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Hatzius Makes The Strongest Case For QE2 Yet, Or How $1 Trillion In QE Buys 0.5% In GDP (And Increasingly Less)
Economists are not known for their fighting words. They tend to be of the meek, "world inheriting", broken clock correct twice a day, variety, so any time one of their kind goes off the territory becomes a notable event. This is precisely what Jan Hatzius did today, when he basically blasted the Fed in its completely wrong read of the economic data, which incidentally happens to be inline with what Zero Hedge has been claiming, that accounting for non-recurring, one time items, means that the entire "firm period" of late 2009 and early 2010 has been nothing than a Keynesian mirage. Hatzius says: "Later this year or early next, however, we do expect a return to unconventional monetary easing. This is because we strongly disagree with the notion that the recent slowdown in activity is a temporary “soft patch” in an otherwise fairly decent recovery, which seems to underlie the Fed’s forecast of a reacceleration in 2011 after a modestly slower period in 2010H2. On the contrary, we believe that the stronger growth of late 2009/early 2010 was a temporary “firm patch” in an otherwise extremely anemic recovery, and there is a sizable (25%-30%) risk of a renewed recession." We wonder - isn't that the whole premise behind the Keynesian cheap credit, wonder years? Does it not mean that the entire economic and market surge from 1980 onward is about to be renormalized to a fair value which is about 75% lower? There is a reason why people far smarter than us have a target of 450for the S&P... Here is why Hatzius is certain that one week (of artificially sugary data) does not a recovery make, and that QE is coming now, stronger than ever.
1. The headlines for last week’s first-tier US economic data releases were above expectations. And at least the employment report was genuinely better, with faster than expected private payrolls growth, significant upward revisions to past months, a 0.3% wage gain, and a firm household survey. The trends are still consistent with the gradual slowing in employment and wage income growth implied by our forecast, so the news is far from good in any absolute sense, but at least for now the deterioration in the labor market no longer looks as precipitous as it did after the last report. The somewhat better claims data of the past two weeks send a similar message.
2. The ISM picture was much less good, however. Although the manufacturing composite edged up from 55.5 to 56.3, the new orders/inventories gap fell again and taken by itself now points to a composite of clearly below 50 in a few months. Moreover, the nonmanufacturing composite dropped sharply, led by new orders, and the all-industry composite showed its largest month-to-month decline since November 2008.
3. The numbers over the next few weeks are likely to look decent. That’s partly because of the direct implications of the employment numbers for industrial production and personal income, partly because the housing indicators are likely to bounce from their extremely depressed current levels, and partly because the bottom-up indications for retail sales—the most important release in the next few weeks—are reasonably firm.
4. Overall the news is sufficiently mixed to make a big “QE2” announcement at the September 21 FOMC meeting unlikely. Although we suspect that the FOMC and the Fed staff will revise down their growth forecasts once more, the size of the revision is unlikely to be large enough to qualify as the “significant weakening of the outlook” identified by Chairman Bernanke as one key trigger for additional easing in his Jackson Hole speech. (The other was a meaningful drop in inflation and/or inflation expectations.)
5. Later this year or early next, however, we do expect a return to unconventional monetary easing. This is because we strongly disagree with the notion that the recent slowdown in activity is a temporary “soft patch” in an otherwise fairly decent recovery, which seems to underlie the Fed’s forecast of a reacceleration in 2011 after a modestly slower period in 2010H2. On the contrary, we believe that the stronger growth of late 2009/early 2010 was a temporary “firm patch” in an otherwise extremely anemic recovery, and there is a sizable (25%-30%) risk of a renewed recession. As this becomes clear, Fed officials are likely to act.
6. The most likely policy shift involves purchases of US Treasuries, although changes in the forward-looking language are also a possibility. Ultimately, any new purchases are likely to total at least $1 trillion, but today’s NYT interview with outgoing Vice Chairman Kohn suggests that Fed officials may only announce a smaller amount upfront and then adjust their plans in response to new information (see http://www.nytimes.com/2010/09/06/business/economy/06fed.html?_r=1&ref=business). The advantage of such a policy is that it may be an easier “sell” to skeptical officials, although the risk is that the markets will view it as half-hearted.
7. How effective is a return to QE likely to be? The uncertainties are enormous, but Jari Stehn’s analysis of the first round of QE in late 2008/early 2009 concluded that it pushed down 10-year Treasury yields by 25bp and eased the GSFCI by 80bp per $1 trillion in purchases. We suspect the next round would be less effective in terms of easing financial conditions, not because of a smaller impact on riskless long rates but because there is much less room for spread compression in the credit markets. So a 50-60bp easing in the GSFCI (relative to what would happen without QE) may be a more realistic expectation. Based on historical linkages, this is worth about ½ percentage point on growth, or a bit less given that the mortgage refinancing channel of transmission is clogged by the large number of households in negative equity. If this is the right order of magnitude, a $1 trillion purchase would not have a dramatic effect on growth, but would not be insignificant either. Of course, Fed officials could buy more and/or supplement the purchases with changes in the Fed statement to reinforce the effect.
8. In the runup to QE2, communications will remain a challenge for the Fed. The problem is twofold. First, the FOMC is far from united, and participants (especially regional bank presidents) who are skeptical of the need for further action will continue to make their views known. This causes confusion in the markets, even if it ultimately has little bearing on the outcome. Second, the leadership wants to signal that more easing is on the table without talking too pessimistically, for fear of “scaring” those market participants who believe that the Fed has a privileged perspective on the fundamental outlook for the economy. The results are sometimes a bit odd—for example, the statement in the August 10 minutes that “…no member saw an appreciable risk of deflation…” which came just a few weeks after one member (President Bullard) had presented an analysis that strongly implied just such a risk. Given the range of different opinions and the conflicting objectives, the risk of further communication hiccups and resulting bouts of bond market volatility is high.
In other words, the 10 Year may soon be at [2%|3.5%] with equal probability... Goldman's top economist said so. .
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"...and there is a sizable (25%-30%) risk of a renewed recession."
Same numbers as the idiots IQ.
Damn! I am so sick and tired of half-assed economists!
"Damn! I am so sick and tired of half-assed economists!"
You ain't seen nuthin yet. After a breathless beginning...Krugman slows for the punchline;
"The economic moral is clear: when the economy is deeply depressed, the usual rules don’t apply. Austerity is self-defeating: when everyone tries to pay down debt at the same time, the result is depression and deflation, and debt problems grow even worse. And conversely, it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses."
http://www.nytimes.com/2010/09/06/opinion/06krugman.html?_r=1
Temporary?...LOL.
They are insane, frightened little men trying to escape the lab rats they injected with the plague.
It's for everyone...it's yours, with no interest charged ;-)
ROTFLMAO!! I swear I can almost hear Krudman shrieking:
"WTF is wrong with you simpletons! Get out there and spend, you backwater hick conservative morons! You retards are too stupid to understand that paying off debt only makes debt problems worse! Spending more...much more...is the key to getting out of debt! Why is this such a difficult concept for 'republicans' to understand?!"
That this man is the establishment's choice to pimp 'modern economics' to the proles only makes the comedy of it all that much better.
AAAALLLLLLLLLRRRIIIIGHTY THEN !!!!!!!!!!!
"money comes in quietly--on slippers not tank treads." i don't know who said this or why it came to my mind recently but it still holds true. The Fed can DO whatever it wants...doing it quietly is what counts. I don't know if this is possible actually because of sites such as this but perhaps a good place to start is to "take in show" instead of being so absorbed with "The Fed." I will never understand "economics as State Dictat" of course. Yet another reason for exploring the "entertainment side of an economy." It is one of our great exports!
Man, I love the humor on ZH!
<Sacs Ram> My friend, ZH sucks, they did not even make it to Wikio's top 20 blog list </Sacs Ram>
So, do you know how they compile their rankings?
I know what this algorithm is called. I think 'tis called algorithm circlejerk?
Junked? Why? Because the junk{i}e{r}s did not understand that 'sacs ram' is an anagram for 'sarcasm'. Go public school?
ZH will take up manipulation by the blogger algos next week.
"They tend to be of the meek, "world inheriting", broken clock correct twice a day, variety..."
Outstandingly hilarious!
tyler
can you get this guy Hatzius on cd or tape. i need an upgrade to my Sounds of the Forest with Babbling Brook audio sleep aid.
Jan Hatzius reads:
- ZH?
- 0H?
- ZeroHedge?
- ...?
Consequently, Jan Hatzius will be gently prodded to retire early or decide to retire early to spend more time with his family?A lot of swinging Dicks are going to get their meat butchered if they follow the lead of the Fed. Hold your piece and wait out the circle jerk. There will be plenty of time to jizz the market and scoop up the cream when the Fed is spent.
Mind if I hide under this TARP until it dries off a little in here?
If Treasuries rally again and oil prices continue their plunge, it is only going to incite even more "Animal Spirits" as the consumer will be enjoying lower interest rates, lower gasoline costs, and they are still not paying their mortgage.
Ergo, consumer discretionary stocks will maintain their relative strength vs. the SPY.
Amazing how bad the economy is, and most advisors are still very bearish. Yet the XLY is not far from 52-week highs.
Every Equity Investment Manager I know is hard at work trying to convince themselves, their clients and their competition that they're the most bullish of the lot, the economy is fine, rainbows and skittle shitting unicorns are right around the corner.
Most all of the Bond Managers I know are positioned for an extended period of substandard growth and potential deflation.
Most everybody else is just pissed off frightened, vacillating somewhere between clinical depression and psychotic rage.
Every one thinks the gov't economist Don't Know Jack. I happen to think they know exactly what they are doing. Its just they are going to lie and smokescreen to the end. Do people actually believe that the gov't is getting ready for a massive QE II with Ben coming out meek with a lasiz faire attitude in the last meeting. THINK PEOPLE. The bastiges started this thing with a BANKING CRISIS. Now our latest news is a syphilis like drip of a few road jobs just like last time. Think about what the Gov't done in the last Depression. Confiscated peoples Gold. Reason? A lot of people had hoarded gold coins and they could instantly add this to the dysfuctional big bank balance sheets to keep some solvent, for without them its game over.
Now fast forward to now and ask yourself where is the greatest amount of stored wealth of the citizens today? That's right the ole safe and sound 401Ks. The government knows exactly where all the money is. They have already put out feelers earlier about confiscating the money only to be quashed by public outcry. The gov't could give a crap about jobs and the working man. Their main worry is keeping the banks afloat. For without this they have no printer to keep the Ponzi feed. Now since the first gamble on reinflating the housing bubble did not work they have housing in a quandry. Continue to prop up the housing market and it only delays the inevitable. Let the fre market reign and homes fall another 20% to a level attractive to bait some buyers in and you get another round of stategic defaults that the TBTF banks get to add to the balance sheet. Forget the stock market. Its obvious they can fudge enough to keep that functioning. No they are after a much bigger and badly needed pie of funds to keep the banks solvent. That ole 401K everyone has forgot about. Pretend to ignore the jobs and bicker back and forth long enough and people have to start tapping their 401K funds.The Fascist Bastards know that when the money is tapped for 17 straight weeks they are winning the game and the money will funnel straight to the top of large corporations and then the banks in short order once it is spent. Are we to celebrate people tapping the accounts every week? They are going to rob the 401k money with SHADOW QE and noone will ever suspect it, Brilliant, simply Brilliant. Just pitch a few piddly road construction jobs to keep the front running. When the brightest minds from Princeton and Harvard start talking to the people like 3rd graders my red flag goes up.
Sound Crazy? Maybe Maybe not. just trying to think like a criminal as to stay ahead of the sorry assed crooks that I vehemently distrust.
Make no mistake about it... somewhere in Washington, there is a nice thick report sitting in a committee room outlining government action in the event of a default of the USD. Some of the tabs in the report include confiscation of precious metals, deployment of National Guard assets, management of the food distribution system... just to name a few.
Uh, with the next Fed meeting on Sept. 21, what better date to set up/announce that the time is ripe for an insurance fillip for the economy?
You know the drill, the Recovery Summer is gaining great traction and to ensure an Anxiety Absent Autumn Advancement followed by a Wild Winter Wonderment, ushering in a Supremely Splendiferous Spring, the Fed will implement QE2 in concert with the Democratic SuperMajority Congress's Proposed and Republican Stifled $ Infinite BazillionQuadrilllion Money For Fucking Every Last Man Woman and Child except Anybody Gainfully Employed or Owning their Own Home and Current on the Mortgage Payment Program.
Come on ! Pitch In!
The Whole of DC is Scared Shitless.
Expect Miracles!
Paul Krugman For Minister of Economic Truth.
"You know the drill, the Recovery Summer is gaining great traction and to ensure an Anxiety Absent Autumn Advancement followed by a Wild Winter Wonderment, ushering in a Supremely Splendiferous Spring"
LOL...just damn.
"Paul Krugman For Minister of Economic Truth"
Bending to kiss the hem.+++++ a quintillion fiats laid at your feet because "debt money" is no object.
That can't be topped...SeeYa
...I give him the driver. He hauls off and whacks one - big hitter, the Lama - long, into a ten-thousand foot crevasse, right at the base of this glacier. Do you know what the Lama says? Gunga galunga... gunga, gunga-lagunga. So we finish the eighteenth and he's gonna stiff me. And I say, "Hey, Lama, hey, how about a little something, you know, for the effort, you know." And he says, "Oh, uh, there won't be any money, but when you die, on your deathbed, you will receive total consciousness." So I got that goin' for me, which is nice.
Who cares? When is SRS gonna come back?
The shaky lack of consensus within the Fed Board is a bad omen. The lack of agreement will be a real drag on all markets. Proof positive that the Fed is too powerful. Wonder if it occurred to the Fed that taking on more power just makes them the target of discontent.
QE2s main purpose is to prop up the capital in the big banks, Buy equities and pay for Wall Street bonuses. Fuck GDP, Deficits and all those other things old man investors, When investors were around, used to worry about in the 80s and 90s. Investors are now extinct. The Feds main purpose is to prop the markets. Thats all. GDP is a Bullshit number. There is no GDP. There is only At&t, Dow chemical, Exxon, IBM, Etc, Etc....
Perhaps even more important is that there is Treasury debt to sell/buy. In Krug-land, chartalism tells all. Barry Ritholtz is also now giving voice to a leading chartalist (charlatanist), Marshall Auerback. In their alternative reality, there is no wealth or money without government debt. Increasingly TPTB are forced to fall back on unreality rather than recall how wealth is actually created (NOT by printing money).
How can one invest sanely in a financial world gone mad?
Got gold?
Test
TEST TEST
I maintain that this is not a recession; this is the end of central planning. America’s banker-designed economy has finally begun its final chapter.
“Crash and burn”…this is what it would look like, according to Austrian-born economist Friedrich Hayek, the economy sliding down the hill and the bankers running after it trying to lasso it. Too bad Hayek isn’t here to see it.
No. This is not a monetary induced recession on a boom-bust circuit that moves into an induced boom. The economic forecasts of high unemployment for the next five or six years mean no end to unemployment. If the central planners at the Fed and in the government can’t see how to reemploy the unemployed, they can’t see what it’s going to take to bring employment back. And of course they refuse to let the market decide. Frankly, these self-serving central planners in their quest to destroy the middle class with a wealth redistribution to the top and bottom of the economic ladder can’t even see bubble formations.
The reason it’s different this time is the Fed, Congress and Obama keep on trying to spend their way out of it, to the point of desperation, and they can’t. Franklin Roosevelt finally shut off the monetary spigot in the Great Depression, and, even then, the economy didn’t pick up for the common man until after world war. This current 21-month recession doesn’t compare with the 30s; it is much more distorted, IMO—the corruption is bigger and wider, unwinnable wars of Empire are ongoing around the globe, there’s a 90% debt to GDP ratio, a national debt of $13 trillion, one of every five males is unemployed after anti-American multinational corporations offshored America’s manufacturing base with its high pay and managerial jobs, corporations have employed an open border replacement workforce with low wages and high maintenance costs for taxpayers, massive additions of non payers have been added to America’s funded entitlement programs, unrepentant out-of-control public employee unions are bankrupting state governments, markets are insider-manipulated and governed by corrupt regulators, a lobbyist-form of government has replaced voter representation…and raping of the American economy has become deliberate Fed policy.
Some say it was President Bush who drove the economy into the ditch, and that President Obama has had only 18 months to get its economic engine started again. Yes, Bush signed the legislation that helped wreck the economy, but it was the Democrats in office these past 43 months that wrote the spending/welfare/bailout legislation that finally pushed the economy off the cliff; and it is the Dems who are at the wheel now, making it worse with huge accelerations in the same failed programs. And, now, the system is out of gas.
Economist Henry Hazlitt saw the outlook for America’s economy as dark in 1978, but he was encouraged that “it was not entirely without hope.” He thought he had detected a break in the clouds” of government interference and failed economic fallacies where people saw that “government has nothing to give them without first taking it away from someone else—or from themselves.” And he thought he saw marked shifts in “the intellectual winds of doctirine,” that the Keynesians and the New Dealers seemed to be in slow retreat.
“There is a real promise,” he thought, “that public policy may be reversed before the damage from existing measures and trends has become irreparable.”
Alas, dear Hazlitt, you were wrong. For, as you said, the whole of economics can be reduced to a single lesson:
"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."
The consequences are upon up.
+100
Excellent summary indeed.
What we are witnessing is the morphing of capitalism into communism in the West just as communism is failing and under retreat in the East.
Communist Hungary in the 1980s had 57% of its economy in state control. Large swathes of the UK and now the US are approaching this level. 95+% of the US mortgage market is communism writ large as it is funded directly by the government.
General Motors, AIG and many, many other enterprises are state controlled. Companies relying on military contracts are effectively state funded.
Communism is a dead-end in the West just as it has failed elsewhere in the world.
"this is the end of central planning. America’s banker-designed economy has finally begun its final chapter"
Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner— and this gang knows nothing about production and has nothing to do with it.
And for those who wondered, that was Karl Marx, Das Kapital VolIII, 1894
Not that we haven't been warned...
And before you junk me or think I'm a communist for quoting Karl Marx, I'll say that his analysis of capitalism was obviously flawed on many aspects. But his analysis of the credit money system and how it can bring to collapse an otherwise functioning capitalisteconomy was correct ... and prescient.
We should have fighted with our bare hands to prevent the credit system and its small clique of financial parasites to take over the complete control of our economies and of our government. Now, it's probably too late. Or maybe not ?
"But his analysis of the credit money system and how it can bring to collapse an otherwise functioning capitalisteconomy was correct ... and prescient."
Apparently Marx read Jefferson and copied his thoughts, then bastardized them for his own designs.
I don't know, maybe.
But look at it positively. If Marx and Jefferson could agree on that one most fundamental of matters, isn't it high time that we, the people, put aside for a while our endless arguments and bickering on the numerous axes that have now developped, fueled by the financial oligarchs : Libertarian/Statist, Conservative/Progressive, Republican/Democrat, Gold bugs/Fiat bugs, permabulls/permabears, Austrian/Keynesian, stimulus/austerity, tax cuts/tax hikes, socialist/free market, Tea partiers/Anti Tea partiers, Glenn Beck supporters/haters, Krugman supporters/haters, pro war/anti war, pro israel/pro palestine, climate deniers/climate warmists, pro choice/pro life, pro gay/anti gay, atheists/Fundamentalists, pro immigration/anti immigration, Obamabots/Obamabashers, birthers/birther bashers etc...etc... etc... I am sure I have forgotten another few hundred subjects of discord and of needless polarization.
None of this really matters much as long as we, the people, do not at least stand UNITED on that most fundamental goal:
that we must free ourselves from the chains imposed upon us by the credit system and the financial parasites who are controling, and ruining, our lives.
You'll have to excuse the long pause in our conversation...I work for someone else.
"But look at it positively. If Marx and Jefferson could agree on that one most fundamental of matters, isn't it high time that we, the people, put aside for a while our endless arguments and bickering on the numerous axes that have now developped"
I think I look at things positively for the most part. And I do think, as I suppose you do as well, that we are coming to a critical mass as a nation because all political spectrums recognize one common foe to our future prosperity. Jefferson recognized it but he had decidely different views from Marx on a range of other issues.
But you have to understand that the Fed and whatever "ism" we are collectively, as a nation, coming to grips with go hand in hand with one theme.
It is a product of a centrally planned economy.
So, while we will toil together to rid ourselves of this abomination, keep in mind that what you perceive as just governance is probably much different than mine.
d
someone shed some light on the above fortune cookie post.
Edit: Well, that post disappeared. Strange goings on around this place at night.
Every economist in the world understands the decreasing marginal rate of return: The more we continue to spend, the less we get.
The most fundamental problem of all is the belief that something 'can' be done. The only thing that 'can' be done is to allow the system to correct, and that correction will and must ultimately involve the outright obliteration of many of the world's largest and most powerful corporations. Many of course, will survive and even prosper during this correction. But one thing is for sure -- there will be turmoil. This turmoil will and must happen at some point, but the prospect of the coming cataclysm is so horrifying to beurocrats that they cling to the fantasy that there is some other solution. Of course, there isn't.
But they don't know that because their understanding of economics is child-like at best (as is that of most supposedly educated people). The market cycle is alive and well, and those who think they can tame it (or best it via policy) are playing with very dangerous explosives.
Sure, bring on QE2. Bring on QE3 if you must. The politicians will watch in horror as the marginal rate of return of the trillions wasted drops into insignificance. Then they will point fingers at each other. But it is already too late. Better to contract now then contract later.
The Fed itself is an uncontrollable black swan. Hatzius is trying to make sense of the insensible. He should give up while he's behind.
Seems to me he's lobbying for QE2 more than predicting it. Notice how he shoots at the "risk" of a small, "half-hearted" QE2. For Goldman, the more QE the better.
I don't see how QE could depress short-term rates any further. QE could depress long-term rates by buying all that end of the curve, but that would accelerate the decline in NIM that Whalen was writing about, and do very little for real investment. You don't have to believe in strict theories of universal rationality to understand why "Main Street" is not interested in investing to chase after such obviously illusory expanding wealth.
http://keynesianfailure.wordpress.com/2010/08/13/qe2-the-overblown-herohorror-stories-and-the-mediocre-reality/
DOW/S&P500/FTSE/EURO short signal continues:
http://stockmarket618.wordpress.com