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The Fed Must End QE2 on April 27th
By Dian L. Chu, EconMatters
The Federal Reserve has lost all credibility on Wall Street, and most of the American public with the absolute refusal to recognize the dire effects on asset prices that QE2 has created. But the refusal is part of the problem. It reinforces the wide spread belief of investors that the Fed is out of touch with reality, and that they sit in their Ivory Tower implementing an exceedingly loose monetary policy, with the stated goal of inflating asset prices.
The Fed has refused to even acknowledge the possibility (rather than the indisputable facts) that not only have they inflated selected asset prices like S&P 500, the Dow indexes, but they also have inflated asset prices like food, energy, and clothing which would actually hurt the economy and consumers (See Chart).
Needed – Housing and Wage Inflation
Remember, overall inflation is actually being artificially under-reported by the numbers because housing and wages are not inflating. These are the two actual groups of assets that Americans in reality need the Fed to inflate. But Fed’s policies have been unable to help and seem to essentially be hurting the housing sector, as higher everyday living costs with stagnant wages tend to reduce disposable income and resources that could be otherwise allocated to saving towards a down payment to purchase a house, improving the real estate sector of the economy.
Inflation Exported Would Come Back To Haunt
Furthermore, since most of these asset prices are priced in dollar, the fed has exported dire and extreme inflationary pressures on an already precariously balanced inflationary picture in the emerging market economies from China to India.
It is the proverbial throwing of jet fuel on a barbeque for most of the economies. Yes, Bernanke is right that these countries had inflationary problems before based upon their undervaluing currencies. Nevertheless, this is how their economies have been set up in the global trade role that has been 30 years in the making.
These countries just couldn`t revalue their currencies near enough to still keep their role as exporting, cheap labor manufacturers, without sending the entire region into a 10-year depression which would bring the entire world into a depression not seen since the Great Depression.
Unmanageable Inflation Elsewhere
Given the fact that these manufacturing exporting countries cannot meaningfully revalue their currencies, they are basically stuck with an endemic higher level of inflation compared with the developed economies, but it is still manageable. Now, with the US`s persistently loose monetary policies exacerbated by QE2, raising input costs for commodities used in abundance by these manufacturing, cheap labor economies like Oil, Copper, Cotton, and Iron Ore (See Chart), these policies are exporting additional inflationary pressures to these developing economies.
This results in making what would be a manageable level of inflation in China of around 3.5 to 4% an unmanageable level of inflation at 5.5 to 6%, and maybe even higher as the full effects of the inflation of commodity asset prices have not yet fully been incorporated and manifested in the Chinese manufacturing economy.
Long Live the Inflation Trade
The other area where Ben Bernanke`s stubbornness of acknowledging the effects of QE2 on food and energy prices, i.e., the rise in prices is due strictly to demand reasons, Middle East tensions, and product shortages and in no part to a loose monetary policy which encourages traders to make the following trade:
- Loose monetary policy is dollar negative (printing money, currency devaluation, etc).
- Commodities like Oil, Gold, Silver, Wheat, Corn, Cotton, Copper are Dollar negative Hedges
- Therefore, put on the following trade: Short the dollar, and go long commodities.
This is the famous inflation trade is has been going on and off for the past 10 years by fund managers around the world. This trade has been in the investing 101 handbook for 50 plus years. And the fact that Ben Bernanke never admits to knowing about these trade dynamics in the marketplace, and how his policy initiate of QE2 actually encourages, facilitates and even mandates that fund managers around the world put on this very trade is beyond a rational explanation.
Inflationary Effects Are Transitory?
In addition, it is even more incredulous of Bernanke and his failure to acknowledge any role whatsoever for the feds function in these higher commodity prices when their stated goal is to in fact inflate asset prices. Whenever he is interviewed about this very question he always uses the standard response that inflationary pressures are not due to the recent Fed policy of QE2.
I guess these are assets that the Federal Reserve has expressly forbidden traders to inflate. However, Bernanke also adds that these inflationary effects are transitory in nature--he has been saying “transitory” for over 6 months now. How long does it take for ‘transitory” to become “stuck in the economy, and cannot get rid of without a massive rate hike sledgehammer”?
Fed Out of Touch with Reality
It is starting to sound like a broken record, and it is completely divorced from the facts in the marketplace, or the facts on the ground for those not in the Ivory Tower. It is this main street denial that has reinforced the notion that Bernanke and his dovish colleagues with their incessant soft selling of inflation in their comments regarding inflation questions every week that they are out of touch with reality.
This “fed out of touch with reality” notion only goes to reinforce the very “Inflation /Currency Devaluation Trade” causing traders to pile even more capital into shorting the US Dollar and going long Commodities because it is only going to get worse down the line. This is what is referred to as inflation expectations.
Dovish Fed Undermines The Dollar
The fed policies regarding QE2 are not near as damaging for the US Dollar as traders perceptions of the Fed policy of QE2, and judging by the rise in Silver alone will tell you, traders perceptions of QE2 is extremely negative. And that old adage perception is reality takes hold and traders do far more damage to the US Dollar than any actual currency devaluation due to QE2 by going heavily short the currency. Traders and their perceptions right now are what is really hurting the US Dollar and Bernanke has failed to realize this fact.
Another interesting question for Bernanke and his Dovish colleagues, and it appears that even the more hawkish members of the Fed are still to dovish in their market comments regarding inflation. Probably because they all are in the upper income bracket on a percentage basis compared with the average US consumer, and are largely immune to the ridiculous six month rise in food and energy prices felt by the average American citizen.
The Fed can change all that on the 27th of April with either a cutting short of QE2, or an equally hawkish wording of the fed statement with a nod towards tightening sooner than previously indicated in past policy statement wording.
Everyone Worries Except the Fed
The Fed might ask themselves the following question:
- How come at every Speech where there is a question and answer session that you are asked about inflation?
- Or how come every reporter when interviewing a fed member asks them about their role in causing inflation around the world and how this is contributing to political and social instability in emerging economies?
- Is this just by coincidence, all these reporters and questions revolving around inflation effects? The answer is that these questions are being asked for a reason, and that alone is a problem for the fed.
Another question for Bernanke is how come every other country is worried about inflation, including developed economy neighbor Europe, while the US doesn`t have an inflation problem? It seems the US is the only country in the entire world where inflation isn`t a problem? Does this seem logical? And if it is in fact the case, how long do you think it will stay this way, where the entire globe is experiencing inflation pressures but the US has a “transitory” inflation problem?
When Transitory Turns Self-Fulfilling
The problem for the Fed is that this goes beyond current inflationary effects in the economy, but future expectations of inflation in the economy. And none of these are transitory in nature once they get embedded in the psyche of investors and consumers. The only way they were doused in 2008 when they were at these exact levels was a near historic crash in the financial and housing markets.
Absent of some similarly extreme deflationary event, inflation and expectations of inflation are only going to feed on themselves and become even more firmly entrenched in the economy, negatively reinforcing investors and consumer’s asset allocation and spending habits.
This all becomes self fulfilling in nature, and the real nasty part about inflation is if you don`t head it off early, once it gets even a little momentum, it becomes much more difficult to control and manage. This is where the fed is right now; they are at the cusp of losing control of their handle on inflation with their incredibly dovish stance towards inflation.
End the Denial or Lose on Inflation
Bernanke and the current Federal Reserve Board have a credibility problem both with Wall Street traders and the American population. The sooner Ben Bernanke acknowledges his role in causing inflation, the better off we will be in fighting the battle of inflation. The longer the denial routine of “transitory’ responses continues, the increased chance that Bernanke loses what shred of remaining credibility he has on the inflation issue.
Then, the inflation battle is essentially lost without equally devastating policy responses that are almost similarly as bad as the inflation effects, i.e., you have to send the economy into a recession with an abundance of tightening measures that completely destroys growth to get a handle on prices.
Needed - Hawkish & Cut Short of QE2
Again, the Fed and Bernanke can change all this on the 27th of April, failure to do so basically dooms Bernanke`s legacy to be remembered by the initial moniker put on him when he initially was chosen as Alan Greenspan`s successor, when he was commonly referred to as “Helicopter Ben”!
During his first six months on the job as Fed chairman, he did everything possible to dispel such a label, but he has more than made up for that period during the last six months regarding his outright refusal to acknowledge the exceedingly negative side effects revolving around out of control food and energy prices related to his QE2 Initiative.
The average American citizen cannot withstand another two months of “Asset Inflating” on behalf of the Fed, enough is enough, time to cut the QE2 policy initiative short.
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Thank you for the link, that was an excellent read.
In the article was this link
http://www.hussmanfunds.com/wmc/wmc110124.htm
This is THE BEST explanation I have read to date for the correlation between QE and uncontrolled "inflation/hyperinflation" risk that has been "pondered" at nauseum on ZH.
Futhermore, per your link this caught my eye,
"The Fed holds roughly $1.3 trillion in Treasury debt, $937 billion in mortgage securities by Fannie and Freddie, $132 billion of direct obligations of Fannie, Freddie and the FHLB, and nearly $80 billion in TIPS and T-bills. The maturity distribution of these assets works out to an average duration of about 6 years, which implies that the Fed would lose roughly 6% in value for every 100 basis points higher in long-term interest rates. Given that the Fed only holds 2% in capital against these assets, a 35-basis point increase in long-term yields would effectively wipe out the Fed's capital. "
After reading the above consider this!
"Fed may well have be constantly doubling down on its risk exposure in the form of off-book derivative contracts in order to "pin" Long-Term rates (read the 10 Year) by constantly selling Puts on Long Dated Treasurys at opportune times when there is no incremental buying of the underlying security, yet when, as the CDO and upcoming ETF debacles have so well demonstrated, the price of the derivative actually impacts the price of the underlying! "
http://www.zerohedge.com/article/did-fed-its-stealthy-synthetic-bet-keep-yields-low-become-next-aig
It would appear that the only option the Fed has, is to "maintain" the monetary policy at the "unstable end of the curve" for many years to come....
Is this insanity or is it a "Hail Mary Pass"?
The Fed will not end QE. This phony right and wrong, Left and right paradigm is here to confuse the masses. There will be no end to QE. Repeat, There will be NO end to QE...No charts and links needed.
exactly....as long as the usd is created out of debt, qe must continue. look at us debt levels correlated to the money supply. near 1 to 1 consistency why? because money is nothing more than DEBT. its only a matter of years before this thing literally IMPLODES!
They won't so I would not get too excited. June 22nd however...that's another story.
There are "flations" everywhere. What is concerning to me is how sure you all are about the outcomes.
Put away your textbooks kiddies and your googled commentaries, you and I have no idea how this end. Just stay focused on the 20 second charts and sell the rises wherever they are and buy the bottoms wherever they are.
You are all full of shit if you think you where this is going. You can ponder, but, be flexible. I can only remind you of 2007-08 when silver went form 22 to 7 in 3 weeks or whatever it was.
In my life those who have been cocksure lose their .....sure very quickly.
The endgame is unknown so be careful
here's your endgame, history repeats if you look into it.
http://www.threeworldwars.com/albert-pike2.htm
http://www.rense.com/general86/realholo.htm
http://www.originaldissent.com/node/175
http://iamthewitness.com/
"The endgame is unknown so be careful"
"On a long enough timeline the survival rate for everyone drops to zero."
lol
I do like the ponder, but be flexible part of your post.
"Just stay focused on the 20 second charts..."
And this is a good way to stand for nothing, hold no sense of right or wrong, and attempt in no way to change things for the better. This is about more than making money.
The destruction of America has been planned by the banksters since the country was founded. FED policies are not just disingenuous or misguided, they are part of the plan to create economic instability first throughout the world and then in the west. The sheeple must be driven so low that they will accept the "hope and change" of the globalists no matter how antithetical to the inalienable rights of man. The NWO is now inevitable; its strength will be enforced by the American military. Tell me again; why are we fighting 3 wars that now make absolutely no sense, and why do we have 900 bases around the world?
I disagree entirely. You watchign "pimp my house! is what they want.
Why would the elites go to chaos when it is far better for them to keep everyone thinking life is good? They get to rape and pillage at will while the Elmer Fudd's play serf and watch teh kardashian blowjob vids.
I would argue the elites want status quo with little chaos. Their ability to rip us off is greatly enghanced by keeping the "Fudd's" happy.
When the Fudd's turn into Zombies like in the middle east and want blood, elites are toppled. Makes no sense to me why they would want chaos or deconsructionist policies.
Those that still think or expect the FED to act in the interest of the poeple and not in the interest of their friends/owners ... should first start getting a clue about how capitalism works.
How to make the most money in the shortest period of time?
Inflation - Deflation - Inflation - Deflation ... fleecing the clueless sheep and lemmings ...
Above article is simply wishful thinking, dreaming of hot lollipops ... maybe grandma some day is a bus ...
Sheeple never wake up
As a UK citizen I am baffled as to why the mainstream media fails to report the facts. When America, at worst fails, or at best, adopts austerity, the whole world does too.
Even on this wonderful site the sheer horror of the consequences are just so vast in scope the words will not come. The USA is the prime driver of the worldwide economy.
As surely as socialism failed, capitalism has failed. It is time to find another way.-
What capitalism would that be Bill? Capitalism cannot fail, it only fails when it is twisted out of recognition. The desire to better oneself through risk taking and transformation of energy and raw materials to a higher value form is not something that can overall fail.
That's not capitalism, though. That's just a start. Creation of a business, taking loans, "bettering oneself," blah blah blah. Those are all pre-capitalist requirements.
"Capitalism" requires the separation of the ownership of the profit-institutions from the participants. Shareholding.
That's what makes it capitalism.
Exactly.
They look out over a thoroughly centrally planned, over regulated, heavily subsidized, socialized loss-privatized profit, one third of GDP transfer payment, fascist banker society/economy and proclaim a failure of capitalism.
It's one of the more bizzare claims floating about these days.
Like all idealists - be careful what you wish for.
You may not like it. When I was in University I pounded the "justice for all" mantra and voted accordingly. As I grew up I realized that socialism bred mediocrity and sloth. It is the animal spirit that drives soceity forward not a bunch of dopes smoking pot making 40 bucks and hour on union wages.
They are food. Capitalism is the only thing remotely close to what can bring a happy life. You have the opportunty to succeed. Name one other "ism" where this true?
I can.t think of one. Maybe Flatulism
I noticed those new pot smoking people making 14.50 per hour union wages are not buying as much and people like you are bitching a lot more
Dude,there is not bitch with deflation,you are scared to death by our studies of the government proveded disciplines,let Bitches go-Wellcome,we want to see what they had so many time to scare us,we want back oil at 30$,gold 600$,silver 10$ and wheat,cotton and followings at prices no one wish to buy it,let it be-enough is enough because now anyone is broken and has no funds to survive,so,what is a difference then?Aaaaaaa,because they are scared that then we can survive and much better and much longer,but their revenues will decline and spending spread narrow,what a big problem-go and suck mr.Bernarke cut offs spending!
Proof read your post (read it out loud to yourself and see if it "makes sense") , add punctuation and "white spaces" so readers can understand what you are trying to say.....
If people are going to take the time to read your posts, than try to be courteous enough to not "waste their time"......
i think whatever and who is knows it this do not matter,where we going from here is a question-Rebelution or ass chasing,the former in my view suits very well american society needless to say why,all knows they are fat and agly,so,world do not need them save their beauty,one brainless electorate!Eat your sheet,sorry for your preiouse Lincolns and Washingtons,its an America of the Facebook production,no other production can come out-think of it iPods generation,clueless,wishless and powerless kids!
Maybe you could ask your girlfriend to proof read your posts for you?
And if the puropse of QE2 was to cause the Asian countries, particularly China to break their pegs to the USD?
The inflation caused may be worth it (and transitory). They would have to sell their treasuries as the dollar depreciates. So there would be a rate increase built in.
Deflation in USA if rates rise world wide and the world goes into crisis...this is a bitch on all three continents : Asia/EU/USA! Nowhere to run nowhere to hide! If the Ponzi really collapses world wide. That's why the Oligarchy wants Benocide to print away ...and damn the consequences...keep kicking the can...Ashita manyana, ashita manyana...
The only real way out for USA is to OPEN a new frontier of REAL technological innovation bringing back real growth world wide (+3% sustainable in USA/EU) which generates as well competitive advantage at home for USA to bring back job creation. Can you see a new innovative age on horizon to meet these pre-requisites?
The current mood prevalent is 'long live the Ponzi FIRE economy' since last thirty years!
Mind set change of mega-dimensions...Oh' Bama is not the man to do it!
If the Fed does not hault QE, for at least a little while, the inflationary firestorm over the next few months is going to be brutal, much more then expected. Lean manufacturing and JIT pushes compresses the amount of time it takes for manufacturing input cost increases to show up in consumer prices for those goods.
Look at the PPI overlaid on the M2 and you will see exactly what I am talking about.
Execute the money-printers and shut off their printing presses!
i was going back and reading the history of the dark ages, we have that in front of us. Its sad they called it the dark age i would call it the " age of reality" no more rich people funding the artists for their own sense of of fulfillment, its just shit it was it is, or no more twisted sense of reality. 1 plus 1=2, the simplicity of reality hopefully will last for eternity
I went back there when 'the clash of civilizations' began in full swing in 2003...and wrote a novel on the dark/middle ages...I was so pissed off with GWB...it taught me a lot about Today...this trip back to understand the Crusades and the birth of east-west trade via the silk/spice routes...Constantinople ...in flames not by the Turks but by the Crusaders!
I hope to publish my book just for fun! When gold reaches 2000! And China becomes...Kublai Khan's Cathay!
asia, they have no choice, deflationary spiral or keep the ponzi scheme afloat. its a wing and a prayer from now on, learn to grow your own food.
Someone needs to get The Bernank posting on zerohedge so he can tell us in advance what he will be doing next, perhaps if we pay him enough FRN's...
There are already a few on here, maybe one is really him ;-)
Benny knows his FRN's are worthless, it's society that needs to work it out, until then Benny will play King for the Day for as long as his luck, and ponzi scheme, holds
Bernanke is a genius. He has pulled it off. Look for tightening to begin as the author stated. A market correction will be a buying op into dividend paying stocks with gold and silver profits.
That's a slippery slope, if it were chess game, it would leave all pieces on the board open to be struck and vapourized. That play book was done before in issuing futures on Tulips for cold hard metal. Destroyed europe for the better half of 50 years financially.
The amount of gold and silver...well everything actually...all the lumber...people...food...homes...
The derivatives market itself is 10 times the value of everything on the planet. The Money in the bank isn't the problem, they can print money nonstop. It's that underlying interest on the derivatives. The fact is the interest calculated at this point time is exponential and dwarfs an entire world of world banks printing money.
So the choices are, keep playing the debt game or pull the plug and everyone is back at zero. I get the feeling that those in charge would have more to lose than a guy/girl with neighbours and friends.
To CPL...
I agree. I don't know enough about derivatives and CDSs but like you said I think it scares the piss out of the FED to think of higher interest rates. I wish someone who knows would comment how higher rates will expose these bets that are grossly over leveraged.
Setting aside the train wreck higher rates will have on fiscal problems, what happens to leveraged bets?
I can't give you a full answer, but according to the BIS, total OTC interest rate derivatives total $451 Trillion. These derivatives have been written in a declining rate environment (see Treasury chart for last 30 years), and these derivatives have yet to cause a problem for the banks. The banks sold these derivatives as insurance against higher rates (see Jefferson County, Alabama for example). It is a safe bet the banks will be highly exposed in a rising rate environment.
Total is just over 600 trillion, this includes all derivatives.
They have more to gain as well.
FOFOA's latest essay, although somewhat long-winded, covers why the Fed will keep printing. Most predominantly, U.S. Treasury funding is too dependent on the Fed at this point to stop QE. In the 'debtors vs. savers' dichotomy, the government is the largest debtor, and debasement is the easiest way to ease the terms of debt repayment. OM
I think the line of thinking is on the right track, but I also think there is a breaking point.
By that, I mean that the Fed is going to need to place much more pressure on Congress to curtail deficit spending-- or widespread inflation will be cooked in the books, as the need for debt continues to grow. If, however, the fools in Washington at least make good progress in whittling down the annual deficit amounts, it make the Fed's job that much easier.
Debasement is the easiest way out for the debtors. But just remember, banksters are creditors as well.
Actually in FOFOA's breakdown banksters favor the easy money policy favored by debtors. The breakdown is,
Debtors - "The easy money camp" likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.
Savers - "The hard money camp" likes to live within their means and save any excess for the future. They prefer hard money (or in some cases "harder" money) because it protects their savings and forces the debtors to work off their debts.
Bankers want something for nothing.
Good stuff, Hansel... thx or sharing.
Just what exactly are the assets being inflated?
Let's see:
Crude oil -- still down 20-30% from the highs.
Gold -- nobody uses that in quantities meaningful.
Stock market -- still down 20-30% from highs.
Restaurant meals -- still down in price.
Airfares -- still down in price over the past decade.
Computers -- still down in price over the past decade.
Seems to me that if one looks at the actual evidence and sees the price deflation that is all around us, it is obvious that the only inflated prices are those of civil servants, bankers, and houses. QE2 and the upcoming QE3, QE4, remain necessary.
For what? Your 401K? Your thesis is a cnbc fairy tale.
Don't have a 401(gay).
Please let me know which restaurant you're frequenting... I'd love to go there, because I'm paying 15%-20% more than I did 6 months ago in my neck of the woods.
I do agree to the extent there are deflationary pressures at least partially offsetting inflationary ones-- the most significant ones of the latter of which are food, energy, healthcare and education. Last time I checked, that comprises a very significant chunk of an Average Joe's very flat level of income (save for the civil servants and bankers, of course).
I figure at some point there will, indeed, be a QE3, QE4... QEn, for that matter. I'm just not sure the real reasons will be for deflationary fears, as the Fed seems content on squeezing the standard of living out of those who cannot keep pace on those basic necessities I mentioned above. Those who are being squeezed the most really can't afford to enjoy the inflationary benefits of the stock market-- or the deflationary tailwinds of lower computer prices and airfares.
That all being said, you know there is a REAL inflation problem when people start protesting in the streets. In that sense, you are absolutely correct-- inflation couldn't really be a big issue, becuase I see no one marching. Well, except in Egypt, Tunesia, Yemen, Greece, etc...
So I guess the green light for launching QE3 is still there. Right?
I live in Canada; local KFC had a huge sign out front, "Now featuring lower prices". Same deal with the pizza chains. McDonalds routinely has 50% off sales. I've almost never seen anything like it.
You are either dreaming, or lying.
A lot of my friends are Canadians and they report food prices are skying and restaurants are getting more expensive.
Stop making shit up to fit into your view of the world.
Natural gas bills have also collapsed, as well as electric bills.
now I know you're just fucking with us
don't you have a puppy to drown or something else more productive?
double post..delete plz
I beg your pardon? Seen electricity prices or natural gas prices lately?? When the economy was actually running, $60-$70/megawatt hour wasn't all that uncommon at Palo Verde. Today its what, $25-$35/megawatt hour? If even?
Its like this all across the country. Demand just hasn't returned, hence, prices remain mired at deflationary levels. This is why QE3, QE4, ... QEx is required. Inflationists need to leave their little fantasy world; deflation is all around us!