the AmeriCorps program, which was created by President Clinton in 1993, will be reauthorized, and supporters say it will have additional funding to match the renewed interest in national service since President Obama’s election and the acute need for volunteerism and charity in tough economic times.

“National and community service can help make Americans a part of the solution to get our country through this economic crisis. I hope the House and Senate will join us in moving as quickly as possible to help President Obama sign this critical bill into law,” Miller, chairman of the education committee, said after the bill was passed.

But the bill’s opponents — and there are only a few in Congress — say it could cram ideology down the throats of young “volunteers,” many of whom could be forced into service since the bill creates a “Congressional Commission on Civic Service.”

The bipartisan commission will be tasked with exploring a number of topics, including “whether a workable, fair and reasonable mandatory service requirement for all able young people could be developed and how such a requirement could be implemented in a manner that would strengthen the social fabric of the nation.”

“We contribute our time and money under no government coercion on a scale the rest of the world doesn’t emulate and probably can’t imagine,” said Luke Sheahan, contributing editor for the Family Security Foundation. “The idea that government should order its people to perform acts of charity is contrary to the idea of charity and it removes the responsibility for charity from the people to the government, destroying private initiative.”

House committee staff insist the GIVE Act will not change the voluntary nature of service.

Not change the voluntary nature? Note they ignore where the money comes from. Seems reasonable to me that if they claim ownership of 50% of my labor passively through taxation there is no philosophical jump required to claim 100% of my labor or force me to ’serve.’

Looks like this is the first real step to national state slavery. They’ve already got plenty of mandatory service plans ready to impliment. This is really little more than a formality.