Goldman: The Fed Needs To Print $4 Trillion In New Money

Tyler Durden's picture

With just over a week left to the QE2 announcement, discussion over the amount, implications and effectiveness of QE2 are almost as prevalent (and moot) as those over the imminent collapse of the MBS system. Although whereas the latter is exclusively the provenance of legal interpretation of various contractual terms, and as such most who opine either way will soon be proven wrong to quite wrong, as in America contracts no longer are enforced (did nobody learn anything from the GM/Chrysler fiasco for pete's sake), when it comes to printing money the ultimate outcome will certainly have an impact. And the more the printing, the better. One of the amusing debates on the topic has been how much debt will the Fed print. Those who continue to refuse to acknowledge that the economy is in a near-comatose state, of course, hold on to the hope that the amount will be negligible: something like $500 billion (there was a time when half a trillion was a lot of money). A month ago we stated that the full amount will be much larger, and that the Fed will be a marginal buyer of up to $3 trillion. Turns out, even we were optimistic. A brand new analysis by Jan Hatzius, which performs a top down look at how much monetary stimulus is needed to fill the estimated 300 bps hole between the -7% Taylor Implied Funds Rate (of which, Hatzius believes, various other Federal interventions have already filled roughly 400 bps of differential) and the existing 0.2% FF rate. Using some back of the envelope math, the Goldman strategist concludes that every $1 trillion in new LSAP (large scale asset purchases) is the equivalent of a 75 bps rate cut (much less than comparable estimates by Dudley, 100-150bps, and Rudebusch, 130bps). In other words: the Fed will need to print $4 trillion in new money to close the Taylor gap. And here we were thinking the economy is in shambles. Incidentally, $4 trillion in crisp new dollar bills (stored in bank excess reserve vaults) will create just a tad of buying interest in commodities such as gold and oil...

Here is the math.

First, Goldman calculates that the gap to close to a Taylor implied funds rate is 7%.

Our starting point is Chairman Bernanke?s speech on October 15, which defined the dual mandate as an inflation rate of ?two percent or a bit below? and unemployment equal to the committee?s estimate of the long-term sustainable rate. The Fed?'s job is then to provide just enough stimulus or restraint to put the forecast for inflation and unemployment on a ?glide path? to the dual mandate over some reasonable period of time. Indeed, Fed officials have implicitly pursued just such a policy since at least the late 1980s.

To quantify the Fed?s approach, we have estimated a forward-looking Taylor-style rule that relates the target federal funds rate to the FOMC?s forecasts for core PCE inflation and the unemployment gap (difference between actual and structural unemployment). At present, this rule points to a desired federal funds rate of -6.8%, as shown in Exhibit 1.3 Since the actual federal funds rate is +0.2%, our rule implies on its face that the existence of the zero lower bound on nominal interest rates  has kept the federal funds rate 700 basis points (bp) ?too high.?

It is important to be clear about the meaning of this ?policy gap.? It does not mean?as is sometimes alleged?that policy is tight in an absolute sense, much less that it will necessarily push the economy back into recession. In fact, policy as measured by  the real federal funds rate of -1% is very easy. However, our policy rule implies that under current circumstances?with the Fed missing to the downside on both the inflation and employment part of the dual mandate (and by a large margin in the  latter case) ?a very easy policy is not good enough. Instead, policy should be massively easy to facilitate growth and job creation, fill in the output gap, and ultimately raise inflation to a mandate-consistent level.

Next, Goldman calculates how much existing monetary, and fiscal policy levers have narrowed the Taylor gap by:

The 700bp policy gap clearly overstates the extent of the policy miss because it ignores (1) the expansionary stance of fiscal policy, (2) the LSAPs that have already occurred and (3) the FOMC?s ?extended period? commitment to a low funds rate. We attempt to incorporate the implications of these for the policy gap in two steps.

First, we obtain an estimate of how much the existing unconventional Fed policies have eased financial conditions. In previous work we showed that the first round of easing pushed down short- and long-term interest rates, boosted equity prices and led to depreciation of the dollar. Although our estimates are subject to a considerable margin of error, they suggest that ?QE1? has boosted financial conditions?as measured by our GSFCI ?by around 80bp per $1 trillion (trn) of purchases. Moreover, our estimates suggest that the ?extended period? language has provided an additional 30bp boost to financial conditions. A number of studies undertaken at the Fed similarly point to sizable effects on financial conditions. A New York Fed study, for example, finds that QE1 has pushed down long-term yields by 38-82bp. A paper by the St. Louis Fed also finds a sizable boost to financial conditions more generally, including equity prices and the exchange rate.

Second, we translate this boost to financial conditions?as well as the expansionary fiscal stance?into funds rate units. To do so, we attempt to quantify the relative impact of changes in the federal funds rate, fiscal policy and the GSFCI on real GDP. As such estimates are subject to considerable uncertainty we take the average effect across a number of existing studies (see Exhibit 2). With regard to monetary policy, the studies we consider suggest that a 100bp easing in the funds rate, on  average, boosts the level of real GDP by 1.6% after two years. A fiscal expansion worth 1% of GDP, on average, raises the level of GDP by 1.1% two years later. Using existing studies to gauge the effects of an easing in our GSFCI on output is more difficult as other researchers construct their financial conditions indices in different ways. Taking the average across studies that report effects for the components of their indices?thus allowing us to re-weight the effects for our GSFCI? and our own estimate suggests that a 100bp easing in financial conditions increases the level of GDP by around 1.5% after two years.

What does this mean for the real impact on the implied fund rate from every incremental dollar of purchases?

Combining these two steps suggests that $1trn of asset purchases is equivalent to a 75bp cut in the funds rate (calculated as the effect of LSAPs on financial conditions (80bp), multiplied by the effect of financial conditions on GDP (1.5%), divided by the effect of the funds rate on GDP (1.6%)). This estimate reinforces the view that QE1 helped to substitute for conventional policy. Our estimate, however, is less optimistic than the 100-150bp range cited by New York Fed President Dudley, or the 130bp implied by Glenn Rudebusch of the San Francisco Fed.

In terms of the other policy levers, our analysis implies that the ?extended period? language is worth around 30bp cut in the funds rate and a fiscal stimulus of 1% of GDP is equivalent to around 70bp of fed funds rate easing.

So how much more work should the FOMC do? Exhibit 3 shows that consideration of policy levers other than the funds rate cuts the estimated policy gap by more than half, from 700bp to 300bp. Of this 400bp reduction, the easy stance of fiscal policy is worth 240bp; QE1 is worth 130bp; and the existing commitment language is worth another 30bp.

And the kicker, which shows just how naive we were:

We can then express the remaining policy gap in terms of the required additional LSAPs. Using our estimate that $1trn in LSAPs is worth an estimated 75bp cut in the federal funds rate and assuming that all other policy levers stay where they are at present, Fed officials would need to buy an additional $4trn to close the remaining policy gap of 300bp.

Now, for the amusing part: what does $4 trillion in purchases means for inflation. Or, a better question, when will $4 trillion be priced in...

In reality, the FOMC is unlikely to authorize additional LSAPs of as much as $4trn, unless the economy performs much worse than we are forecasting. The committee perceives LSAPs as considerably more costly than an equivalent amount of conventional monetary stimulus, and is therefore not likely to use the two interchangeably. Many Fed officials believe that there are significant ?tail risks? associated with LSAPs and the associated increase in the Fed?s aggregate balance sheet. These  risks include the possibility of substantial mark-to-market losses on the Fed?s investment, which might prove embarrassing in the Fed?s dealings with Congress and could, in theory, undermine its independence. They also include the possibility that the  associated sharp increase in the monetary base will lead households and firms to expect much higher inflation at some point in the future.

Unfortunately, it is extremely difficult to put a number on the perceived or actual cost of an extra $1trn in LSAPs in terms of these tail risks. However, we have some information on how the FOMC has behaved to date that might reveal Fed? officials? perception of these costs.

Oddly, nobody ever talks about the impact of "unconvential" printing of trillions on commodities such as oil and gold. They will soon.

Our analysis is therefore consistent with additional asset purchases of around $2trn if the FOMC?s forecasts converge to our own. It is unlikely, however, that the FOMC will announce asset purchases of this size in the very near term. Rather, our analysis suggests that the timing of the announcements should depend on whether, and how quickly, the FOMC?s forecasts converge to ours.

Hatzius pretty much says it all- suddenly the market will be "forced" to price in up to 4 times as much in additional monetary loosening from the "convention wisdom accepted" $1 trillion. We have just one thing do add. If Goldman has underestimated the impact of existing fiscal and monetary intervention, and instead of closing 4% of the Taylor gap, the actual impact has been far less negligible (and if Ferguson is right in assuming that all this excess money has in fact gone to chasing emerging market and commodity bubbles), it means that, assuming 75bps of impact per trillion, the Fed will not stop until it prints nearly ten trillion in incremental money beginning on November 3. That's almost more than M1 and M2 combined.

Is the case for $10,000 gold becoming clearer?

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SWRichmond's picture

7 December 2008

How much new money will Bernanke have to print in order to do this? Early estimates (April '08) of the amount of capital destruction ran in the $1.5 Trillion range. Roubini stopped estimating at $2 Trillion, so let's say that $2 Trillion of capital has disappeared. If that $2 Trillion blew a credit bubble at an average 30:1, you have an approximate estimate for the value of global economic activity, so the scale of this number is probably correct. Now, if $2 Trillion in capital has vanished, and if that $2 Trillion had been lent out to create "credit" at 30:1 ($60 Trillion worth of credit), how much new capital will Bernanke and the rest of the central bankers have to print in order to replace it at 10:1? Answer: $6 Trillion.


Oh regional Indian's picture

4 trill, 6 trill.... all the same eh? Trillion, used to be a big number.

I'd re-weight my portfolio towards Silver if I were you (mine is).

Gold is for the Annunaki eh? (Hat Tip Zach Sitchin!!!).

Also, ever wondered about the phrase "born with a silver spoon"? Why not a gold spoon?

Meaningless you say? Stupid? 

Hmmmmmmmm.......... egregores take a long time to be born. Eh? Worth paying them some attention.

November 3rd might well be the last big Fed meeting of any import. Ever!

Mark my words.



Sudden Debt's picture

It's already getting more and more difficult to buy silver at spot. Mostly it already costs 20 to 30% above spot.

For those who still need to step in, it's getting 5 minutes before 12.

EscapeKey's picture

I haven't yet seen any issues here in the UK; is still (fairly) well stocked.

Oh regional Indian's picture

Escape, there is availability and then there is the illusion of availability.

Vested interests (who do you think supplies bullionbypost???), will keep the ilusion of availability going till the end.


EscapeKey's picture

I understand that, but I've essentially bought continuously for the past 9 months (get paycheque, buy PMs, wait for another month, etc.), and haven't yet had any issues with unfilled orders.

But having had a 2nd look today through their entire catalogue, it seems as if quite a few (especially) silver bars, and the lower demoninated gold coins are out of stock.

If they are starting to run out of stock, however, then this is very, very interesting. Inflection point?

Oh regional Indian's picture

Interesting. So we'll know soon enough won't we?

Week after next will be the prologue for what's really in store (!!!).


bingaling's picture

I have to agree with you . Either massive QE2 or none at all (which would surprise everybody except maybe a couple of insiders,but I think the insiders knew about qe2 b4 joe public and had their bets in ) . Geithner in China is also an indicator that something big is about to go down.

One question though . How is a 4 trillion dollar QE dump going to bypass congress ? Will there be a public debate or is the FED now also controlling the Federal budget ? It is the one thing I can't wrap my head around being if they can just create 4 trillion in debt ,what the hell do we need congress and a president for?

Max UK's picture

Hi escape key; some UK banter:

i use that firm too. Good supplier. BUT BACK AT THE RANCH, at the Royal Mint (who effectively set the price bar, even if it is the price ceiling) two interesting developments.
No.1: They have an alert on their site, that gold items are likely to increase in price on the 11th Nov (and they already sneaked up the prices of sovereign products recently, the basic sovereign being hiked from £245 to £255).
No.2: The only silver coin anywhere near spot, is the one ounce silver Britannia. It has been intermittently in stock, at £22.50, and recently went up to £25.00. I wouldn't be surprised if it goes up again on the 11th Nov, else 1st Jan is another likely time for a price hike when the VAT rate goes up to 20%.

Royal Mint is an interesting benchmark. At times, like in early 2009, their prices on some products were within 2% of spot; I think they are slow to respond to spot price movements, they must operate a FIFO product costing system or something, so always worth keeping them in mind for such anomalies.

Sudden Debt's picture

They charge 28$  for a eagle + 17,9% tax!

Spot is 23,3$!

Chappaquiddick's picture

If you want to pay $37 an once use these guy's - fuck that!!  

EscapeKey's picture

Well, bullionbypost are ok for kg bars, which is essentially all I've bought off their site. Their charge for those: 521*1.6/32.15 = 25.93 USD/oz.

The VAT added on top, well it sucks, but it's the law here in the UK.

merehuman's picture

stellasecrets just did a vid (utube) on escaping the vat. hope i got the name right

Careless Whisper's picture

why would anyone waste their time reading something published by an economist at goldman sachs?

boiow's picture

this guy is good for uk buyers /sellers

when i sold some gold recently he paid spot price. money in bank account immediatly.  he has also started doing silver recently and offered me spot price on a 100oz bar. nice chap too.

 i also buy from to get around the uk vat robbery.

Ripped Chunk's picture

Dirtbags. Doing business with them will only cause strife.

oddjob's picture

First Majestic sells $1 above spot.

Easy pay,easy delivery.They do limit to 300 ozs. per month.



SheepDog-One's picture

Dont worry about this gold and silver, worthless to 'trade' in chaos...instead buy a bunch of cases of pint Jack Daniels bottles. Now youre talking real tradeable money.

goldsaver's picture

Shit, I just checked. APMEX is almost out of 10oz bars and have almost nothing else below 100oz. And I was planning to buy more next paycheck. SHIT!!!

barkingbill's picture

save up an buy a nice 100oz

goldsaver's picture

At the rate is going up it would be a loosing battle.

tmosley's picture

Looks like they still have 1oz Buffaloes, as well as 1oz American flag bars.

Supply is much drier than it was when I last checked at the end of last week.  Last time it was this dry was in 2008, when the price had been cut in half.  This time, the price was down, what, 5%?  Not good news for those of us still in accumulation mode.

cole's picture

When you are thinking of buying, indecision can be fatal. It is always best to take quick decisions but ultimately mistake

Fotos del mundo - Calcular hipoteca

IQ 145's picture

A coin collection is not a retirement account. in London has all the Silver Bullion you need for your store of wealth. It's a very old and simple business model, they keep it in  the vault and you can sell it at any time to obtain current expenses currency. The website explains everything in detail. Only a fool would pay a premium over spot.

EscapeKey's picture

Bullionvault != physical.

goldsaver's picture

SO I'm a fool for paying a premium for having my physical in my safe? Only a wise man would trust some centralized storage facility with physical not been over leveraged or subject to confiscation?


Chappaquiddick's picture

Well if you really want to get paranoid, they can track your purchases from all of these sources through the vendors sales ledger.  Unless you pay cash for bullion eg at a car boot sale or an auction, where your id is not linked to the purchase, then in theory they can track your ownership and come a calling if they so choose.

We know that the US has a history of gold confiscation and that could translate to gold and silver this time in Europe and the US - I put the chances of that at near zero.  But diversification is a means to mitigate that risk, so you need a hard metal basket that includes metals other than the above and coins, which bypassed the restrictions last time.

Personally, I'm not too worried.  I hold the majority of my investments in overseas vaults and collect coins, which is fun.

tmosley's picture

Rich children were fed with silver spoons to prevent common infections, thus the saying.  Gold spoons gave no such benefit (though it was certainly tried).

Though I agree that silver will appreciate in purchasing power to a much greater extent than gold.

Oh regional Indian's picture

Thanks tmos. Not an appropriate enough metaphor then and I'm glad to know the source. See silver is good for you, better than the barbarious relic! ;-)

But equally, anecdotally speaking, here in India, for as far back as memory (it's said in old stories), when someone got really lucky in matters of wealth, they always said "Chandi Lag Gayi", which means, literally, I got silvered. You hear it in conversation all the time. Never Sona (gold).

Always Chandi. And there is some linguistic education for all of you.

In hindi

Sona = gold

Chandi (pr..Chaaandee) = silver


High Plains Drifter's picture

I know a full blooded Hopi.  He is into the legends, and walks on coals and says he can shape change. Yeh right, says I .

goldsaver's picture

I think you've got yer injuns confused.

IQ 145's picture

 Yes it's very significant that millions of people have these kinds of linguistic clues in their minds; It hasn't been that long since the Silver Tael was the unit of currency in China, also. This cultural "priming" potentiates the decision to put savings away in silver; and in not in the papers of politicians who will certainly cause it to diminish.

Gully Foyle's picture

Oh regional Indian

Silver needles were used to test for poisons. At least in MA movies. Silver also seems to be an antibacterial, that's why you see Colloidal Silver used in some healing homebrews. It will turn you Blue if overdosed. Unlike those mountain folk who are genetically Blue, the Fugates of Kentucky.




robobbob's picture

use ionic silver. much more effective then colloidal, and won't turn you blue even at X100 normal dosages

fiftybagger's picture

Grrrrr, snap, slept in late.  24 comments later:



Drachma's picture

Hello Gully Foyle:

True silver colloids will NOT turn you blue. Ionic silver solutions on the other hand can (and I am not talking about silver hydrosols).  Colloidal silver is metallic silver (Ag) particles in the range of nanometers in size. Ionic silver is cationic and is reactive in the body. It will combine with chlorine to form silver-chloride and other silver halides and salts (e.g. AgI, AgNO3, etc.), as well as silver-protein complexes. Silver halides are very insoluble in water and your body tends to sequester silver halides and their metabolites in your skin. UV light from the sun will then 'fix' these substances, effectively turning your skin into a photographic plate. This is the cause of Argyria (the blue skin condition you refer to). It is not caused by pure colloids. Also keep in mind that metallic silver (not silver ions) will not react with the hydrochloric acid in your stomach as many other metals will. In other words, huge difference bewteen ionic silver and silver colloids. Problem is most colloidal suspensions contain varying amount of ionic silver, depending on how they were prepared.


barkingbill's picture

not too many people have gold spoons. 

SheepDog-One's picture

IMF- '$7 trillion Q/E2 needed' $4 isnt even close. Between a rock and a rockier place is the FED.

Ripped Chunk's picture

Black hole. The velocity of printing must accelerate in order to keep up with the moneterization suck.

william.smith61's picture

Hmmmmmmmm.......... egregores take a long time to be born. Eh? Worth paying them some attention.

November 3rd might well be the last big Fed meeting of any import. Ever! AC Evaporator

Bluntly Put's picture

SWR, I followed your comments over at KD's site and found I usually agreed with you. That was a prescient article especially for it's time. 2 trillion stands on the Fed's balance sheet currently, add another $4 trillion and we do in fact arrive at $6 trillion. But that is most likely a low estimate, they will in fact be forced to further devalue the dollar, probably until it just snaps one day in a crisis of confidence. Again, you have stated this over and over in KD's site. Kudos.

MeTarzanUjane's picture

Just curious. Why does Tyler now believe the Goldilox propaganda machine? Usually he says: Fade-ilox on all things published or rumored from this crew.

QE1 has still not been spent, not even close, neither has TARP. Goldilox is trying to get those hot money flows funneled in one direction so they can pounce.

ZH: part of the machine?

Gen X Gen Y Hybrid's picture

i've thought this myself from time to time because the crash aint coming.  at the same time, gold has continued up and we did get the big dip earlier in the summer?

u think TD is buying AAPL?

High Plains Drifter's picture

Tyler is buying gold and silver bullion , on the dips and stashing it in one of his many hidden wall safes , in his fashionable upper eastside pad.



SWRichmond's picture

QE1 has still not been spent, not even close, neither has TARP.

Can you provide some justification for this outlandish statement?  QE1 has been spent several times already.

  1. Bernanke printed it
  2. He spent it on MBS
  3. The banks turned it around and spent it on Treasuries
  4. Fed dot gov spent it on unemployment benefits and wars
  5. Unemployed people bought things they wouldn't have bought otherwise
  6. Defense contractors spent it on hookers and blow
MeTarzanUjane's picture

THAT is outright conjecture! You are the one who should be required to prove your deliberately deceptive statements.

Pure conjecture. I don't often interact with you Sir so sorry if I'm out of line saying this but your statements are as mythical as a pink unicorn.

Except for #4, it's not a crime to invest in Treasuries. In fact it's a prudent action on their part based on prior actions. If they plowed it into something that turned out to have very low alpha you would be screaming foul.

Positive risk aware judgment.

But the real story here is how chummy Tyler is with Goldman. With that in mind, please discuss.