Bullard Confirms QE Over $1 Trillion Would Result In Outright Debt Monetization, Which Geithner Said Would Never Be Allowed

Tyler Durden's picture

The Fed's preferred voicebox, WSJ's Jon Hilsenrath is out with another article discussing what the imminent QE2 may look like. The summary is that contrary to expectations for a "big bang" intervention, the Fed will instead do $100 billion in QE a month until such time as it deems fit. A few observations on this article.

  • First, this is not news, and was disclosed by Ambrose Evans-Pritchard about a week earlier.
  • Second, $100 billion a month is precisely what a $1 trillion QE action would amount to, as the Fed can not possibly do more than $25 billion of POMOs a month without thoroughly blowing up the stock market, courtesy of endless excess liquidity.
  • Third, as we discussed previously, not even Primary Dealers have enough Treasurys in inventory to satisfy this much demand (in fact, according to the New York Fed as of Sept. 15 PDs only had just over $60 billion in UST holdings on hand).
  • Fourth, piecemeal monetization of Treasurys will have a smaller impact on overall rates and MBS prepayments, both of which are key goals for the Fed. This is stupid because as Hatzius notes: "The more you commit to large amount of purchases up front, the bigger effect you're going to get." And if there is one thing the Fed is, it has never been shy about intervention.
  • Fifth, what will be the metric for the Fed to determine when enough is enough? Will the Fed merely set a DJIA threshold past which it will consider it's job solver (and forget all that bullshit about inflation and unemployment targets - even the San Fran Fed said that unemployment is about to go back above 10% and stay there for 2011). So what will be the Fed's cut off for indirect equity market intervention: 12K? 15K? 36K? And what about oil: $100? $200? Revolution?
  • Sixth, again as we discussed earlier, we most certainly expect rates to plunge upon any announcement, and MBS prepayments to spike. This means that the Fed will be forced to not only purchase $100 billion in USTs per month, but may have to almost double that to account for its shrinking holdings of MBS/Agencies.
  • Seventh, and most important, is Bullard's admission that even $100 billion of QE a month (and possibly up to $200 billion assuming prepays) is equivalent to outright monetization (as it adds up to $1.2 trillion a year) "Mr. Bullard says the idea of doing more than $1 trillion of purchases a
    year "gives me pause
    " because that is how much net debt the Treasury
    will issue this year, meaning the Fed would be financing it all.
    " In other words, the Treasury will have to issue ever more debt to satisfy the open mandate for demand (possibly all the way up to double the $1 trillion per year in issuance). That should not be a problem. What is however, would be the implicit lie that Tim Geithner will have committed by swearing on live TV that the Fed will not monetize debt. Alas, as Bullard confirms, the Fed would be doing just that. Which incidentally is precisely what the Weimar government was doing before the hyperinflation train took off.

In other words, Hilsenrath's speculation today does nothing to change our conclusion that very soon, the Fed's ravenous demand for assets will result in a break in the rates market, and will take equities, commodities (inversely) and last, but not least, the dollar with it.

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kathy.chamberlin@gmail.com's picture

first  bitchez†

disingenuous, word of the 21st century.

Mr Lennon Hendrix's picture

They know if they do it all at once, trends would be in our favor for readmittance.  Preach the gospel, and dig in. 

PS, one of mine hangs lower too.

kathy.chamberlin@gmail.com's picture

wilt the stilt

chamb the flame

oh it just goes on and on.


TooBearish's picture

100,000 billion is a big number TD!

Mr Lennon Hendrix's picture

Geithner says a lot of things.  Controlled demolition is not one of them.

reading's picture

This ought to give him a great reason to quit too...hopefully soon.

Rainman's picture

There will be no formula or plan for intervention. Like TARP, the numbers are scribbled on a cocktail napkin. If it doesn't work, discard and get a bigger napkin.

A 10y T yield at 1.5 ain't looking crazy no mo.

Mr Lennon Hendrix's picture

No, but buying the paper is!

Miles Kendig's picture

That tril of prepays will just about fund the let to own shells that will hold the 50% LTV trash... while providing a stream to dip to help keep CRE afloat.

LeBalance's picture

TD is thinking with his long counting system on. A thousand million is a milliard (instead of a billlion) [10^9]. A million million [10^12] that we commonly refer to as a trillion would be only a billion.  A thousand billion is a billiard [10^15] and a million billion is a trillion [10^18].  So now all you milliardonaires [10^9] have something to shoot for to be real billionaires [10^12].  Plus we can use our old friends (the counting words we know) for awhile yet before they too become obsolete.

kathy.chamberlin@gmail.com's picture

is zerohedge fan, kinda cramping your style?

Everyman's picture

Can someone explain to me that a person who is supposedly smart enough to help guide our nation's monitary policy, and is supposed to be principaled, ethical, et al.


Please explain to me, that when they lie to this level and steal from not only this generation but the next one as well, just to line the pockets of their GS and political elite friends,

how can they expect to remain "safe".  Somebody is going go after one of the elitist a-holes and take the very breath out of them.  The country is not going to sit by and let these criminals and theives advance the Bancruptcy of our Republic.

Are these guys that stupid in reality, or are they really "untouchable".

LeBalance's picture

Sadly the elitist a-holes actually have a grasp on the real org chart of the US and who owns what.  They know who owns the FED and that the FED owns the US including every man, woman, and child.  Owns as in slaves.  They have begun to understand the rules and the actual service being provided here.

Most folks don't care to grasp what a Constitution is (a debt to be paid by those the delegates signed into the Group [US]).  Most folks don't care to grasp a whole lot of other very uncomfortable information.

(a) There is a small group of people.

(b) They own everything.

(c) They have all the power.

(d) They do exactly as they are told to do by the plan.

(e) If they deviate from the plan they get hammered and so does their entire family for generations (Kennedy).

These folks have been asked to make a substantial sacrifice to provide a service to others.  A service that you see everyday as you walk out the door.  They create the Matrix.

goldmiddelfinger's picture

Didn't you see the million man perp walks resulting from the greatest bubble and meltdown in human history?

MayIMommaDogFace2theBananaPatch's picture

million man perp walks

I dreamt that dream.  Then I woke up.  Shit.

Pseudo Anonym's picture

well put, LeB. Some additional ideas who the puppet masters might be can be found in this source: http://tinyurl.com/dfztye . When will people stop being naive and quit blaming the Fed. That's what I want to know.

Dollar Bill Hiccup's picture

No one is untouchable. Very hard to touch yes. And it would probably not be surprising if you think about it, but they can scurry around pretty well when the light comes on ...

Village Idiot's picture

"Are these guys that stupid in reality, or are they really "untouchable"."


I have been thinking of the movie, "Conquest Of The Planet Of The Apes."  Remember the visuals?  Remember the chimps?  We are the chimps.  We need to become Apes.


"Where there is fire, there is smoke.
And in that smoke, from this day forward, my people will crouch, and conspire, and plot, and plan for the inevitable day of Man's downfall.
The day when he finally and self-destructively turns his weapons against his own kind.
The day of the writing in the sky, when your cities lie buried under radioactive rubble!
When the sea is a dead sea, and the land is a wasteland out of which I will lead my people from their captivity!
And we will build our own cities, in which there will be no place for humans except to serve our ends!
And we shall found our own armies, our own religion, our own dynasty!
And that day is upon you NOW!"

However, as the apes raise their rifles to beat Breck to death, Lisa (Natalie Trundy), Caesar's beloved and later wife, voices her objection; "NO!" other than Caesar, she is the first ape to speak. Caesar reconsiders and orders the apes to lower their weapons, saying:

"But now... now we will put away our hatred.
Now we will put down our weapons.
We have passed through the night of the fires, and those who were our masters are now our servants.
And we, who are not human, can afford to be humane.
Destiny is the will of God, and if it is man’s destiny to be dominated, it is God’s will that he be dominated with compassion, and understanding.
So, cast out your vengeance. Tonight, we have seen the birth of the Planet of the Apes!"

Edit:  Caesar for President.

MayIMommaDogFace2theBananaPatch's picture

Disease called AVARICE combined with terminal BAGHDAD BOB SYNDROME.  All the symptoms are present.

StychoKiller's picture

Time for a large dose of "Defaulta", then!

eatthebanksters's picture

I think its time to go out and buy those big sacks of rice and beans...what do you think will happen to the politicos and banksters when the shit hits the fan?

Maos Dog's picture

Killed by their own butlers


StychoKiller's picture

Sushi chefs are very good with knives.

tahoebumsmith's picture

Kinda reminds me of my bankrupt neighbor that has lost 2 homes to foreclosure, owes 100's of thousands to creditors and has a $600k tax lien. When he's out with his friends, he throws $100 bills on the bar and buys drinks for everybody. Just pretending he still is the man that he isn't...Wakes up the next day with a hangover and realizes he spent the weekly grocery money...And you wonder why his kids hate him?

Rainman's picture

I'm glad you said " he "........thought it might be my sister-in-law.

LeBalance's picture

Can you say debtor's prison?  Coming to a thrifty guy near you.

Or maybe you'd like to pay with a kidney?  A lung?  :)

Missing_Link's picture

A guy like that has KIDS?

Ugh  ...  Shouldn't be allowed to breed.

MayIMommaDogFace2theBananaPatch's picture

Shouldn't be allowed to breed.

Uh, there's a political system for that.  Not a political system that I'd be in favor though.

Snidley Whipsnae's picture

Like the soccer mom sister of my wife. Still buys a new mini van every two years and it literally never stops rolling...she rolls one upside down auto loan into the next. Shuffles her two kids from one event to the next. Keeps piling up credit card debt, eats only fast food but never has twenty bucks in her wallet. When she withdraws money from an ATM it's never more than twenty bucks!

Her hubbys income is about 90K and she used to work as a part time teacher. Refied their home, took another loan to add a nice screened pool...now they couldn't come up with two grand if their lives depended on it...and I don't think they knew the country was in a recession until her part time teaching gig went away...clueless. But, she has a degree from UCF in psychology.


traderjoe's picture

This is all so sad. We are approaching the end-game. I look forward to the other side, but it did not have to be this way (though the die was cast in 1913). 

1. Why do they think more QE will work if the 1st (and QE2 lite) didn't?

2. Just a few months ago everyone was discussing the Fed's "exit strategy"? Remember that? There can be no exit from a $2 trillion + cumulative QE. 

Miles Kendig's picture

heh  Oh yes there can be an exit.  In fact I'll venture to say there will be an exit at some point.

Goldenballs's picture

So desperate to keep a failing system going.The elites are totally out of control in their quest to keep their power and wealth.

StychoKiller's picture

Just like with Hitler and the Brown-Shirts, the general populace will be cheering "Krystalnacht" foisted upon the banksters!

knukles's picture

Nothing more than being caught with their pants down, in the round robin beggar thy neighbor global devaluation game. 
Overprint and it'll go to shit.

Perfectly fits the textbook positioning of Keynesian economics;
-economic theory underlying political reality of the moment
-devalue in order to increase exports (formally announced public policy, populistically adroit)
-cheaper dollar makes imports more expensive thereby stoking inflation (and/or expectations thereof)
-when defeating deflation has been isolated as FED priority (ref; last FOMC minutes)

All ties together rather neatly.

"I can print more money than you can."
Even explains the newly instituted programs of foreign central banks to borrow dollars opposite their own currencies.  (Which is another disaster waiting to happen.... Leveraged Central Bank currency speculation, but another story for another time, eh?)

I can't wait.

Lay in the popcorn and gold (PM) positions, Shirley. 


PS.  T'would also be consistent with a higher or abandoned pegging of gold at artificially low prices.

Tic tock's picture

Can someone explain how it can be a preferred monetary policy to engender Hyperiflation?

Rainman's picture

It's like the scene of Butch and Sundance blowing up the safe on the train they hijacked. "Use enough dynamite there, Butch " ?? Butch would have preferred to use less powder.....in hindsight.

NumberNone's picture
  • Fifth, what will be the metric for the Fed to determine when enough is enough? Will the Fed merely set a DJIA threshold past which it will consider it's job solved So what will be the Fed's cut off for indirect equity market intervention: 12K? 15K? 36K? 

    CNBC poll today...Which will make America feel better Dow 12K or 8% Unemployment?  Imagine the Fed's disappointment that the unemployment rate won.  82% to 18%.  Keep trying Fed...I'm sure Dow 16K will do the trick!   

    I'll run the same poll at 11PM on the 30th at my local Walmart. 

    frankTHE COIN's picture

    Hyperinflation = $ 20,000 for a loaf of bread and the overthrow of Govts.

    Quinvarius's picture

    Sounds like strong trend.  I'll take 2.

    goldmiddelfinger's picture

    I've buried white bread and lunch meat nearby

    Robslob's picture

    In order to be fair shouldn't we cutt off the free money first THEN ask them if they would rather work for it vs. not have it at all?

    belogical's picture

    The FED bought I believe a trillion worth of mortgages from the banks at or near 100 cents on the dollar. If that liquefy another trillion, that makes two. If I'm not mistaken the housing market is six trillion. So the FED could have cut everyones mortgage by 30% and saved us a whole lot of trouble. Instead their funneling money the elite. Milking every last dime from the American people. Thank GOD for the second amendment, because sooner or later we're gonna need it.  

    gwar5's picture

    Once they start down this road the result will be the same because of expectations. Won't matter if the dollar is euthanized slowly with a pillow or with a nuke.

    I do wish to express my gratitude to the Fed for killing me softly.

    Waterfallsparkles's picture

    Why does the FED think that the Value of the Stock Market determines the Health of the Economy?  It appears that the Stock Market is doing fine but the rest of the Coutry is falling off a cliff.  Isn't there something else that they could do to help the people of the country other than pump the Stock Market?

    Prof Gulliver's picture

    They are helping the people: Their people. Y'know, the bankers and brokers and realtors in Manhattan and the Hamptons. The rest of the country not only doesn't count to them, they don't even exist.