Guest Post: Alert: QE II Has Lit the Fuse

From Chris Martenson

Alert: QE II Has Lit the Fuse

For a very long time I have been calling for, expecting and otherwise anticipating the day that the Federal Reserve would begin openly monetizing government debt. I knew the day would come intellectually, but in my heart I hoped it wouldn't. But with the Fed's recent decision to directly monetize the next 8 months of federal deficit spending, that day has finally arrived. I have to confess, while my prediction has proven accurate, I’m still stunned the Fed actually did it.

In this report I examine the risks that this new path presents, what match(es) may finally ignite the decades-old pile of dry fuel, what the outcomes are likely to be, and what we can and should be doing in preparation.

How is this Quantitative Easing (QE) different from the prior QE?

There are two main points of departure between the two QE programs:

• The level of global support for such efforts
• Where the money was/is targeted

Let's take the second point first.

QE I consisted of all sorts of liquidity efforts that went by various acronyms, but the main act was the accumulation of some $1.25 trillion in MBS and agency debt. Some might note that taking MBS paper off the hands of financial institutions, which then bought treasuries with the cash, is little different than the recently announced QE II program because at the end of the day, money was printed and Treasuries were bought. In this regard, they're right.

But let's be clear about something: the first QE effort had the specific aim of repairing damaged bank balance sheets. That is, banks and other financial institutions had made some colossally poor and risky financial moves that didn't work out for them and needed some help, and the Fed was more than happy to oblige by handing them free money to patch up their losses.

Of course they didn't do this outright by saying, "Here take this money!"; they did it somewhat sneakily. But when the Fed hands you huge piles of money (for your dodgy debt) and then let's you park that very same money in an interest bearing account at the Fed, there's really no difference between that and just handing banks free money. No difference at all. If the Fed ever offers you free money that you can then park in an interest bearing account with the Fed, you should take them up on it, and you should do it as much as they will allow.

Indeed, that's exactly what happened. These parked funds are called "excess reserves" and this chart clearly displays the massive program undertaken by the banks and the Fed:

Now, it's also true that the Fed does not pay a lot of interest on this money, just 0.25%, but on a trillion dollars that pencils out to some $2.5 billion a year, handed straight over to the banks. I call this program "stealth QE" because it is nothing more than printing money and handing it over to the banks with a slight bit of complexity thrown in just to put the dogs off the scent. A couple of billion may not sound like much these days, but I raise it to illustrate the many and creative ways that QE I was about getting the banks back to health, and not much else.

So QE I (and the ‘stealth QE’ program) was directly aimed at banks to help them repair their balance sheets and make them whole on their terrible decisions and losses. It turned out, though, that fixing the banks did absolutely nothing for Main Street. The rest of the economy remained mired in a rut, with banks either unable or unwilling to make additional loans. They kept their QE lotto winnings and parked them with the Fed.

QE II, then is about getting thin-air money to the government which, the Fed rightly assumes, will immediately spend that money and push it out into the economy. Here's how the head of the Dallas Fed, Richard Fisher put it in a recent talk he gave:

A Bridge to Fiscal Sanity?

The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt.

This is risky business. We know that history is littered with the economic carcasses of nations that incorporated this as a regular central bank practice.

There it is in black and white. You might want to read it a couple of times to let it sink in. The Fed is directly monetizing the next eight months of excess(ive) spending by the federal government and is doing it despite being perfectly aware of the extent to which history is littered with the economic carcasses of those who have traveled this path before.

Presumably we are supposed to console ourselves with the idea that the Fed will be successful where others have failed, and sometimes failed miserably. Yes, we are talking about the same Fed that fueled that last two destructive bubbles by keeping interest rates too low for too long, failed to see the housing bubble as late as 2007 for what it was, and which apparently entirely lacked the capability to foresee any of the current mess. That Fed.

The one run by the gentleman who said this to the House Budget Committee on June 3, 2009,

“Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation…The Federal Reserve will not monetize the debt.”

~ Ben Bernanke

In summary, the difference between QE I and QE II is that QE I went primarily to the banks and QE II is going directly to the government. While this may be something of a semantic difference, it shows that the Fed is changing its strategy again. We might ask: why this shift and why now?

How is QE II being viewed outside of the US?

In a word, poorly.

The German finance minster called the Fed's application of US monetary policy "clueless" and argued that the Fed decision would "increase the insecurity in the world economy." 

China was predictably unhappy too, but initially used more diplomatic language:

Xinhua: G-20 Should Set Up Mechanism To Monitor Reserve Currency Issuers

BEIJING (Dow Jones)--China's state-run Xinhua News Agency published a commentary on Tuesday calling for the Group of 20 industrial and developing economies to supervise the issuance of international reserve currencies, and harshly criticized the U.S. Federal Reserve's new round of quantitative easing.

The G-20 should "set up a new mechanism that effectively monitors the issuer of the international reserve currency, especially when it is not able to carry out responsible currency policies," Xinhua said, making an apparent reference to the U.S. as the issuer of the dominant reserve currency.

"Considering the influence of the policy moves in the major international reserve currencies on the global economy, it is necessary for the issuer of the international reserve currency to report to and communicate with the G-20 Group before it makes major policy shifts."

All of the above is loosely coded diplomatic speak for "The US really bummed us out here, they should have stuck to the agreements we thought we had after the Pittsburg meeting. Going off-script like this was really not appreciated. We think an intervention is needed here."

Later, an advisor to the Chinese central bank went further and called the US actions "absurd."

PBOC Academic Adviser Questions Dollar’s Global Role

Nov. 9 (Bloomberg) -- Li Daokui, an academic adviser to China’s central bank, said it could be seen as “absurd” that the dollar remains a reserve currency after the financial crisis.

Here are a few other selected expressions of dismay from around the world:

United States receive criticism from all sides because the decision to print money

U.S. decision to pump 600 billion dollars into the economy has sparked a wave of strong disapproval. World leaders, who are preparing for the G20 summit in Seoul this week, warns that the move will complicate U.S. global economic recovery.

G20 tensions rise over the future of the global economy

The US last week stoked the simmering tensions by unveiling plans for another $600bn (£370bn) of quantitative easing (QE), on top of the $1.7 trillion already in place. The dollar crashed in what is being seen as the latest round of competitive devaluations, as nations seek to debase their currencies to help domestic industry.

Brazil retaliated by buying dollars. Xia Bin, a member of the Chinese central bank's monetary policy committee, branded the US stimulus plan "abusive" and warned it could spark a new global downturn. German finance minister Wolfgang Schäuble accused the US of breaking the promise made at June's G20 in Toronto, saying he would "speak critically about this at the G20 summit in South Korea."

Just two weeks earlier, G20 finance ministers at the warm-up summit in Gyeongju, South Korea, had pledged to refrain from competitive devaluation and Tim Geithner, the US Treasury Secretary, had promised the US would retain its "strong dollar" policy. At Seoul, the US will be facing accusations of empty rhetoric.

The harmonious language of hope at the Pittsburgh summit has now given way to something brazenly belligerent. The Brazilian President, Luiz Inácio Lula da Silva, has said he will go to the G20 meeting in Seoul ready "to fight." For President Obama, who has just lost a bruising midterm election battle, it will mean another painful encounter.

Greece Hits Out At Money-Printing Nations

Speaking on Jeff Randall Live, George Papaconstantinou warned quantitative easing only serves to stoke up inflation.

"You get inflation. You get a situation that's out of control. People lose their purchasing power. It doesn't get you very far," he said.

In summary, QE II has been described by several major trading partners as "clueless," "abusive," "absurd," and even resulted in a lecture from Greece on the subject of printing. By the time you are getting lectured by Greece on monetary actions it might be time for a bit of self-reflection.

It is not too strong to suggest that something of a tipping point has been reached in regards to how the US is perceived as a leader on financial and monetary matters.

Why this is important

Okay, so the US's international friends are a little upset with the US for deciding to print up the better part of a trillion dollars out of thin air. What's the big deal?

The big deal here is that the OECD countries have a monster borrowing bill set for next year. There needs to be some level of cooperation and fair play is going to be required in order to pull this off:

$10.2 Trillion in Global Borrowing

Next year, fifteen major developed-country governments, including the U.S., Japan, the U.K., Spain and Greece, will have to raise some $10.2 trillion to repay maturing bonds and finance their budget deficits, according to estimates from the International Monetary Fund. That’s up 7% from this year, and equals 27% of their combined annual economic output.

 

Just ponder those numbers for a bit. The average borrowing across 15 major developed countries is 27 percent of GDP(!). Ask yourself how dependent the entire OECD world is on a smoothly operating financial system in order to merely function next year.

Having the perception out there that the US is being run by clueless (or 'abusive') individuals is not going to help the situation much.

In order for the requisite levels of borrowing to be pulled off in a smooth and uninterrupted fashion, there can't be any hits to confidence and no major disruptions can happen. Everything has to run with clockwork precision. It is against this backdrop that I view the profoundly undiplomatic statements directed at the US as quite a bit more serious than some other observers.

Conclusion

By choosing the path of money printing (instead of austerity like the UK), the Fed has decidedly placed the US on a very risky course. I see the outcomes are almost binary: either this works or it doesn't.

If this gamble works, business will pick up, unemployment will drop, tax revenues will flow again to the states and federal government, the sun will continue to rise in the east and roses will bloom in the spring.

If the gamble fails? There we can envision an enormous devaluation event for the US dollar and the Fed having to choose between defending the dollar (via rising interest rates) or preventing the federal government from a fiscal emergency brought about as a consequence of rising interest rates. And by "fiscal emergency" I mean being forced to slash expenditures by as much as 50% in order to service rapidly escalating interest carrying costs on the short term portion of the fiscal debt load. But that's a death spiral because cutting government spending is the same as cutting GDP (it's practically 1:1) and every cut to GDP leads to lower revenues which will necessitate more expenditure cutting, etc. and so forth until 'the bottom' is reached.

I wish there was some sort of middle ground on this one, but I can't quite see it. Either the Fed's efforts work or they don't. Let's hope for success.

In truth, I‘ve long predicted that the day would arrive when the Fed would monetize government debt, but I hoped that it would never come. Because hope alone is a terrible investment strategy, I prepared for this event years ago by accumulating gold and silver as the core of my portfolio.

But now the rules have changed again, we are on a slippery slope, and gold and silver were always meant to be my "transition elements" put there to help shepherd my wealth through the transition period as the world's fascination shifted from "paper" to "things."

Now that we're "almost there" in terms of the required shift in perception necessary to call an end to one period (the "king dollar" period) and mark the beginning of another, it's time to begin considering the places, timing and ways that these transition elements can be redeployed to take advantage of the second part of this story.

In particular, concerned minds are looking for answers to questions about what might happen next and how to insulate oneself from monetary madness.  These questions are explored in detail in Part 2 of this article (free executive summary, enrollment required to access).

Comments

[bluebare]

You're a hoot, Turd.  Distinctive investment insights with a peculiar aroma. 

See Profile: Turd "Freguson."

Thanks.

[JS1234]

banks and other financial institutions had made some colossally poor and risky financial moves that didn't work out for them

What do you mean it didn't work out for them?  It worked out perfectly for them:  they got fantastically rich, personally suffered no negative affects, and stuck the taxpayers with the bill.  Sounds like it worked out perfectly for them.

[NotApplicable]

If the gamble fails? There we can envision an enormous devaluation event for the US dollar and the Fed having to choose between defending the dollar (via rising interest rates) or preventing the federal government from a fiscal emergency brought about as a consequence of rising interest rates. And by "fiscal emergency" I mean being forced to slash expenditures by as much as 50% in order to service rapidly escalating interest carrying costs on the short term portion of the fiscal debt load. But that's a death spiral because cutting government spending is the same as cutting GDP (it's practically 1:1) and every cut to GDP leads to lower revenues which will necessitate more expenditure cutting, etc. and so forth until 'the bottom' is reached.

And this is exactly why there will be QE to infinity. There is no way that politicians can make hard choices. My guess is that they will continue to flatten the curve so they can start kicking the can down the 30 yr road.

[Arkadaba]

There is no way they can kick the can 30 years down the road. 30 months? Maybe.

The thing is that we are living through a paradigm shift and much as I would have preferred not to live in "interesting times", to ignore the obvious is not healthy for you or your family (are you listening Harry Wanger?) 

Crumbling empire and peak oil. 

But ... I don't think it is all bad news. Economies, even if local, will continue.  I really like this talk by Jeff Rubin because he envisions what it might be like "after" and it is not all doom and gloom:

http://www.youtube.com/watch?v=wYuLjGQQ-jg

(and I know it is around a 45 min talk - but jeez)

[bank guy in Brussels]

Transcript of the Jeff Rubin video here, on the Oil Drum site ... interesting perspective, that the reason for the financial crisis is really oil shortage and pricing ... the real deep reason behind the last few years of actions by the Fed and others ...

And also his cheerful view we are about to arrive at the new, small-is-beautifully, locally-made-or-grown economic world ...

Jeff Rubin: Oil and the End of Globalization - ASPO-USA

http://www.theoildrum.com/node/7095#more

[Amsterdammer]

Perfect illustration of S.Johnson's 'doom and gloom'

upcoming cycle.

[Bill Lumbergh]

The chart displaying government borrowing needs is intense...in 2011 the US is worse than any of the proverbial "PIIGS".

[Cone of Uncertainty]

QE-INFINITY

[smokeybear]

"In truth, I‘ve long predicted that the day would arrive when the Fed would monetize government debt, but I hoped that it would never come."

The Fed has been monetizing Treasury debt since Open Market Operations was instituted. That is one way they attempt to keep overnight lending rates between banks close to their target rate -- by buying government debt from the public.

In 2008 the FOMC announced that they would be targeting longer-term treasuries in their overnight purchasing. This is nothing but an extension of that program.

Martenson may be confusing ordinary monetizing of government debt with direct purchase of treasuries at government auctions. There has been no mention of that action by the Fed. Section 14 of the Fed charter does not allow direct purchases.

[doolittlegeorge]

absolutely true.  how 'bout we call them "better traders" than the current crop?  no one is seriously considering the 2 trillion "on the sheet" to be repayable.  ever.

[Youri Carma]

Wrong Place sorry

[macholatte]

So what happens if/when QE2 fails and the globe panics and makes a "flight to safety"? Will people gobble up USD so tehy can hide froom the boogie man, who this time could very well be the USD?

Doesn't look like the "flight to safety" thing is going to happen the same way it did 2008-2009.  So what will it look like?

 My first plan of escape having failed, I now determined upon another.
Buffalo Bill

[SheepDog-One]

'Flight to safety'....I dont own a space shuttle, so I see no means of flights to safety from whats coming next.

[-1Delta]

It did fail last time- and will this time

 look at MUNIS

PZT HYD PWZ IQI PCK NNP MUB PCQ BFZ ETC..

[jkruffin]

Like I said last week,  get ready for 8 months of commodity and stock price increases via FED monetizations.  Its free money to those in these assets.  The dollar was given these past few days to rally so it would sink too far too fast.  We will see days like this going forward,  but the overall outcome is going to be the same.  Dollar much lower, stocks soaring along with commodity prices.  Signed, sealed, and delivered by the FED.  This week is the chance being given to get on board.  Hyperinflation is coming soon.

[Kina]

I figure my gold and silver stocks should do well out of this. Just need to sell before a crash, the rebuy at the new lower level before they make a recovery.

I gather that gold stocks did quite well during the Great Depression.

[JLee2027]

If I was Bernanke and I keep printing money, I'd better use some to buy an armored car and a larger security force when hyperinflation starts.

[Thunder Dome]

If I were Bernanke I'd be doing the same exact thing.  It's 4th down and very long.

[CheapKUNGFU]

I dont think it will be 'hyper-inflation' if they default... dont they just end up like GM and IPO a week later with a clean slate, thats how it works in the CORP world isnt it..

Heh

CKF

[Fraud-Esq]

Banks are your true sovereign. The gov is their tool. Cities are selling new bonds to pay termination fees from fraudulent muni swap deals. 

http://www.bloomberg.com/news/2010-11-10/wall-street-collects-4-billion-from-taxpayers-as-swaps-backfire.html 

These fuckers are sick. Those taken the bribes in the cities corrupt pricks not filing suit. The fed gov could also easily intervene on an emergency basis, like the FRB does. 

BUT - they won't. 

Banks are your sovereign. The declaration of independence is dormant/dead. 

Elliot Spitzer has a TV show. Yipee.

[greenewave]

Watch the YouTube video Global Riots, Currency War, Fed Bubbles at (http://youtu.be/PieHhMepVb0) for more information on the global economic collapse.

Anonymous-

"The only thing we have to fear is fear itself, and? being completely fucking destitute due to great deppression II."

[Spalding_Smailes]

I skipped Global Riots, Currency Wars, Fed Bubbles ....

http://www.youtube.com/watch?v=5Jw_Sq-0aHk&feature=related

I went with " This is your moment " ^^^^^^^^^^^^^^^^

((((2nd phase of crisis is happening NOW. Sep 16th ))) ... YOU TOLD EVERYONE " GO CASH "Call your friends, your mommy......... !!!! RUUUUUUUUUUUUUUUUUUUUUUNnnnnnnnnn ................. Before one of the biggest bull runs ever ..........

All your bear calls all the video's my lord the entire summer .......Super mega ultra bad !!!!

[doolittlegeorge]

Great article and great posts.  Good luck, Turd.  My recollection is that TARP was the "bank bailout" and not "QE."  Again "I have never understand the QE policy" but the stated goal by Treasury and Adminstration was "to restart securitization" because it was the securitization process that allowed at a minimum the ability to "roll over existing debts" and more importantly "create new credit."  What the officials DIDN'T want to happen was a "credit contraction."  This is of course "exactly what has happened."  Now "that's just part."  On top of that we have "ZIRP."  This one is a REAL mindblower!  HOW THE HELL DO YOU GAIN MORE CONFIDENCE IN YOUR DEBT BY KILLING SAVERS???!!!  More to the point "what is the public policy purpose behind it?"  In theory "it saves the banks because now they get free money and they then get to lend it out for a profit."  Of course "with re-payment risk at all times highs why would they lend it for a purpose that benefits the public"???!!!  Predictably "the banks didn't."   Sure "they bought billions in treasuries" but "the government was going hog wild on 'never let a crisis go to waste'" so "why not go all in on commodities and currencies then?"  Needless to say "it sure looks like ugly time for this pubic policy set."  Bill Cosby had a great joke about people who do cocaine.  He was told as a non-user "people do cocaine because it enhances their personality."  Cosby queried "well, what if you're an asshole?"  That's all that the Fed and indeed entire Federal Government has been doing:  "enhancing the personalities of assholes" through the cocaine of ZIRP and QE. Needless to say "the only bank left of any consequence is JPMorgan--with only two trading houses left in the form of Goldman and Morgan/Stanley."

[fiddler_on_the_roof]

Great Article. This is exactly what QE I and QE II is. QE II is inflation now. QE I can turn to inflation later via loans from Banks. QE II will ignite QE I.

[Mediocritas]

Oh, here we go again...even Chris Martenson doesn't know what Quantitative Easing is, neither do any of the people commenting above me, neither does ZH, neither does the MSM, even Wikipedia, Does ANYONE?

Listen very carefully people: 

QE IS NOT MONEY PRINTING, IT'S A SWAP

QE IS NOT MONEY PRINTING, IT'S A SWAP

QE IS NOT MONEY PRINTING, IT'S A SWAP

Are we paying attention yet?

QE involves swapping reserves for assets. The Fed is converting it's liabilities to assets. Under QE1 those 'assets' included MBS, under QE2 it's mainly gov bonds.

Now what part of this don't people get? This is the Fed's whole POINT, to maintain a reserve and use that reserve in whatever way it can when an emergency arises, and that's exactly what it's doing!

Chris says:

the Fed's recent decision to directly monetize the next 8 months of federal deficit spending

Wrong, the Fed is NOT directly monetizing debt, it's swapping

because at the end of the day, money was printed and Treasuries were bought

No, money was NOT printed. Reserves were simply engaged, it looks like money printing but it's not, and it's easily reversible

QE II, then is about getting thin-air money to the government

Yes, it's about getting money to the govt, but it did NOT come from thin air

Even Wikipedia is confused about this, right from the get go, observe:

A central bank implements quantitative easing by first crediting its own account with money it creates ex nihilo ("out of nothing")

Sure, all fiat currency originally comes from thin air, but that money was NOT simply created at the time of QE for the purpose of QE, it already exists.

Quantitative easing is sometimes colloquially described as "printing money" although in reality the money is simply shifted from member bank dollar deposits to financial instruments.

Right!

Are we learning yet?

[spinone]

I junked you.  Dollars are fungible (one dollar is the same as the other), you cannot say these dollars go here, these go there.  If the Fed is creating new money, and Fed money goes to the Treas, then the Fed is giving money to the Treas.

[Mediocritas]

THE FED IS NOT CREATING NEW MONEY

What part of this very simple statement do you NOT understand?

[spinone]

You say that the fed has reserves.  These reserves are not independently audited, but self reported.  From my understanding, at least 40% of these reserves are worthless MBS.  And on the basis of these self reported reserves, they issue notes, which are dollars. If their reserves  (MBS) are worth less, and they issue more notes, they are printing dollars from thin air.

I am a big Chris Martenson fan, and his calls have been on so far.  I think he understands more than you do, pinhead.

[Mediocritas]

I also respect Martenson, but he is not God, he makes mistakes and you should realize that Fanboi.

And, BTW, MBS are not reserves. Reserves are liabilities, MBS are assets. Maybe you should be more careful calling people pinheads.

The Fed is taking a big risk overpaying (on current market conditions) for MBS but what you (and everyone it seems) fail to understand is that by parking MBS at the Fed, the Fed is both adding stability to the financial sector and sitting on a tool for controlling elasticity of the money supply in the future.

[Attitude_Check]

The Fed has bought agencies (MBS/bonds) from Fanny and Freddie, and you are correct are assets.  Don't play word games with folks - even if you are correct.  The man's point is still correct.  These bonds have to be sold to "soak-up"the new credit. The problem is they aren't worth enough to soak-up the  original spawn.

[Mediocritas]

These bonds have to be sold to "soak-up"the new credit

No they don't. They can be liquidated at a huge loss and the money can be soaked up in other ways. The game here is simple, keep the member banks (and investment banks) alive as zombies long enough for them to build up a cash buffer, THEN expose the fraud slowly, let the lawsuits begin, let the mark to market begin. The Fed can keep a lid the rate because the Fed is sitting on the fraudulent paper.

Make no mistake, banks will pay for this in the end (at least partially, with peons making up the rest). The Fed is buying time. In the end, if the Fed ends up sitting on the loss with the reserves still out in circulation, there are other ways for the Fed to pull it back in, such as increasing reserve requirements to reinstate the original net reserve. All of this will be done slloooowwwly.

[tip e. canoe]

"Question : if Control is Absolute, why does Control need to control?  Answer : Control needs Time.  

Question : Is Control controlled by its need to control?  Answer : Yes.  

Why does Control need humans as you call them?  Death needs Time like a junkie needs junk.

And what does Death need Time for?  The answer is so simple...Death needs Time for what it kills to grow in, you stupid vulgar greedy American deathsucker."

-Burroughs

[Jendrzejczyk]

"MBS are assets. Maybe you should be more careful calling people pinheads."

Not sure if many people agree that MBS's are assets at this juncture.

[Mediocritas]

I have no dispute with you here. The Fed has become the proud new owner of fraud but, unlike the member banks, the Fed can afford that, after all it is the KING of fraud (able to create money from nothing).

[RockyRacoon]

(able to create money from nothing).

OK.  So, the Fed can create money from nothing, but QE is not it.

Now you have me confused.   How/when do they create it?

[Mediocritas]

That's right, Every CB can create "high powered money" from nothing, but QE is not an example of it. Effectively, the Fed's implementation of QE is no different to reducing the reserve ratio. Same effect.

Understand that and you can see why I see this "INFLATION, RUN FOR THE HILLS" crowd as a tad over the top. 

[Jendrzejczyk]

"the Fed can afford that...."

Thats where we have the problem IMHO. Isn't the FED printing money from nothing and charging the taxpayer interest and fees debasing our savings, pissing off the rest of the world and destablizing the equilibrium of the entire earth? (slightly dramatic, but you get the point)

[Spalding_Smailes]

Kind of like Japan, right....?

So uncle ben is swaping assets (mbs) he,he,he ...ummm & does an asset need to be liquid on the open market ????

And ......... and it's easily reversible.

So at some point said assets will be liquid ? Cdo's, Siv's ....?

Thanks ! I no junky but I shouldyyyyy

[Mediocritas]

Yes, exactly like Japan which is why all the inflationistas should think twice.

QE2 is easily reversible (from the Fed's perspective). Just reduce the size of the bond roll. QE1, on the other hand, is a nightmare.

Junk me if you want, it's like an idiot test. So you passed, just.

[Spalding_Smailes]

I don't junk.

You can always learn something ....

[flaunt]

You should avoid throwing around names if you want to get people to listen.  Otherwise you just drive them further toward their current convictions and could cause them to lose sight of what really matters... The truth.  I don't care who is right personally and I'm assuming you don't either unless you've got your mind made up and it's blinders on from here on out.

You say QE2 is easily reversible via the Fed selling bonds.  I would find that hard to argue with assuming the value of the bonds were equal to or greater than the value when they originally bought them.  If inflation kicks in, high interest rates are going to follow which will reduce the value of their bond holdings.  If a loss of confidence in the dollar occurs, the bonds will be worth far less than what they paid.  Just as in the situation with the MBS being worthless the Fed could end up sitting on a pile of highly-devalued bonds which limits their ability to sell assets to reduce liquidity. 

If their assets end up being worthless the only real option they will have is to raise interest rates. If they do that though they'll demolish any hope of an economic recovery and it could bankrupt the government with all the debt they're carrying. 

It would be less risky if one could say with assurance just where the tipping point is.  If they go too far they create too much inflation and might cause people to abandon the dollar.  They've been trying to create inflation and still aren't satisfied with the results, which shows just how difficult it is to predict exactly what's going to happen by the Fed's actions.  So if they end up causing more inflation than they meant to, then they're going to have to react, and how can anyone know whether they will take just the right action to get inflation down to their target?  They'll be afraid to pull out too much money, but if they don't pull out enough inflation would remain high.  It seems imprudent to expect miracles from the Fed, based on past experience.

[Mediocritas]

what really matters... The truth

Amen to that. It wasn't that long ago that I too was participating in the group think and calling QE "inflationary money printing". I was wrong and I admit it. Truth is what matters. I only throw names when they get thrown at me, aggressiveness in my initial post was a pre-emptive strike based on past history here on ZH regarding the kinds of responses I draw. Doesn't matter how nice I am, I get junked by people who are dead set on their dream of hyperinflation and don't want to hear any counter case.

Onto addressing the points you raise in a rational manner.

Yes, the gravest threat is an uncontrolled currency dump but I've already talked about this in previous posts so I won't repeat it now. Summary, I believe the probability is very, very low. Putting that aside, the primary concern you describe is the Fed taking a huge loss on assets that turn out to have been overvalued when the Fed swapped for them, leading to the Fed having less power to do anything in the future.

I agree with the latter point. The Fed is taking a risk here, it's reducing its ability to save banks from bank runs in the future by eating into its reserve. Find if the swapped assets hold value, trouble if they don't. The Fed is going all in here, but I don't see that it has much choice in the matter. People can criticize if they want, but do they have better suggestions? A point to make here is that the Fed can afford to take a hit and doesn't necessarily have to recover it. All that happens as a result is that the effective reserve ratio gets reduced. Is this a problem? For people who say it is, I'd direct them to look at the RBA which maintains a reserve ratio of 0% (the Australian economy is still doing OK). Therefore I don't agree that the Fed has to raise interest rates if its assets prove to be worthless. If it raises rates it will be for other reasons.

Next, I don't think the Fed is ultimately going to be successful in creating inflation through QE. All it's doing is creating zombies and these are deflationary. If inflation appears it will come from the world ditching the USD as a trading currency, but so far, the motivation behind this is "inflation from money printing". Um, what money printing? I think that this motivation is going to disappear in a puff of busted neurons when people finally get that the USA is Japan 2.0.

Finally, there are other ways to dampen inflation than just raising rates (assuming inflation even becomes a problem). Raising the reserve is the most obvious candidate, made more attractive if the reserve has been eroded through destruction of asset values on the Fed's books. That would be my first choice if I were Bernanke.

[flaunt]

No I think you're right that the Fed doesn't have any other choice, which to me favors the case for inflation.  They are experts at creating inflation and bubbles.  This is what they do.  I see no reason to believe they will be able to thread the needle between high inflation and deflation given prior mishaps.  Given Bernanke's extreme distrust of deflation, he must be biased toward inflation.  Based on his words I think he would rather see high inflation than any kind of deflation.

I'm just trying to maintain a picture of what is currently happening rather than extrapolating too far into the future which leads to a whole lot of guessing.  I wasn't suggesting the Fed would use rate increases in response to devalued assets but due to inflation if it gets above their target rate.  If the Fed were to raise reserve requirements on the banks that would essentially be the same thing as raising rates.  If they raise rates banks will leave more money with the Fed.  If they raise reserve requirements banks will be forced to leave more money with the Fed.  Both cases would result in less demand for bonds and higher rates. 

One huge problem I have with the deflation argument is that it defies all empircal evidence at the current point in time: 

1) The government has massively increasing debts and expenditures that have to be paid for somehow.  There are so many special interests that will fight tooth and nail to prevent the massive budget slashes that need to happen it seems highly unlikely they will occur anytime soon.

2) A dollar today should be worth what it was in 1913 if the Fed wasn't serious about inflating the currency.  Clearly a dollar is worth a lot less than it was in 1913.  I don't see that changing.

3) Price increases are already occurring.  You could argue that's only because of speculation in commodities but there's no way to prove that.  Bottom line is prices are going up.

4) Bernanke has said over and over again he is going to do whatever is necessary to prevent deflation.  I see no reason not to take him at his word.

5) There has been an exodus over the past decade into precious metals from currencies and that trend is only increasing and has gone world-wide.  Without extrapolating too much that indicates there is a deep distrust of currencies that is going to continue building and may end in a run on the dollar.

6) China and other countries are starting to really publically criticize the Fed and what it's doing.  They're not being as diplomatic as they used to be and they won't be charitable forever.  Frankly, some countries are pissed that they have to keep devaluing their own currencies because of our actions.  Their citizens are also having to deal with inflation because of us.  We'll see where that leads.

If things change then I will change my viewpoint, but for right now I have to stick with what I see happening in the world.

[Mediocritas]

I agree with some of what you say and disagree with other parts. Primarily, I disagree with the idea that we haven't seen this before and we don't know where it will go. I think we have in Japan. If the Fed continues on this path then I expect the outcome will be the same as for Japan. The complicating factor is the status of the USD as a trading currency (that's the potential spanner in the works and that's why I pay close attention to it)

#1: special interest. Yes, you nailed it here. This is going to be the primary problem for reversing QE2, as we see in Europe, austerity isn't popular, however, I argue that European's PTB are having a major brainout here. Their timing is utterly wrong and they're implementing austerity at exactly the opposite time to when they should be. I read the US PTB as being smarter and they'll hold off on austerity until the economy really does stabilize (which might be never). Introducing austerity at that later time will be more acceptable but, as I said to Bruce earlier, I'm not holding my breath for that one. Your fundamental argument is sound though, and I agree with it, social and political factors could prove to be the Achilles Heel for the Fed. I can't call it, have to wait and see.

#2 & 4: I used to also think that it was a bad thing to see ongoing inflation as it resulted in a perpetual transfer of wealth inwards over time and yes, it's true that purchasing power of the USD has fallen >95% since 1913 through the Fed's deliberate pursuance of an inflation level > 2%. However, I've since come to realize that the Fed is right here. Maintaining steady purchasing power encourages a steady state economy (I would argue that given population levels and resource availability, that's actually what we need), but also eliminates s buffer against a potential slide into a debt-deflation trap. In my opinion, and that of the Fed, avoiding debt-deflation and encouraging economic growth are goals worthy of maintaining inflation no lower than 2% (although I don't favor the latter objective so much in the present world).

#3: In selected areas yes, commodities and equities are the most obvious. Meanwhile house prices are falling, real wages (price of labor) are falling, etc. I'm interested in the net picture and I don't see a lot of evidence of inflation.

#5: No disagreement here. I am personally heavily invested in physical silver which obtained at an average price of $12.50. Most people think that PM prices link to inflation. They are wrong. PM prices link to volatility of currency conditions aka lack of confidence in fiat currency (as you correctly state). I don't see that changing soon.

#6: China's situation is its own fault. China needs to truly break the currency peg, it's not just America that they're burning now. It won't be long before they run out of friends.

[flaunt]

History repeats itself but never in exactly the same way.  I'm not familiar enough with what happened in Japan to make an intelligent comment about whether it's similar to what's going on in the U.S. now.

The problem with waiting is that our debt is mounting.  As the debt mounts, the liklihood of getting out of this without a demise of the currency grows less and less likely.

I disagree with your view on inflation but I don't want to get distracted from the bigger issue of what's going on right now.

Inflation doesn't necessarily have to come from consumers as we're seeing in commodities.  Money has to go somewhere and that's exactly what the Fed is trying to do, hoping the profits will trickle down to the rest of the economy.  Just because people can't afford inflated prices for goods doesn't mean the inflation will stop and reverse itself.  There's lots of money around the world looking for protection and the most natural place is in "real" things of value.  For people to dump commodities there has to be a better alternative to things of real value and I don't know what that would be right now.  Actually, I don't think Bernanke is totally off-base in thinking people will spend more money if their assets increase in value.  After all, isn't that what happened when people thought they were rich because of their housing "investment?"  Heck, I'll go buy a new car if Ben wants to boost my asset values enough.  He thinks by doing this he'll light a match and will ignite consumer confidence and an ensuing spending spree that will lift all boats.  I have doubts about whether he can get away with it but ponzi schemes can last a lot longer than people think.

I'm a little surprised you're in silver if you believe in deflation.  In a deflationary scenario wouldn't you expect lower demand from the industrial side?  Inflation is a factor in prices of everything real, including silver.  If there's more money out there searching for a home, it's going to find somewhere to park.  But yes, lack of confidence in currency plays the bigger role and actually causes the price increases.  I think those are two side of the same coin.

[Mediocritas]

My position in silver is because I see fraud in silver, that is my primary reason. Prices are artificially low (historically). Currency volatility is another reason. As more people get shaken out in forex confidence is lost, they inevitably crawl to PMs. I don't trade in PMs based on inflation expectations as the historic correlation between inflation and PM prices is weak (like I said, inflation isn't the primary driver of PM prices).

Shaking out the fraud in silver is a long term play. I don't lose any sleep watching the silver price, this might take years.

Next, I don't believe in deflation as such, I just don't expect hyperinflation. I'm trading on a short term inflationary focus (by the markets) followed by a return to reality (which may involve rapid deflation of equities) and a long period of not much (like Japan). The spanner is that USD dump.

On the topic of inflation. I see massive black holes off-balance-sheet in the banking sector. There is also a lot of hot money going around, but at some point, these have to meet. The CBs are trying to ensure that the meeting is a gradual trickle rather than a sudden shock.

On the debt. I don't see this as such a massive problem if the Fed is on the other side of it. As I've said a few times before, if the Fed becomes THE primary holder of US debt, then there is little concern that it won't be rolled (dumped). Also, the interest service on that debt becomes irrelevant as the Fed pays the Treasury back. Effectively, the Treasury borrows money from the Fed at 0% interest. 

I'm not as scared of the debt as Martenson is.

[tip e. canoe]

Martenson is making a living out of being scared of the debt.

[alpds]

http://www.cnbc.com/id/29880401/The_Biggest_Holders_of_US_Government_Deb...

Is this accurate? I thought FED is already the primary holder of US debt. 

[flaunt]

Seems like you're arguing the technicalities of how it actually works vs. the net effect.  The effect is that this ficticious money was sitting on the sidelines and now it is being brought into the system via the Fed.  The money was already "printed" but now it's going to be out there and ready to boost prices. 

[Mediocritas]

No it's all about the net effect, the end product. One says hyperinflation, the other says non-event (Japan).

[flaunt]

All else being equal the net effect is inflationary, which is exactly the reason the Fed is doing it.  Hyperinflation is the outcome when they go too far.  They won't necessarily know they've gone too far until it's too late. 

[Mediocritas]

I would correct you there to say that the short term effect is inflationary (so long as people continue to behave as if this is money printing and the newly released cash (source) hasn't made its way to the sinks (black holes in derivatives).

Long term, this is not inflationary. Zombies are deflationary.

[Fraud-Esq]

No, money was NOT printed. Reserves were simply engaged, it looks like money printing but it's not, and it's easily reversible

Explain how it's easily reversible? Who's the buyer and how much? Looks less like an "engagement" and more like a long, unhealthy marriage.

[Mediocritas]

QE2 = reduce the bond roll. It then becomes the govt's problem. Read, austerity program.

QE1 = total nightmare. The Fed will be sitting on that crap for a long, long time. The only way to feasibly get rid of it is if the world ditches the USD as a reserve currency. All those repatriating Eurodollars will need somewhere to go, and real estate seems like a good target (reinflation soak). Hard to control that though, hot money isn't very predictable.

[MiddleClassWhiteLady]

Mediocritas, could you explain what 'reduce the bond roll' means. i understand what you are trying to explain about  QE2, and appreciate the discussion as this is exactly the other side of the argument i've read elsewhere. sigh... I am still trying to grasp the basic though, alas. like what is a liability vs. a reserve and why that makes a difference.

It is the language that keeps us sheepies so ill-informed. Someone needs to make an 'Accounting and The Fed, for Dummies' video.

[Mediocritas]

The Fed is eating into its reserve (money that member banks are obligated to keep in deposit at the Fed). That reserve is a liability for the Fed (to member banks) which, in turn, is a liability for the member banks (to depositors).

The Fed uses that reserve to purchase bonds from the Treasury which has the effect of transferring the Fed's liability to the Treasury (the Treasury now owes the Fed). The Fed has now swapped a liability for an asset (bond) which earns the Fed interest (that actually gets returned to the Treasury by the Fed). That piece of magic is called "financial intermediation". Think of a liability as an "obligation to pay in the future".

When the bond reaches maturity, the Treasury must repay the original notional value to the Fed which means the Treasury takes a hit to its finances which it must pass onto the people through taxation (which is deflationary). To avoid this, the Fed will 'roll' the position. In other words, when the Treasury pays up to the Fed, the Fed will immediately turn around and buy bonds again. The effect is that the Treasury and Fed maintain a permanently open position.

This is why the Fed has been focusing on the short-dated end of the bond spectrum, and why the Treasury is going to focus on issuing short-dated bonds. It gives the Fed higher resolution control than if it went to the long end.

If inflation gets out of check, then the Fed can reduce the roll which has the effect of forcing the Treasury to actually find cash which it will do through the government implementing austerity measures (deflationary).

Hope I explained that well enough.

[Attitude_Check]

Swapping $'s for assets that aren't worth anything is "printing", and it in reality isn't really easily reversible.  Say the Fed buys and asset for $100, but in fact it's economic value is $1.  Selling the asset in a future only "reverses" $1 of the $100 "printing".  another $99 $'s worth of assets must be sold to actually fully reverse the effect.  Eventually the Fed runs out of assets to sell, and the remainder of the money will stay in circulation.

[Mediocritas]

Swapping $'s for assets that aren't worth anything is "printing"

No it's not, it's just stupidity. All that happens here is a redistribution, in this case, money is moving from reserves to member banks (QE1) and the government (QE2)

Don't forget that the Fed can hang onto these things forever if necessary. It's in no rush. The Fed will sit and sit and sit until buyers appear then reinstate the reserves. Meanwhile, that swapped money out there that might cause inflation, won't because it will ultimately make its way back to speculators / member banks that will eventually develop an appetite (again) for real estate with the Fed on the other end.

It's ultimately a zero sum game. Pockets of inflation will be negated by pockets of deflation. I believed chindit coined the term "flatulation". I believe he's right.

[desgust]

Are you the "Greg"- plague coming from FOFOA?

[Diogenes]

Deficit spending to stimulate the economy is the equivalent of shooting drugs to pep yourself up. The US has now acquired what William Burroughs called an oil burner habit.

[spinone]

If the fed starts to buy treasuries, then it will have to buy them all.  QEII will not be a temporary 8 month program.  Its permanent.  And no country has ever succeeded buying its own debt.  Its the path to ruin.

[Fraud-Esq]

that's the concept Mediocritos misses. It's far less about the semantic argument than it is about the broad concept being employed. They're undoubtedly creating money. The FRBNY has been doing this since 2007. They bought out Lehman's CLO's, that had no other market. Because of this KKR and Carlyle has that money and spends it rolling up new assets and increasing prices with their bids. 

Carlyle should be bankrupt today, all things being equal. Instead, the Fed 1) created money (swapped for worthless assets), 2) gave the money to specific people they chose. Not all LBO's at Lehman were saved. Dangerous days...

[Mediocritas]

No, actually, both you and Spinone are touting a wrong concept. There are plenty of examples of countries funding themselves that work. Even America has a history of great success when it had control of its own money supply. Things only went pear shaped for America when it handed control of money supply to private interests in 1913.

Spinone is totally wrong. Case in point: China.

Tell me, who does the Chinese govt borrow from? Oh that's right, it funds itself because it controls the PBOC. This is what has Greenspan's knickers in a twist, China isn't playing the banksters' game, meaning that the banksters are going to do all they can to take China down.

[robertocarlos]

+1. Thanks for your posts. I am learning all the time. I am in the minority because  I believe in what you, and some other posters like Mako (and even Johnny Bravo), have written.

[flaunt]

And China prints the hell out of their currency so that's hardly a case for central bank intervention.  Does it really matter if you're impoverished by a private central bank or one that's part of the government?  Money should be a commodity just like anything else.  Money is too important to give any government control over it.

[Mediocritas]

I respect your opinion on this flaunt but I totally disagree. Money supply is far too important to leave in concentrated control (private interests, unaccountable governments, royal families, etc). Money supply must be as democratic as possible, that is, controlled by a government that is truly democratic, therefore making inflation/deflation an election issue.

As far as I am aware, there is only one country in the world right now where this is implemented: Guernsey. (And it works).

As for money being commodity-backed (as the Austrian school suggest), I fundamentally oppose that. Commodity backed currencies are horribly inelastic. They are brilliant in a steady-state economy, but where are the steady-state economies? Economies grow and shrink and the money supply has to grow and shrink with them. Commodity-backed currencies fail for that reason, and secondly because they encourage hoarding.

Just look at all the gold buffs around here. If our currency again became gold backed they'd hold onto their gold tighter than ever. We couldn't possibly have a functional economy unless the government confiscated gold.

[flaunt]

You say money is too important to leave in concentrated control and I agree.  There's no such thing as an accountable government.  Inevitably what they all do is seize too much power and eventually destroy the country they were supposedly formed to protect.  Government is the biggest ponzi scheme the world has ever seen.

Decentralized money controlled through private non-government backed interests is the exact opposite.  Anybody should be able to create currency and that's exactly how it used to be in the U..S.  Many banks printed their own currencies and there was competition.  Competition is the only way to ensure fairness in the marketplace.  Government is a one-way ticket to hell as history has proven many times.  Today if someone tries to create a competing private currency government quickly comes in and stamps them out.  Case in point the "liberty dollar."

If gold and silver backed currencies were so bad, how did we have the industrial revolution?  Generally the ones who prefer fiat currencies are those who have monopolistic control over them.  Everyone else prefers something more real.  Why should anyone be allowed to force someone else to use a particular medium of exchange?  Governments love monopolizing the medium of exchange since that allows them to more efficiently steal from private interests.

Governments encourage hoarding because people know that the government can't be trusted.  Without the government creating uncertainty people would not have such a death grip on gold and silver.  As things are going now this will only become more of an issue going forward.

[Mediocritas]

Decentralized money creation was a disaster. The period in which banks issued their own banknotes was characterized by constant mini-crises. Central banks were established specifically because of these crises to provide stability. If you eliminate the central banks and go back to the wild wild west of money creation, then you will again get chaos and after a short time the CB will be reformed out of necessity.

As for the industrial revolution. It was characterized by a boom in bank formation. If it wasn't for banksters providing credit, the industrial revolution would have been slower. The only difference then was that the 'reserve' was actually gold, doesn't change the fact that the majority of currency units out there were actually backed by nothing. Today's fractional reserve system is just a modern version of the fractional reserve system then, the only difference is that the crooks today realized that a commodity backing the numerator of the fraction causes too much trouble, so they eliminated it.

On the final point regarding govts. I still have faith in TRUE democracy, but it is not what we see in America today. Therefore I agree with your conclusion (that govt can't be trusted) but not your foundation. I do still believe that real democracy is possible, it depends 100% on the participants in the democratic system actually *being* participants and by that I mean not only voting, but *understanding* the issue being voted upon.

Your icon sums up the difference between us. You say "don't vote", I say voting must be compulsory. Unfortunately, the primary problem though with our democratic system is that a person who knows jack shit about an issue can't make a good decision about the issue (if they do it's just luck). Because ignorance is EVERYWHERE, sold and desired...we're fucked.

[tip e. canoe]

i think you're probably the 1st person here ever to mention Guernsey.  it's a shame it's not discussed more...a really interesting case study.   it's also very small which is probably why it works more or less.   question is: could it scale up?

[Mediocritas]

I think it could scale up, yes. Some would argue that China is exactly the proof of this.

My only argument with that is that money supply in China isn't adequately democratized to satisfy me.

[tip e. canoe]

yes, but who is adequately democratized?  who will ever be outside of a handful of islands?   have you ever considered taking money creation out of governmental control completely, ala P2P style, completely open source?

[Mediocritas]

Yes, I've considered it. Maybe it's workable but of the suggested models I've seen to date I haven't seen one yet that really convinces me....

Not ruling it out though. Paul Grignon's idea about digital dollars seems the most robust against the problems that go with open source money creation.

The primary problem (from history) is if the core "money" isn't standardized somehow then you end up with hundreds of different currencies in the same economy. The controllers of each currency constantly attack one another (rumors, counterfeiting, etc) and trade becomes difficult as nobody knows exactly how much they can really trust currency X vs currency Y.

We see the same thing with every barter-card style system that sets up when a core currency collapses. These things get corrupted very fast, typically when the controllers discover the personal benefits of causing deliberate inflation.

It's a tricky one...

[MiddleClassWhiteLady]

could somebody explain this discrepancy to me. over on another site "pragmatic capitalism" i read the below quote. http://pragcap.com/qe-inflationary. Please note I am in no way trying to start a fight on ideological grounds or any other - I simply don't understand.  Everyone seems to have 180 degrees different facts here around inflationary or not inflationary??

“That anticipation of QE might have fueled a speculative rally which predominantly flows into commodities thanks to reflexivity — that i think we can agree on.

That QE itself is an inflationary phenomena remains totally unevidenced — to the contrary, observe core inflation readings in the context of QE1 and QE lite, please!

You’re taking a speculative leveraged flows into notoriously volatile raw inputs and end-of-the-capital-structure financial instruments and from that construing that a fed measure that hasn’t begun yet causes inflation? Color me bemused.

I think it far closer to the truth to say that the fed plans to exchange some very-cash-like assets out of the private sector and replace them with cash itself. That very minimally alters the character of net private sector financial assets, and should not be expected to do much of anything — as indeed QE has in the past rarely if ever accomplished much of note outside of a liquidity crisis. If wall street wants to take the anticipation of QE as an excuse to flood speculators with call money, taking advantage of popular misconceptions of what QE is and what it can do to create standard-issue speculative demand for assets, that’s another thing entirely.”

And this is really the key here.  QE does not add new money to the system.  Therefore, it is not inherently inflationary.  There are not more dollars chasing the same number of goods.  There has certainly been the perception of this (due to misconception) and even some borrowing to buy risk assets, but ultimately, without an increase in the amount of currency in circulation the only thing that will justify these higher prices is higher wages or a surge in borrowing.   Unfortunately for working class America wages and lending are dead in the water."

Anyway, that's the quote.

[Fraud-Esq]

Of course there are more liquid dollars chasing goods. Read above info I posted about Carlyle and lehman's CLO for example. That was dead money. Carlyle was dead in the water. Look at what they've done lately. They are literally bidding up prices and buying things. Once dead, now buying things with cash from the Fed. The Fed is putting out liquid cash for dead assets while also holding down rates. You have to consider FASB too. We're ALL playing that fraud game now. Prosecutions would be funny because the defense would say to the gov, "No, YOU'RE a fraud"

"No, you are."

"You are too!"

They're both right. 

Read Ben's 2002 or 2006 (I forget) speech on avoiding deflation. He explains it there. It's the Bernanke doctrine

[Mediocritas]

Pragcap is right about QE, one of the few sites that is.

QE doesn't add new net money to the system, it just moves it. If markets want to get all excited about that and run commodities and equities up to new highs then, by all means, go ahead. Markets have a long proud history of being dead wrong about things.

The problem is, (as Fraud-esc actually correctly states), that the money gets moved to the wrong places. Those places do NOT promote economic recovery, they just create zombies all over the place. Not only do they suck productivity down the drain, but the effect also destroys confidence and detracts from the activity of the living.

The end result of creating zombies is deflationary, just like Japan.

For the record, I am fading the hell out of this bogus QE2 rally. The underlying economy continues to degrade, idiots are chasing rising commodity prices while inventories continue to overflow. In other words, supply is overflowing while demand is dying. I'm not chasing that.

[Cheesy Bastard]

idiots are chasing rising commodity prices

Yeah, especially the ones that eat or drive.

[Mediocritas]

Slap accepted. I should focus on the speculators when I say "idiot". Eaters and drivers are the victims of idiot speculation here.

[chet]

QE seems to add to the total amount of reserves, doesn't it?  Maybe the debate is over whether those reserves ever get out into the economy or sit there forever.

My understaning is when the Fed buys an MBS from BofA it credits the price to BofA's reserves with new (digital) money.  It isn't paying with some other already existing reserve.

That's why both the assets and liabilities (excess reserves) of the Fed have ballooned in the last couple of years.

[Mediocritas]

Good post Chet and that is one of the primary reasons why, in my opinion, QE2 has been aimed directly at the govt.

When the Fed buys MBS from BofA it uses BofA's own reserve (with the Fed) to do it. The cash never moves, it's just redefined, now as an 'excess reserve' for BofA. The hope now (of the Fed) is that BofA will expand lending and trade its way out of the hole.

Unfortunately for Bennie, the banks haven't been performing as he expected (for multiple reasons that I won't go into now). The greatest problem is not that banks won't lend, it's perhaps that, like Japan, people don't want to (or can't) borrow.

The penny dropped with the Fed that without cash getting to the peons, QE1 goes nowhere, hence QE2 is targeted more at main street. Going via the govt is necessary as the Fed has no distribution channel immediately available to go straight to the peons.

Perhaps QE3 will see direct citizen credits?

[Attitude_Check]

Do you mean QE2 is driving commodities higher? HMMM sounds similar to inflation.....

[Mediocritas]

Speculators are driving commodity prices up while producers are boosting production to grab higher prices. Meanwhile, organic demand is in decline. 

How do you think this story ends?

This "inflation" is a sucker's play, don't get caught on the wrong side of it.

[johny2]

money is moved from being kept as a reserve to being used. to me that is very likely going to prove inflationary, exactly like Bernanke desires. and i dont buy into this rally, but i think it is too dangerous to bet against it. 

[blindman]

your link resulted in a viral response by my operating system.

coincidence, perhaps?

[EZYJET PILOT]

I don't know how Chris can say QE2 is money for the government, it is free money for banks also, supposedly they will put this into the economy but not for the greater good of main street, it will be thrust into buying commodities and all sorts of weird and wonderful avenues.

[Mediocritas]

Nah, it will go into bailing out the states and their angry pensioners.

[tony bonn]

"the sun will continue to rise in the east and roses will bloom in the spring."

oh it will work alright....the sun will rise up over a massive summer monsoon....just in time to ignite another war somewhere for the blood thirsty plutocrats pulling on bernankrupts strings....

[Chappaquiddick]

So where do you think CM is putting his PM wealth next then??  I can't be arsed giving him an oz of silver for his research but I'm keen to hear where else you can exchange your dollars for something that might actually be worth something - like the Yuan perhaps??

[dehdhed]

But that's a death spiral because cutting government spending is the same as cutting GDP (it's practically 1:1) and every cut to GDP leads to lower revenues which will necessitate more expenditure cutting, etc. and so forth until 'the bottom' is reached.

one of the reasons our economy is in such dire straits is that government is hogging all the capital needed for capitalism.   even if their deficit spending adds to gdp, it's not an efficient allocation of resources.  it's not the death spiral as he argues .. the death spiral is the continued deficit spending which soaks capital out of the economy.

[Charley]

Dehdhed,

It is impossible for government to hog all the capital needed for capitalism ... in fact, the government plays exactly the opposite role: it is absorbing all the excess fictitious capital that would otherwise be worthless.

Think TARP ...

There is no shortage of capital in the economy -- there is a massive excess of capital, labor, machinery and raw material. It is this excess that now have the G-20 at each others throat, trying to decide who will take the losses on all the excess capacity in the global economy...

[DosZap]

I wonder how fast this ship wpiuld turn, and maybe for a long while, IF, the Fed would distribute this fiat currency DIRECTLY into the peoples  hands?.

Can you imagine how fast the inventory pipelines would empty?, if the American taxpayes got their hands on a 100k free and clear?.

Would there be jobs creation?, how about having to re-supply business inventories, and car lots, and you name it.

I say,all else has been tried, why NOT do this?.

IT might just be the KICK start needed to get this boke dik economy moving again.

Some would save it,most would not....................Free money?(FRNS).

No way...................bstds would run over you getting to the Malls, and stores to spend it.

Couldn't be any more of a waste than the 14 T they have already pissed off.

[Charley]

The world is coming to an end, find out how to survive in my subscription only followup post...

Chris, you are better than this, dude.

[Cone of Uncertainty]

True.

[DosZap]

They ave been monetizing the debt for a while, the only difference is they told the PUBLIC openly.

They are not ahead of the entire class.

[Alcoholic Nativ...]

BUT BUT BUT.....AL QAEDA IS GONNA GONNA GET US!!!

edit: This post was retarded, but something you will hear on your 24 hour "news" channel in the U.S. constantly

[snowball777]

Two bigtime currency manipulators teapots (crackpots) calling the other's kettle black.

Fourteen cannibal kings / Wondering blithely what the dinner bell will bring...

http://www.youtube.com/watch?v=tK3Ce9md96g

[blindman]

?

[unemployed]

  All this QE commentary is fogged.   The US has had massive stealth quantitative easing easing for the last 2 years.   Stealth quantitative easing is when the people that print the money,  i.e. the Banks and the SIVs,  increase their assets and liabilities.  The FRB no longer "prints money"  in the US.   If QE1 meant something,  bank assets/liabilities would have remained constant.   Instead for SQE1 the banks have increased their assets/liabilities on their books almost 2 trillion to fund 2.8 trillion US deficit.   Where the real money is printed in derivatives, leveraged securities,  and short sales is in off the books entities.

  The QE is just speak for the FRB being the garbage bag holder of the junk the banks dont want.

   When  people wake up and realize the FRB has only printed a couple hundred of billion in bank notes while the US has foisted 3 trillion in deficit,   they will figure out who is doing the SQE.    Those living in the past when the FRB changed the reserve rate to enable the banks to print more money can Rip Van Winkle their way to grokking 1 dollar in required bank reserves to over 100 dollars in bank assets.    And that is just what is on the reported books.  Only the devil knows what is in the structured investment vehicles.

[unemployed]

 deleted to protect the innocent

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