This page has been archived and commenting is disabled.
Bernanke Will Be Forced To Do QE3
Dr. Frank Shostak, an Austrian theory economist who works for MF Global, and who writes for Mises.org on economics, came out with an article this week on what will happen when the Fed freezes its balance sheet in June, as they have said they will do. I very much enjoy Shostak's writing and have followed his ideas for years.
In this article he says:
We suggest that once Fed policy makers freeze the balance sheet of the US central bank it will slow down the growth momentum of the Fed's balance sheet.
Consequently, this is going to exert downward pressure on the growth momentum of the money supply. Note that ultimately it is fluctuations in the growth momentum of the money supply that set in motion fluctuations in the pace of formations of bubble activities. As a result, various bubble activities that emerged on the back of the rising growth momentum of the money supply will come under pressure — an economic bust will be set into motion.
Obviously it is possible to have a situation where commercial banks' expansion of lending "out of thin air" counters the freezing of the Fed's balance sheet. It remains to be seen whether this is going to be the case in the months ahead. For the time being, the Fed's balance sheet continues to expand at a rapid pace. ...
Now, we suspect that the difficulty the Fed has had in meaningfully "reviving" the economy so far could indicate that the state of the pool of real savings or the pool of real funding is in trouble. This means that even if the growth momentum of lending does currently show some strengthening (see chart) it is highly unlikely that, with the weakening of bubble activities on account of the Fed's freezing its balance sheet, commercial banks will pursue an aggressive expansion of credit out of thin air. Also, it is quite likely that with the freezing of the balance sheet, Treasuries will come under pressure, and the growth momentum of banks' holdings of Treasuries will weaken. This in turn will exert downward pressure on the growth momentum of total bank lending, which includes lending to the government. ...
He predicts that CPI growth will reach 5% by year-end.
We suggest that once Fed policy makers freeze the balance sheet of the US central bank, the growth momentum of the money supply will slow down. As a result various bubble activities that emerged on the back of the rising growth momentum of the money supply will come under pressure. A visible strengthening in the growth momentum of the CPI may prevent Fed officials from introducing QE3 as suggested by some experts.
There are several aspects of this conclusion that I wonder about. The basic issue is whether or not the Fed will let their balance sheet "freeze" at its current $2.75 trillion level or will the Fed be eventually encouraged to undertake QE3.
I agree with everything he says about the bubble consequences of the money supply expansion. The vast amount of liquidity the Fed pumped into its primary dealers have fueled the stock markets and the current M&A splurge. It has also provided liquidity to the corporate markets which makes borrowing cheap. That is why you see companies like cash rich Google ($35 billion in the till) borrow $3 billion on the bond market at an average of 2.33%.
It makes sense that when the growth momentum of quantitative easing stops, that this will eventually affect the markets, usually 6 to 9 months later.
Shostak sees that this will put downward pressure on credit expansion by banks and thus the money supply will shrink. I think that is correct as well. We have seen some growth in lending activity recently and, as I have written lately on this, it is likely that this will stagnate.
But there are two factors which lead me to believe that it is more likely that we will see more quantitative easing.
While Shostak concludes that the Fed is wary of price inflation (that they are causing) and that this will deter another round of money pumping, I think the primary motivation behind QE is unemployment, not price inflation.
The consequence of taking their foot off the money pedal will lead to higher unemployment and I do not think this is politically acceptable to the Fed or to the Administration. I think they will institute a new round of quantitative easing (QE3) because politicians will demand that the Fed "do something." Which is, of course, the worst thing they could do. It will lead to more "bubble" activities and higher price inflation.
I believe the Fed and the Administration will be willing to tolerate a higher level of price inflation and for a much longer period of time, despite the inflation hawks' warnings. I think this new money stimulus will occur no later than during the start of the presidential election period (January, 2012), and will continue until the winner is sworn in. I think Dr. Bernanke will be fired thereafter.
This would also cast a different light on Treasurys. If I am correct, then the Treasury market would, post-QE3 remain as it is today. It is likely though, that between June and when the new QE round occurs, the freezing of their balance sheet will take some pressure off the Treasury market as Shostak suggests.
Assume that I am incorrect, and the Fed doesn't embark on a new round of QE. Where will money go? I believe there is sufficient demand from institutional and foreign sovereign buyers to keep the market up and keep yields low, despite growing price inflation. It is likely that eurozone problems will continue for quite some time in the future, at least two more years if I were to guess, and that institutional and sovereign investors will continue to park money in Treasurys, despite what China, Russia, and other Brics may say. China has no real alternative. It is conceivable that Japan will reduce its Treasury holdings, and possibly be forced to borrow on the international market in order to fund its reconstruction. But the PIIG problem will continue to drive money into Treasurys.
The Fed is serious about freezing its balance sheet starting in June. They will continue to buy Treasurys as issues mature and are replaced. But, as Shostak points out, the momentum of money growth will slow down and that is the key to understanding what will then happen. If Treasury rates do not take off, then my assumption about domestic and foreign demand for Treasurys will be correct. If they do take off, it will be an indication of a shrinking money supply as Shostak points out which will lead to economic stagnation or even a market bust. On the other hand, I don't believe the Fed will play "chicken" during an election year, and when things turn ugly they will announce QE3 and that will kick the can down the inflationary road. QE3 may be the last installment of this monetary madness.
»
- advertisements -
QE3 to be called "American Re-Recovery Act" and will involve more $ at the back door to the banks at 0.25%, raising the prime rate while underwriting FHA and Fannie/Freddie, and the new "sign over your right to collecting Social Security for a 3.25% 40 year home mortgage loan" or reverse mortgages remanding the deed to Uncle Sam, and of course, "withdrawal limits" on IRA, 401K, and pensions essentially confiscating them and creating anemic annuities inflated into vapor.
Who is going to fund all the deficit defecate spending if they stop printing?
There are 4 Trillion slave tokens just sitting there now...I wonder, nahhhh
as long as people are addicted to the status quo 'prepetual war, zionism as law, accounting fraud, centralized power, globalism vs. revolution'... things will seem ok
.
QE3 is a no brainer hell... people are eating like 25,000 big macs and shit
And someone will be forced to shoot BB in the face.
Focus should be on Treasury. The Bernank can do whatever he wants. As the picture in the bar "Cheers" said: We Win! The bailouts have kept the US from "being Greece"--government still functions, private sector still in risk taking mode as well. As the saying goes "better to be lucky than good"--but "far better to be both lucky and good" and the USA has for whatever reason been blessed with both. Money..."it goes where it goes"--capital on the other hand "doesn't." Methinks "this fanatical focus on legal process and proceedings" doesn't hurt--nor the finest "managed" military in American history. Needless to say there is nothing irrational about having a belief in God. In short "stand in the way of American Justice at your peril." Who knows--maybe i can even interest some of you here in taking a look at an equity play in an oil major. Even they distinguished themselves from "that BP thing over there." I like that. Makes me want to ask them "what makes you think your better?"
Once again...this article like a few others seems a little "needy" for QE 3
"On the other hand, I don't believe the Fed will play "chicken" during an election year, and when things turn ugly they will announce QE3 and that will kick the can down the inflationary road."
Bernanke, Yellen (Vice Chair), and Dudley (Head of NY Fed), rule the Fed. Evereyone else is just window dressing for "democracy".
There is no way that Bernanke and Co. do not juice economy before elections. They stop in June, but come November (everybody needs a good Holiday season) spigots are back open.
But where's the appetizer to get us from July 1 through to November? The market is going to get awful hungry.
The banks, funds, and HFT machines will feed off the volatility as the hapless Pension and Individual investors splash about like seals and wounded fish on the surface.
Sexy, this is a very smart post. Worth a long think, I think.
The Great Nation Robbery is not over. Greece will be an interestng template. How many islands will disappear into private portfolios? Coming to the US is the takeover of all IRAs and 401Ks. Next will be silver confiscation; then nationalization of all farmland, etc etc etc.
Bullseye.
Well I disagree that QE, QE Lite, or QE2 had anything to do with unemployment, unless it's the employment of bankers that's important.
I believe the monetary policy of the last 3 years was aimed entirely at recapitalizing banks to try to make up for their enormous behind-the-scenes losses.
If Bennie feels the banks are healthy enough he might actually do something for employment in this country, but don't hold your breath.
QE3 start is not a question. What i really wonder about is which catalysts would prompt the fed to start it, and what deterioration in economy/employment would the fed tolerate. It would be nice to see some comments regarding catalysts from the author/readers proficient in economy...
As they say before WWIII starts, "Confidence is high, I repeat, confidence is high".
The Fed will not be allowed to do QE111. The party is just beginning.
Respectfully disagree. They will pull a tax holiday for foreign reserves by US corporations first, so USD can temporarily appriacte some against EUR, JPY, CNY etc. Byproduct is higher velocity combined with higher money supply (technically the supply doesn't change, but the amount in the system does) for a Minsky meltup.
Only afterwards the Bernank will ejaculate all over the markets with QE 3.0.
The wild card is a synchronous move by central banks worldwide (the FED is not a central bank, but who cares anymore) to flood the system with liquidity. In their mindset that is the only "solution" and it has to pulled of simultanously by the FED, ECB (problem with mandate, will be solved due to "severe strain in the system", you know the drill), BOJ and BOE. Swiss and Chinese will be neutered, unless they pull off something similar, which I doubt.
The constant element in all these "solutions" is trying to achieve escape velocity, ie Minsky meltup, sudden and brutal. Only way to play this bitch is long tangible, things you can drop on your foot. Stocks will not keep up, perhaps 40% of this highly inflationary move max, no matter how much bs they spread about being in the market in order to survive hyperinflation.
This isn't win-lose or win-win, this is lose-lose more.
The wild card is a synchronous move by central banks worldwide (the FED is not a central bank, but who cares anymore) to flood the system with liquidity. In their mindset that is the only "solution" and it has to pulled of simultanously by the FED, ECB (problem with mandate, will be solved due to "severe strain in the system", you know the drill), BOJ and BOE. Swiss and Chinese will be neutered, unless they pull off something similar, which I doubt.
The constant element in all these "solutions" is trying to achieve escape velocity, ie minsky meltup, sudden and brutal. Only way to play this bitch is long tangible, things you can drop on your foot. Stocks will not keep up, perhaps 40% of this highly inflationary move max, no matter how much bs they spread about being in the market in order to survive hyperinflation. This isn't win-lose or win-win, this is lose-lose more.
Call me contrarian, but y'know what. Everyone is expecting QE3. Everyone.
Except the fed's shareholders are fully reserve'd up. To excess even. They're ready.
I wouldn't confuse everyone on ZH with Everyone in real life. Everyone is talking about the end of QE2, just as the Fed has described.
If you believe this like i do then you should have put your spec money in usa dollars like i did a month ago.
I suggested this thesis was likely several months ago and i have consistently poo poo-ed the hyper inflation thesis.
We shall see wont we?
http://deadcatbouncing.blogspot.com/
Support being put into Euro Oil and SnP
Will it hold?
"expansion of credit out of thin air." from the Fed and the banking cartel, leads to malinvestment in "assets" that are... well... thin air.
" I think Dr. Bernanke will be fired thereafter."
And take a seven figure position with GS or JPM as his reward.
The gods never descend...they only rise to Olympus...
That's right. He may become the leader of the World Bank...
the problem with this sort of analysis is that it assumes that the central banks and cabal that controls various governments actually wants the U.S. economy to recover. remove that assumption and everything starts to make sense.
So true. He does not answer to the American public. He answers to his handlers.
Employment and prosperity are not the goals...enslavement is.
Print those shackles, Ben!
R u crazy or stupid! The special interests are out of control but get ahold of yourself people. I'm all for plausible conspiracy theories but u r a quack- if the bottom falls out of the market it benefits no one- least of all the status quo politicians whom r the first voted out. Get a grip on yerself. Most readers of ZH r more intellient that that. Either that or u explain it to me and make it plausible.
This is a depletion of oil reserves problem not an hyperinflation one.
Our incomprehensible economy is also disguising the oil problem from the masses and thereby preventing an even worse panic. It has also put control of the stock of America's industrial base into the stronger hands of the banks through the Fed's QE money.
We are all in the same boat except for the super rich who are on the Titanic.
OR Shekels...he-he!
Why wouldnt they hope for a global durable recovery?
You can shear a sheep twice a year but only kill it once.
they've been shearing, and now its time to skin.
besides, they make money either way, they just have to know the when and which direction.
Its called NWO and a globle $$$
Yes, the entire argument is based upon a faulty premise.
Ben's gone this far, it would be foolish to think he won't stop until everyone one is begging for bonds at huge negative real rates. Then he'll stop.
from the horses mouth
http://www.youtube.com/watch?v=iy4AO4n4LSw&feature=mh_lolz&list=WL5BDD9F846E2EC2D8
Exactly. Finally someone is getting it.
The Federal Reserve is a private, for profit institution. People tend to assume it serves U.S. interests; but it serves private banker interests.
If you could create dollars from thin air, would you want inflation or deflation?
Of course, deflation.
So the inflationary priority of the fed is an 'act', much as the name of this institution itself, deceptively called "federal".
Bernake's REAL goals are to create DEFLATION... and empower the Federal Reserve bank and its benefactors.
If you recall, when Obama re "appointed" Bernake to the position of chairman of the Federal Reserve, neither one wore a tie; quite informal, actually.... I would assume this was Ben's idea.
I'm sure I am missing something so please don't flame me but wouldn't a deflationary collapse wipe out the bankster's balance sheets?
Wouldn't inflation be useful to the baskters if they can print dollars out of thin air and sit on those dollars, ever increasing their respective share of the total pool?
Just asking...