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The QE2 Sails
From The Daily Capitalist
The Fed Open Market Committee (FOMC) announced today they would buy $600 billion of US Treasury bonds through Q2 2011, mostly of longer-term maturities. They said:
Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. ...
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
My guess was that they would target an amount of about $75 billion per month and that is exactly what they chose to do. And I will characterize the amount of $600 billion as their target amount is a "tentative" move, a "see how it goes" approach, which is also what I thought they would do.
Here are their purchase targets:
Because they still have to maintain the level of securities in their existing portfolio from QE1, they expect to reinvest $250 billion to $300 billion over the same period:
Taken together, the Desk anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.
We will see how the markets react and if this pushes down long-term rates for the long term. If the market anticipates that this is the beginning of a long term strategy, then, rates will move the opposite way.
I think this move also indicates that the employment numbers coming out on Friday will not be good. Again, unemployment will be the Fed's prime measure of "success" especially in light of the election results.
We need to ask where all this new money they are printing will go besides into the pockets of the Prime Dealers. At the very least this injection will boost the financial markets for the short-term. My belief is that this new money will find its way into the general economy, increase money supply and result in some price inflation. QE doesn't have the impact of a credit based expansion, but another $600 billion in fresh money will have an impact. The problem is that I don't think this will work to stimulate the economy and raise employment and that is why I believe this is just Step 1 of QE.
If GDP stays flat, or declines, and unemployment remains high, I think the markets believe more QE will be coming and that it will mean serious inflation. And that will mean stagflation.
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There is no reason to believe Quantitative Evil 2 will have the effect of hoodwinking the nation's producers into creating more wealth (as distinct from painting the GDP tape). However many costless electronic entries the Fed makes vis-a-vis primary dealers offloading Treasuries, what would primary dealers do with the credit that they couldn't have already done (but haven't)? Even ignoring the very large elephant in the room of the doubling of the monetary base since 2008, the marginal "utility" of QE's wholesale dilution of the value of each existing unit of money stock, pari passu, is low and falling and may in fact be negative, as the remaining Treasury holders, en masse, or even at the margin, stop worrying about the return on their principal and start (or have already started) worrying about the return of their principal. QE2 is an act of desperation and now, more than ever and even without the burgeoning MBS Crisis, Part Deux, it is clear that Bermonkey's owners are making it up as they go along. The 40-year experiment with a noumenal global reserve currency is unravelling at an increasing pace. Gold, agriculture and energy speculations should soar.
My theory is that all this "liquidity" is being used to put out the fires on bank balance sheets caused by bad MBSs, CDOs, etc., which is why the banks don't lend it out -- it's being used to counteract the black hole(s) on balance sheets.
(Sorry for the mixed metaphors.)
Uros
I'm trying to figure this out too and not many blogs give a good mechanical description. From what I know and please someone correct me if I am wrong . . .
the Primary Dealers are selling to the Fed from their balance sheets. This could be their inventory or it could be Joe Smith's individual account or it could be from ABC companies investment assets.
If its from the PDs inventory then MB (monetary base) increases but M1 and M2 do not. It just sits with the PD in reserves raising the amount they could ultimitaley lend if demand existed.
If its from Joe Smiths account and he leaves it in cash or withdraws it it ends up in M1/M2
If it from ABCs account it depends what they do with it (reinvest in ARS/business opportunities/MM) whether it ends up as an increase to M1/M2
To me it appears that the PDs are offloading tons of Treasuries and holding cash or risk-on assets. If they did not want the cash or reinvestment and just wanted to trade and make trading fees they would be encouraging Mr Smith and ABC companie (as clients) to be sellers to the Fed. I don't think this is happening. I worked for a large portfolio when Goldman had a bunch of crap securitized assets that they desperately needed to convert to cash for their reserves. I got calls from what sounded like junior cold callers trying to pitch the stuff days before they went belly up. So the Pds can push the sales team downstreem pretty fast. In this case I think they are happy to trade from their own account.
Ron Paul will kick Ben's ass and dismatel the fed.
The end.
What they are doing essentially is akin to a snake eating it's tail because he or she is hungry. The Fed doesn't have enough buyers external of the fed system to buy their treasuries, so on top of the shadow buying by offshore shells and others that do it for the Fed, they buy it right out and soak up the excess. They are monetizing their debt here and abroad. It's monumental printing of money to buy the IOU's so our govt. can continue to function at an unsustainable rate. By them buying their own treasuries, it also negates the market from demanding much higher yields on bonds. A normal procedure would be that if nobody is buying your debt/bonds, then your raise the yields in order to intice buyers into buying them. But since they don't have to worry about that, it doesn't matter if someone does or doesn't come in to buy. The rate will be kept as low as possible.
The two things that foreign buyers and institutional buyers can do is for one not to buy at all and see the velocity of money/monetizing happen faster to the the US. And two, start dumping treasuries. We are done as a financial powerhouse in the world. If the QE's have been working why are we still doing the same 750 billion here and 750 billion there, actually you can really say that this is not QE2 but QE5 and possibly QE6. And that is because of Paulson and Bernanke going to congress twice (the 750 billion dollars) for bank bailouts and then the 3 mentions of the US backing certain securities, backing money market funds (this was done because they broke the buck, you can find the Cspan interview on youtube of the Senator or congressman you was told that more than half a trillion had already left our banking system that morning and that if the govt. didn't back these MMF then the US banking system would be insolvent by early evening), etc. etc..
If the Bankster Oligarchy is committing treason.. then why aren't there hearings and talk of a military junta?
There must be some union of Lions or Patriots in the combined branches of the armed forces . They all know who each other are vs. the ticket puncher bureaucrat types. To unite and create a formal document and send it to the Joint Chiefs would at least serve written notice that this has become a national security matter and that they are watching.I only wish the Joint Chiefs had the sophistication to see how this is going to impact national security. They have an obligation to speak up.
When insolvent banks are a higher priority than the people it can only end one way.
Can you throw in a few tubes of KY too Bennie?...Pleassseee.
You're hurting me.
I will check back later but what does this do for job creation, State deficits, Inflation or deflation? Does this mean I should cash in all my T-bonds that are ready next month? I don't know, I really don't get this.
Can someone explain to me where the 600 billion is actually spent? If they are just buying Treasury's, shouldn't that mean they are lending the USGov 600 billion, so the only way it could reach the economy is via gov spending? How does this money make its way to the stock market?
They don't buy the treasuries directly from the government. They buy them in the open market. In otherwords, the amount of treasuries purchased by the Fed does not imply that the same amount of treasuries will be issued by the gov.
from FRBNY site:
"The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).
On March 18, 2009, the FOMC announced a longer-dated Treasury purchase program with a different operating goal, to help improve conditions in private credit markets.
On August 10, 2010, the FOMC directed the Open Market Trading Desk at the Federal Reserve Bank of New York to keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.
On November 3, 2010, the FOMC decided to expand the Federal Reserve's holdings of securities in the SOMA to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate."
and
"The Fed uses three tools to implement monetary policy, the most important being open market operations. These “domestic operations” are conducted for the System only by the New York Fed under direction of the FOMC. Through open market operations, the Fed buys or sells U.S. Treasury securities in the secondary market to produce a desired level of bank reserves. These securities are held in the System’s portfolio, which is known as the System Open Market Account or “SOMA.”
The “primary dealers,” designated by the New York Fed, serve as its counterparties in open market operations and other securities transactions. The Fed adds extra credit to the banking system when it buys Treasury securities from the dealers and drains credit when it sells to the dealers. As the laws of supply and demand take over in the reserves market, the cost of funds for the remaining reserves finds its level at the federal funds rate."
Thanks a lot.
Ah, quit your whining and just give it to the gang on fortune hill already.
"Cough it up and deliver it with a smile..."
http://www.youtube.com/watch?v=_LzZjXdIqo0
Like you have a choice, nobodies.
Invest? I love they used that word. They must be the ONLY investors!
Soon we will see inflation....
Now what? Captain, ice berg dead ahead. Hard right, hard right, and down she goes.
The $600billion of U.S. Treasury bonds bought will increase the GDP, dollar for dollar, right?
Don Levit
Is it wrong to assume this money goes to the economy?
Fed buys from the Primary Dealers.
PDs sit on the cash because they are being sunk by bad loans and bad bonds.
Try owning cash spread bonds in this environment. Ben calls my pad every day. There is nowhere to run. You need spread so you have something to compress when it goes the other way.
Don't forget about the theoretical multiplier effect. This is the prime theory taught in economics, and with this $600B infusion, I would about bet the FED is expecting a mutliplier of about 3-5x, so in essence we are looking at $1.8 to $3 Trillion dollars of new banking power. Guess where that money is going? Stocks and treasuries just like the last QE. The end result remains to be seen, but once the QE plug is pulled, its crash city on Wall Street and Treasury street.
With that said, you have about 9 months of stock gains coming for free!
but thats just it, theres practically no M2 so this is what you get instead. Its like a 20 amp fuse made from shitty pot metal, its gonna take 100 amps of juice to get thru but by then the whole board is toast.....so it won't matter!
Obama said it when he got elected 2 years ago. In 2012, the national debt would go down 25%.
Either way, he's doing it! Even if he needs to trash the dollar. And at the end of the line he will get his number, and in 10 years time people will say:
"Can you imagine. 10 years ago, you could buy a car for only 20000 dollars! That's the price of a cola can now!"
and that will be the only thing people will remember from this era.
"and that will be the only thing people will remember from this era."
Bingo! Everybody forgets. Almost instantly. How many people remember that the dollar used to be pegged to gold at $35/oz., and a month's rent on an apartment was $70? Anyone born before 1960 should remember that, but most of them have forgotten.
If this FINALLY pops the bond bubble this ship will be sunk in no time.
If this FINALLY pops the bond bubble this ship will be sunk in no time.
This is the beginning of the Fed's "Austrian Solution": $4-6 trillion in monetization.
This becomes less about stimulus and more and more about debt repudiation all the time.
"debt repudiation" - paying off some1 elses debts with your money
No, debt repudiation = paying off bondholders with their own money.
So why do I care about bondholders?