"Zero Interest Rate Plus Trillion Dollar Stimulus Equals Lost Decade"

AFP/File – A euro coin balanced on a US dollar bill. The dollar took a record dive against the euro and fell against …

The dollar took a record dive against the euro and fell against other major currencies Wednesday, a day after the Federal Reserve slashed interest rates to virtually zero.

The euro also leapt to near-parity with the pound and gained against the yen.

At 2200 GMT, the euro was trading at 1.4404 dollars, up sharply from 1.4018 late Tuesday. Earlier, the single European currency had surged to 1.4437 dollars, it highest level since September 29.

It was the euro's strongest gain against the greenback since the currency was launched in January 1999.

The euro also climbed to 126.02 yen from 124.74 late Tuesday.

The dollar skidded lower against the Japanese currency, trading at 87.95 yen compared with 88.98 Tuesday. The yen earlier hit a 13-year high against the dollar, at 87.11 yen.

The US currency was under pressure after the Federal Reserve on Tuesday cut its already historic low 1.0 percent lending rate to an unprecedented range of zero to 0.25 percent, and said it would keep it "exceptionally low" for "some time."

The Fed also promised to use all its firepower to unblock frozen credit and stimulate growth in an all-out battle against a year-long recession.

"The move yesterday in the currency markets was the rush to cover risk of a potential massive infusion of money into the US financial system," said Andrew Busch, analyst at BMO Capital Markets.

"However, there may also be a rush out of the US dollar due to a disbelief that the US central bank can manage the risks" of their quantitative easing program, a strategy that effectively prints money, he said.

"After all the last time the Fed embarked on a serious monetary stimulus program, it created a massive bubble in the US housing market. Let's face it, the Fed doesn't deserve much credibility when it comes to turning off the monetary spigot."

AP – President-elect Barack Obama, right, introduces Agriculture Secretary-designate, former Iowa Gov. Tom …

Anxious to jolt the economy back to life, President-elect Barack Obama is considering a federal stimulus package that could reach a whopping $1 trillion, dwarfing last spring's tax rebates and rivaling drastic government actions to fight the Great Depression.

Obama has not settled on a grand total, but after consulting with outside economists of all political stripes, his advisers appear determined to make the stimulus bigger than the $600 billion they initially envisioned, aides said Wednesday.

Obama is promoting a recovery plan that would feature spending on roads and other infrastructure projects, energy-efficient government buildings, new and renovated schools and environmentally friendly technologies.

There would also be some form of tax relief, according to the Obama team, which is well aware of the political difficulty of pushing such a large package through Congress, even in a time of recession.

While a stimulus of $1 trillion over two years is under discussion, a more likely figure seems to be $850 billion. There is concern that a package that looks too large could worry financial markets, and the incoming economic team also wants to signal fiscal restraint.

Obama advisers, including Christina Romer and Lawrence Summers, have been contacting economists from across the political spectrum in search of advice as they assemble a spending plan that would meet Obama's goal of preserving or creating 2.5 million jobs over two years.

Obama aides also pointed to recommendations by Mark Zandi, the lead economist at Moody's Economy.com and an informal McCain adviser who has been proposing a $600 billion plan.

"I would err on the side of making it larger than making it smaller," Zandi said in an interview. "The size of the plan depends on the forecast — the economic outlook — and that is darkening by the day."

"Even a trillion is not inconceivable," he said.

Only one outside economist contacted by Obama aides, Harvard's Greg Mankiw, who served on President Bush's Council of Economic Advisers, voiced skepticism about the need for an economic stimulus, transition officials said.

A stimulus package that approaches $1 trillion could run into significant Republican opposition in Congress. It also could cause heartburn for moderate and conservative Democratic lawmakers, known as Blue Dogs, who oppose large budget deficits.

"Republicans want to work with the president-elect to help get our economy on the path to recovery, but we have grave reservations about taking $1 trillion from struggling taxpayers and spending it on government programs in the name of economic 'stimulus,'" House Republican leader John Boehner said in a statement.

1989 Economic Bubble (Japan)

In the decades following World War II, Japan implemented stringent tariffs and policies to encourage the people to save their income. With more money in banks, loans and credit became easier to obtain, and with Japan running large trade surpluses, the yen appreciated against foreign currencies. This allowed local companies to invest in capital resources much more easily than their competitors overseas, which reduced the price of Japanese-made goods and widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.

With so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The Nikkei stock index hit its all-time high on December 29, 1989 when it reached an intra-day high of 38,957.44 before closing at 38,915.87. The rates for housing, stocks, and bonds rose so much that at one point the government issued 100-year bonds. Additionally, banks granted increasingly risky loans.

At the height of the bubble, real estate values were extremely over-valued. Prices were highest in Tokyo's Ginza district in 1989, with choice properties fetching over US$1.5 million per square meter ($139,000 per square foot). Prices were only slightly less in other areas of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped and Tokyo's residential homes were a fraction of their peak, but still managed to be listed as the most expensive real estate in the world. Trillions were wiped out with the combined collapse of the Tokyo stock and real estate markets.

With Japan's economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were increasingly directed out of the country, and Japanese manufacturing firms lost some degree of their technological edge. As Japanese products became less competitive overseas, the low consumption rate began to bear on the economy, causing a deflationary spiral.

The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid. Loan Officers and Investment staff had a hard time finding anything to invest in that would return a profit. Meanwhile, the extremely low interest rate offered for deposits, such as 0.1%, meant that ordinary Japanese savers were just as inclined to put their money under their beds as they were to put it in savings accounts. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called "zombie businesses". Eventually a carry trade developed in which money was borrowed from Japan, invested for returns elsewhere and then the Japanese were paid back, with a nice profit for the trader.

The time after the bubble's collapse (崩壊, hōkai), which occurred gradually rather than catastrophically, is known as the "lost decade or end of the century" (失われた10年, ushinawareta jūnen) in Japan. The Nikkei 225 stock index eventually bottomed out at 7603.76 in April 2003 before resuming an upward climb.

You're Going To Guarantee A Depression!!! Ron Paul

      The economic "Lost Decade" in Japan that started in 1989 was preceded by the exact conditions the US economy is now facing, a highly speculative housing bubble that burst followed by the Japanese Central Bank dropping interest rates to zero and the government spending trillions on infrastructure. Dropping the interest rates and excessive stimulus spending only exacerbated and prolonged the Japanese recession. Why  is Ben Bernanke and the Federal Reserve Banks, along with the incoming Barack Obama Democratic controlled Administration hell bent on duplicating the failed monetary policies of the Japanese economic "Lost Decade" upon the US? The Japanese economic "Lost Decade" is a very recent example of what not to do to get out of a recession. Is this the "change we really need" in America? Congressman Ron Paul and millions of other Americans don't think so! (Please take the time to view the above You Tube video)

tags: capitalism  the economy  barack obama  japan  the fed  takebackamerica  business  politics  ron paul  lost decade  

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