QE2 Trashing Trifecta: Peter Orszag Joins Gross and Grantham

Tyler Durden's picture

The president's own former advisor, and now very much outspoken critic, Peter Orszag has joined the cool kids by releasing the following scathing oped in the NYT, whose topic is, drumroll, QE2: "by perpetuating an artificially low 10-year government bond rate, the Fed may be delaying the very fiscal policy action that the nation most needs, while doing little to boost an economy whose principal problem is not high long-term interest rates." The message, for anyone having read the prior two essays, or Zero Hedge, is nothing new. What is, is the massive onslaught by virtually everyone of any political and financial stature on this pretty much inevitable policy decision by Bernanke. The question we have is did Goldman's estimate that QE2 needs to be up to $4 trillion blow the party? Are expectations for future monetary easing so high (and unattainable) now that the market had to be artificially be pushed lower so there is some upside on November 3? Because for all those who believe that the Fed has found religion and thinks a strong dollar is suddenly a policy goal, we have two words: "Wake up."

Sailing the Wrong Way with QE2?, posted in the New York Times

To bolster the economy, we need a three-part shift in policy:

    · more fiscal expansion (read: more stimulus) now;

    · much more deficit reduction, enacted now, to take effect in two to three years; and

    · an improvement in the relationship between business and government (the current antagonism, even if not the primary explanation for slow hiring and sluggish investment, does seem to be affecting hiring and other business behavior).

Unfortunately, the necessary shifts in fiscal policy are extremely unlikely to happen, and the strains between business and government are now so deep that they will take time to address. So we’re left relying on monetary policy — and in particular a much-anticipated second round of quantitative easing by the Federal Reserve — which may create more problems than it solves.

As Paul Krugman and others have pointed out, the net effect of “QE2” is similar to having the Treasury sell short-term T-bills and using the proceeds to buy back 10-year bonds. The result is thus that the average maturity of government debt held outside the government falls. (From a debt management perspective and given current interest rates, the Federal government should probably be lengthening the average maturity of debt held by the public rather than reducing it, but let’s not worry about that for now.)

What are the benefits of such a reduction in the average maturity of government debt in the current economic environment?

They’re quite limited for two reasons. First, at the likely scale of the Fed’s purchases, the long bond rate will fall only modestly. And second, a modest reduction in long-term interest rates will not have much effect on economic activity at a time when corporations are flush with cash and worried about the future. (As Alan Blinder recently emphasized, “To attach some illustrative numbers to this concept, suppose the Fed succeeds in trimming government-bond rates by 30 basis points, and that brings down corporate bond rates by 15 basis points. Will that make a big difference to corporate spending?”) Many commentators, including a few presidents of the regional Federal Reserve banks, have noted the risks to the Fed’s credibility from QE2.

Ironically, QE2 could make the right policy mix less likely. In particular, any substantial additional stimulus will probably not (and should not) be enacted without a medium-term deficit reduction package — and that medium-term deficit reduction package is less likely to be enacted when interest rates on long-term government bonds are so low.

In other words, by perpetuating an artificially low 10-year government bond rate, the Fed may be delaying (even if very modestly, given the modest impact of the action on long rates) the very fiscal policy action that the nation most needs, while doing little to boost an economy whose principal problem is not high long-term interest rates.

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tip e. canoe's picture

methinx you're dead on chet.   sneaky is as sneaky does.

ElvisDog's picture

I disagree. There is no way the Fed can expand its balance sheet at a $1.2T annual rate for very long. No way the rest of the world (i.e. China/Europe) is going to sit back and take that. QE2, like all the other bullshit stimulus, is intended to jump start private economic activity. When it doesn't work, like all previous attempts, the Fed will have to abandon QE2. I give it 2-3 months at $100B a month at most.

cougar_w's picture

I'm smelling politics.

1) Play down the $2-4T QE2 that is fucking baked into the fucking cake.

2) Elections. We win (for known values of "we")

3) Post-elections roll out QE2 like Grant taking Richmond.

4) Dollar goes down like a $2 whore. Global currency crisis. We win again.

5) Epic lulz ensue.

SheepDog-One's picture

Politics schmolitics, control grid for the worker slaves to give them the illusion and belief they actually have a choice and are not a slave.

cougar_w's picture

"control grid" sounds like some kind of central planning anti-Communist paranoia. Christ on a crutch, this thing is in flames. The whole economy and monetary system is set to burn down and take everyone with it, while the wealthy escape to their fortified islands to lord over their serfs and screw the female slaves.

Damage control grid, maybe. I don't see even the pretense of controlling anything here except perceptions, and that only long enough to get past elections, and that only to get them another 2 years in the high seats of power. And after that whoever gains control can manage the god-damned ashes, centrally or democratically or haphazardly or barely or however the hell they want.

Cecil Rhodes's picture

how about Sherman taking Savannah, he and his officers convened a mock legislative session and jokingly voted Georgia back into the Union over brandy and cards.

bogey4's picture

There is no alternative, and Orszag is being disingenuous in his analysis, because:

  -  there will be no more fiscal expansion given the makeup of the gov't, particularly post-election

  -  there will be no deficit reduction, now or ever.  Neither party will propose anything substantive to reduce the deficit because they don't want to alienate the electorate and

  -  the relationship between business and gov't, or rather the "poor" relationship between the two is a total construct of the corporatocracy in an attempt to siphon even more from the taxpayer and isn't a valid disincentive at this point, no matter what the CEO's say

Therefore, there is only one tool for any level of government to employ, thus you have QE.

 

 

monmick's picture

They are all mouthpieces for the Fed, preparing the markets for next week's decision...

John McCloy's picture

We are now seeing what I predicted a week ago. They have rallied the market on rheotoric for months now of QE and now in order to feign a surprise in order to keep the momentumenomics of America and sentiment condition going in their direction they have been trotting out the rumors and tapered expectation for the sole purpose of a surpise.
This means Ben will bust out a whopping 2 trillion or announce indefinite QE until the employment numbers reverse. They will not stop until another bubble has been created. And this is the proof of the illegality of all these fradulent actions.
They will steal from the future of America until someone does something about it and that is all. When the citizens are surrounding the the Fed they will stop. In the meantime they have Senatorial cover, congressional cover, Presidential cover and Main stream media cover.

This will only end when they destroy the fabric of this nation and nothing short of Ron Paul winning in 2012 and True life V for Vendetta playing out will prevent this.

CU1981's picture

++ Very well put

 

 

(third times a charm on the captcha math geniusery ;)

cougar_w's picture

Totally correct. These train tracks run only one direction, and there is no stopping it now. One damned awful wreck in the making, god only knows how long we'll have to endure it or what if any pieces will remain to pick up after.

 

RobotTrader's picture

Gamblers are simply moving over to other tables which are not affected by QE2, currency movements, or inflation/deflation debates.

Ergo, hot money is now fleeing commodity plays and piling into the SOX.

As long as Interactive Brokers continues to offer 1.4% margin interest rates, the action junkies will NEVER leave the casino.

HarryWanger's picture

Robo: I know a lot of posters here junk you but they just don't get where you're coming from. You see the fraud/manipulation in the markets and present here. I don't know why people junk for that .

I for one appreciate you bringing some nice plays to my attention throughout this rally in the market.

Minion's picture

+1 (for both of you).  Good to have a variety of opinions. 

RoRoTrader's picture

Totally agree Harry, and do not get it why people junk Robot so much.......the posts are very informative, which is definitely an understatement.

Unless I am completely missing something there is no solicitation to sell a service, and if so please provide the subscription details.

trav7777's picture

I only junk him if I don't like the pics of the girls

SteveNYC's picture

LOL!! Must read:

http://www.smh.com.au/world/cuckold-claims-leave-mugabe-fuming-20101027-...

 

Central Bankers the new sex symbols? I can see the headlines now: "Ben Bernanke seen in Luxury Manhattan Hotel with Supermodel"

No surprise the "Little Red Wagon" in Mugabe's head is willing to risk life and limb (of others) on his pathetic little ego....wanker.

HEHEHE's picture

You have had a 10%+ move in a month so I don't see how $3T-$4T is not baked into the cake already.  This will be the biggest sell the news event in history. 

HarryWanger's picture

Even the hacks on CNBC are expecting a sell the news. What does that tell you? Just the opposite will happen. When this is announced, it will be a buyer frenzy.

youngandhealthy's picture

 

"...In other words, by perpetuating an artificially low 10-year government bond rate, the Fed may be delaying (even if very modestly, given the modest impact of the action on long rates) the very fiscal policy action that the nation most needs, while doing little to boost an economy whose principal problem is not high long-term interest rates...."

It going to be all fun watching the Republican after Nov 3rd to say exactly where, beyond the discretionary spending that accounts for a modest proportion of US government outlay, they are prepared to make the deep cuts that will reduce the deficit as steeply as they and the author say they want.. Since they refuse to contemplate reining in military spending, they will have to run on reduced entitlements. Hello voters in Michigan and Nevada and elsewhere: "...our platform is to cut or postpone the Social Security you have allready paid for...."

 

pauldia's picture

Add China to Gross et al. Smart move bailing out Greece, offers China back door window to trade Treasuries for Euros backed by Germany. Euro will rise to 150. Wait till China offers lifelines to Portugal and Spain. Pretty smart crowd those Chinese, front running the Fed and raising the Euro at the same time. Not to mention trading devalued dollars for Euros and commodities. Adam Smith would be proud.

proLiberty's picture

QE2 will be follow-on theft by dilution added to all the previous theft by dilution the Fed has perpetrated since 1913.   When coupled with a progressive tax on "income" as measured in nominal dollars, this amounts to the grandest scheme of theft in all of human history.  Period.

repete's picture

I think that they have to take the market down here in order to make Qe2 more "necessary".  It's the obvious thing to do to avoid an immediate "sell the news". Maybe they will amplify the foreclosure fraud frenzy, but this is going to be like milking a Porcupine for the Fed no matter what.

sschu's picture

It is likely that Orzag and Gross have seen the Bennie plan, probably not Grantham.

There are WAY more reasons NOT to do this than there are to do this QEII.

Maybe the decision has not been finalized and these guys are either giving Bennie cover or trying to go public with the "do not do this" or "I told you it would not work" pitch.

If they announce $2T in QEII, Bam's popularity drops by another 10 points, they have/are polling this for sure.  It is looking more like Bennie will not have a chance to prove his college thesis and this whole QEII has been a farce.

sschu   

 

pauldia's picture

Here is nice little story about the integrity of our elections. Watch the lower video whereby a Union official is caught describing how an official stole a New Jersey election. I don't know which is more surreal November 2nd or... Nov 3rd?

 

http://atlasshrugs2000.typepad.com/atlas_shrugs/2010/10/demo-coup-alert-...

tip e. canoe's picture

come very soon, the entire world is going to know full well how america does 'free' elections.

here's another one in texas:

http://www.bradblog.com/?p=8141

texpat's picture

The Fed have clogged all the toilets with paper towels, and are organizing a curry night.

HEHEHE's picture

Sell the news.

Gordon Freeman's picture

Orzag is a fucking weasel, who has never done anything outside of the insular oligarchy.  Frankly, I don't know why he quit the administration, but I wouldn't believe a word that snake hisses.

Don't kid yourselves--these assholes are all on the same team, and they despise the public, as well as the REpublic...

cougar_w's picture

Come on, you don't need much of an imagination to figure out what he's angling for now.

Nothing less than TresSec of the Fourth Reich. Or whatever the hell they end up calling it. A turd rose by any other name ...

 

BrosMacManus's picture

Orzag wasn't being heard and left. That arrogant prick Austin Goolsbee (sic?) is the type I worry about.

Ever taken some gizmo apart to find out what's wrong and "fix" it? That's what these sumbitchez are doing...except it's likely the R's turn to pipe up and say "Here, gimme that you idgit, you don't know what the hell you're doing. I'LL fix it." Rinse and repeat. When it's time to come clean and tell junior their XBox is royally fooked up, "sorry, but I tried", junior's gonna lose it like the Menendez boys....I see the guillotine rather than the Reichstag.

 

zaknick's picture

Exactly!!

 

Water boy for the fascist, bankster created "establishment".

LePetomane's picture

It's not rocket science, folks.

Either real estate prices recover or the Fed prints IOUs to make up the budget shortfall. 

Or, government downsizes...  ...nah That's crazy talk!  Noone working for the government believes in market forces.

Just ask Krugman!

sschu's picture

Either real estate prices recover or the Fed prints IOUs to make up the budget shortfall. 

Or, government downsizes...

These are the real reasons for QEII, IMHO.  If housing prices continue to erode (which is required for the market to recover) the state and local government budgets get busted.  Which means those pensions for SEIU members are even more underfunded.  Who are the rioters in France anyway?  :-)

Also, if the stock market declines, then those underfunded pension obligations become even more underfunded.  Sorry about that. 

The real problem is the first reaction to the crisis in 2008 was to bail out the big money center financial institutions, and these guys are still getting their massive payouts.  It is politically suicide to now tell the electorate that sorry, your pension and retirement funds are gone, you will have to work longer or retire poorer.

The TBTF and bailouts in 2008 continue to drive public policy to this day.  This can not end well, there are going to be some REALLY unhappy people before this all clears.

sschu 

 

 

ElvisDog's picture

Explain to me how QE2 will cause real estate prices to rise? The money isn't going to filter down to J6P. If anything, the discretionary income of the lower 80% of the population is going to decrease due to increased commodity prices.

gigeze787's picture

Orzag NYT memo to Bernanke-Geitner-and-especially Summers:

F--- you and the horse you rode in on.

I'll see you in Keynesian hell.

Strong msg to follow.

Viva Obama.

P.O.['d]

bluebare's picture

The Fed has put us on the track to economic oblivion but they're not running the race to lose.  Therefore, it IS dangerous to "fight" the Fed because they have magic marbles and play with strategy and passion.

The recently QE2 "whispers" are trial balloons, IMHO.  The Fed is gauging market reaction and will calibrate QE2 policy to what they think is just right based on what they've learned from public reaction to these speculations.

Who is it here keeps sayin', "Wash, rinse, repeat" about the Fed? Well then, wash, rinse, repeat.  Given the bluster and shucking and past action so far, my guess if they'll split the diff around $2T.

bluebare's picture

The Fed has put us on the track to economic oblivion but they're not running the race to lose.  Therefore, it IS dangerous to "fight" the Fed because they have magic marbles and play with strategy and passion.

The recently QE2 "whispers" are trial balloons, IMHO.  The Fed is gauging market reaction and will calibrate QE2 policy to what they think is just right based on what they've learned from public reaction to these speculations.

Who is it here keeps sayin', "Wash, rinse, repeat" about the Fed? Well then, wash, rinse, repeat.  Given the bluster and shucking and past action so far, my guess is they'll split the diff around $2T.

bluebare's picture

The Fed has put us on the track to economic oblivion but they're not running the race to lose.  Therefore, it IS dangerous to "fight" the Fed because they have magic marbles and play with strategy and passion.

The recently QE2 "whispers" are trial balloons, IMHO.  The Fed is gauging market reaction and will calibrate QE2 policy to what they think is just right based on what they've learned from public reaction to these speculations.

Who is it here keeps sayin', "Wash, rinse, repeat" about the Fed? Well then, wash, rinse, repeat.  Given the bluster and shucking and past action so far, my guess is they'll split the diff around $2T.

bluebare's picture

Geez, sorry 'bout the trifecta.  I'm blue with embarrassment.

trav7777's picture

Orszag is a moron.

Look, it's really this simple:  the monetary system and vicariously, the financial sector, is a parasite on the real economy.

The parasite has continued its growth rate as a function of mathematics.  The real economy that services it has NOT been able to do that because it exists in the real world.

So the system is eating the real economy, devouring it just like any unchecked infection or parasite is wont to do.

Buck Johnson's picture

I think that your right, they know that the bailout needed is to high for them to attain and so they are going out their pushing the attacks on the economy and some of the banks.

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