Friday, March 20, 2009

Economics 101

Toby has been explaining economics to me again, although he has to go slow and say it several times to get the info in my now dark honey blond hair. My hair may be a bit darker, but it is still blond. He explained how the Federal Reserve is "making" money and he sent me this link to help me understand:

This is from Jim Jubak on MSN Money. He is one of the financial guys I read. http://articles.moneycentral.msn.com/Investing/JubaksJournal/fluke-credit-crisis-was-a-heist.aspx?page=2

Everything changed March 18 (at least for the short run; in the long run, probably not quite so much). That's the day the Federal Reserve announced it would buy $300 billion of U.S. Treasury notes.
There's nothing subtle about this: The Fed is printing money in order to stimulate the economy. At least that's the theory. Over the next year, we'll find out if the real economy responds to theory. But in the short run, the Fed's move has had powerful effects.

It sent the U.S. dollar lower against the euro by 3.2% and the yen by 2.3% as investors anticipated that lower U.S. interest rates and higher U.S. inflation will result from adding $300 billion to the money supply. Gold rallied, jumping 6.6%, as did oil and, indeed, just about every commodity and every stock linked to a hard asset.
The effect was so strong that on March 19, as the indexes fell, commodity stocks rallied, with investors snapping up commodity stocks as hedges against inflation. Shares of Devon Energy (
DVN, news, msgs) climbed 3.1%, Freeport McMoRan Copper & Gold (FCX, news, msgs) moved ahead 5.7%, and Potash of Saskatchewan (POT, news, msgs) gained 2.5%.
In my opinion, we're still in a bear market until the economy proves otherwise. A first-quarter earnings season that's likely to be very ugly is set to begin in just about a week and a half, and the market could easily give back all it has gained in recent weeks -- and then some. I'd still use this rally to sell any stock you've been waiting for an exit


Toby also sent me this link to explain more on how this "printing" of money will effect oil and such. I may be a ding-a-ling when it comes to economics, but I do find this interesting. Even I knew that printing money could lead to inflation and possibly other problems. We will see.

Hearing Toby talk economics is kind of like when Buck talks hockey. I don't know a thing about hockey and I have to really concentrate, but I do like to be informed.

Now it is time to change gears - kick it up a notch - the GGs are coming to spend the day with Booboo.

5 comments:

GUYK said...

Thanks for the links. I always figured that once we went off the gold standard that the dollar was only as strong as what the nation could produce and we just are not producing what we did in the past. I am hedging against inflation...I have an idea that is is coming and coming soon as the prelude to an economic collapse.

Buck said...

The Fed "printing money" without underlying value is MY nightmare scenario. I understand the rationale behind the deflation vs. inflation argument, but I don't BUY it. I suppose it all depends on which Church of Economics ya attend, but I really thought Keynesian theory had been fairly well discredited. Guess not...

Your oil link is broke in the post text, Lou. But I fixed it.

Have fun with the grandbabies!

Becky said...

I'm stocking up on beans and rice myself. Y'know, just in case.

Bob said...

The problem with printing money to pay your debts is just what you'd expect: No one wants your money, so they quit buying your bonds, which then means you have to print more money to cover more debt. Soon the currency is in free fall and no one is willing to take it in trade for anything.

Worse, your savings are eroded as the currency falls. Hyper-inflation is a tax, not just on your income, but on all your past earnings.

Towanda said...

Lou, Oh I am so much like you in trying to understand all this stuff....and then I wonder, Do I WANT to understand it .... and just get more anxious about the future?

I have started watching the Neil Cavuto show in the afternoon on Fox News channel because I think he and his guests explain the economy/current situation in a way I can understand. Or maybe I am just getting better at understanding it.

That is .... IF we can understand ANYTHING that is happening these days.