Time Value of Money

The Fed is accelerating a deflationary scenario via the zero rate policy...

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again."

http://www.telegraph.co.uk/finance/economics/7852945/Ben-Bernanke-needs-fresh-monetary-blitz-as-US-recovery-falters.html

Thomas Hoenig, president of the Kansas City Federal Reserve, called for a gradual hike in interest rates and the rate at which the Fed lends money to private banks in an interview with CBS News Correspondent Rebecca Jarvis. (Watch at left)

"A large bank, or bank, can access funds for near-zero percent and then, because of what the Federal Reserve's policy is providing, then turn around and loan that money back to the government by buying securities for three or four percentage points more," Hoenig said.

Meanwhile, Hoenig said, cellar interest rates discourage people from depositing their money in a savings account.

"With the zero percent interest rates, if I take a certain amount of my paycheck and put it in savings, I can get almost nothing for it, so why would I save?" Hoenig asked. "I might as well buy goods. The other thing that is happening is people do tend, under those circumstances, to buy assets, whether it's land or whether it's gold or whatever."

http://www.cbsnews.com/8301-503983_162-20010207-503983.html