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A question for Bernanke

Submitted by Bruce Krasting on 07/16/2011 12:31 -0400

Bernanke said some things in his testimony to the Senate Finance Committee on Thursday that raise a question. One that I don’t have an answer to.
All comments/thoughts/answers are welcome. I will send this off to the
Fed. I doubt I will hear from them, but if I do, I will post the update.

Bernanke had this to say regarding the consequences of QE2:

Our analysis indicates that our actions (QE2) to be roughly equivalent to a 40-100 basis-point reduction in the Federal Funds rate.

Six months ago Bernanke said something similar to this. At that time he
suggested that $200b of QE was equivalent to a 25 BP reduction in
Federal Funds. The $600 QE2 was therefore a monetary policy equivalent
to a 75 BP reduction in short-term interest rates. The range that Big
Ben used this past week is evidence to me that the Fed is no longer so
sure about the consequences of QE. However, the range that Ben used
gives a mid-point back to that 75BP (25BP/$200b of QE).

Bernanke went on to applaud QE with this:

The net result of this action has lowered borrowing costs and created easier borrowing conditions throughout the economy.

What I get from this is that Bernanke believes (or he trying to convince us) that QE has a lasting and permanent consequence (until the QE action is reversed). I don’t believe that is correct. But I also don’t know how long the benefits of QE (if any) actually do extend. That’s my question to you (and the Fed). My effort at an answer:

There are only three possible results:

1) QE has a permanent consequence on monetary conditions (until reversed).

2) QE has only a very short-term consequence. The benefit of a
POMO operation is transmitted within 24 hours. Once transmitted it has
no lasting consequence.

3) Something in between 1 and 2.

For what it is worth I think the answer is 3. I disagree with Bernanke
that it has a permanent consequence. I think that any benefits are
short-lived; at most six-months. (My guess would be less than one month,
but I hate QE)

I base my conclusion on the following:

The total of QE1 and 2 is $2.3 trillion. Using Bernanke’s rule of thumb
that $200b of QE is equal to ¼% drop in Federal Funds (monetary
equivalent) one would have to conclude that the cumulative affect would
be -3% (2.3/0.2). I see no evidence that current monetary
stimulus is equal to minus 3%. If it were, the economy would not be
struggling as it is and inflation would be much higher than is being
recorded.

Bernanke has painted himself into a corner with this. He is maintaining that the answer is #1. That is the least likely possibility IMHO. To my knowledge, the Fed has not factually demonstrated this conclusion. I think it is important that they do so.

I would warn those Fed economists that if they try to defend the notion
that there is a perpetual benefit to QE you are on very thin ice. There
is no data to support that conclusion. If you try to convince us that
the value of QE extends for more than one year, your message will not be
credible. If you conclude that the benefit of QE is less than six
months, you have a problem.

If the answer to this question is that any consequence of QE is short
lived, then the Fed must take this policy option off of the table and
put it back on the shelf. It might be a useful tool in an extreme
emergency (2008) (where an immediate and significant short-term monetary
shock is required to stabilize a sinking ship). But QE has no role to play in normal monetary operations.

Face it Mr. Bernanke (and cohorts), monetary policy is range bound at zero. QE can’t push through this barrier. Your quiver is empty.

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Sun, 07/17/2011 - 08:03 | 1463346 mind_imminst

As someone mentioned earlier, Bernanke's real QE induced interest rate of -3.0% is a war on savers. I used to be a saver, ie, just buy a few bonds, 5% CDs, collect a percent or 2 on my savings account, pretty happy with that. Now I am losing money fast by keeping it in a bank. I have started trading stocks and buying PMs. Trying to find some sort-of return. Bernanke, Obama, et al, would like someone like me to take a greater risk and start a business, employ some people, what-not, but regulations and taxes are just too opressive in the U.S. Why kill myself fighting the bureaucrats, IRS, lawyers, when I can just trade commodities and other risky stuff? That is what the psuedo-goverment corps and banks are doing with the free trillions from the FED.

Sun, 07/17/2011 - 08:08 | 1463353 Moe Howard

It is a war on savers, and you like many try stocks, but it is a fixed game. So PMs. But they manipulate the PM market as much as they can also.

It is getting to the point that it makes more sense to spend the energy gardening and repairing your stuff than going to work.

Perhaps a little 'off the books' barter work as well.

No work, no taxes. Sounds good.

Sun, 07/17/2011 - 09:26 | 1463404 Vorpal1

Precisely. Deconstruction of all the tools. The truth is not "time is money", it is "money is time".

Sun, 07/17/2011 - 08:19 | 1463357 mind_imminst

Interesting that you mention gardening (because that is my main hobby right now). Now that is is Summer and I am harvesting some stuff, I haven't had to buy vegetables at the grocery store for a couple of weeks. I figure food (and energy) are a little superior to PMs, if a major crisis were to occur.

Sun, 07/17/2011 - 07:53 | 1463343 benbushiii

Bruce,

All of these QEs juice the markets for a very brief period of time, but can have no lasting effect since Bernanke and the Central Bankers are trying to fill a very large Black Hole of debt that was created during the massive leveraging that has occurred over the past 30 years. Each ploy by Greenspan and Bernanke has been designed to inflate assets so they are above the underlying debt levels they are secured by. Since the QE money is pouring into this abyss, there can be no benefit to the reality of actual asset values or benefits to business and employment since the cheap money is closing the gap of the underwater debt to assets. Additionally other ploys such as changes in account rules (witness the earnings, or lack thereof from the TBTF banks), or carrying sovereign bonds at face value (France and Germany) to avoid the inevitable. The cheap QE money does allow those whom have access to leverage further in order to take advantage of zero borrowing costs and purchasing Treasuries. The problem with this trade is it actually increase the deficit further by creating an arb for the banks borrowing at zero on leverage and receiving interests on Treasury coupons. The banks may never be able to close the gap between asset values and debt, and as the burden gets moved off their balance sheets unto the U.S. balance sheet a point of no return will ensue.

Sun, 07/17/2011 - 02:17 | 1463257 jkruffin

"If you try to convince us that the value of QE extends for more than one year, your message will not be credible."

I bet the banks would disagree with you. They are the only ones that will. They have been loading their cash vaults since 2009 in preparation for the planned default. The rest is smoke and mirrors for the serfs. These crooks know the American people are a passive and whiny bunch that will allow anything to be shoved down their throats with enough fear and doom talk. People in America are an embarrassment to freedom and rights, and do not deserve it if they will never stand up for it. Fighting wars for another country is not standing up for freedom alone, there is much more to it. That is why everyone across the globe simply laughs at us every single day.

Sun, 07/17/2011 - 02:46 | 1463282 straty01

They don't just laugh at the US, the laugh at the British, French, Canadians, Australians. Western society has reached its peak of materialsim. Bernanke's policies prove that everyone is asleep, I used to wonder how Hitler got away with so much but not anymore!

Ron Paul made Bernanke look totally inept when questioned on gold and inflation.

Personally, I think the western society lifestyle is finished and running on auto right now. It's a good thing too, just how many people are truly happy with 'economic growth paradigms'?

We need a massive collapse, we need the Fed to destroy itself, we need all debt to be reset to zero. We live on planet earth, not "planet shopping mall war zone slavery shallow selfish bastard"

Time for all of us to grow the hell up

Sat, 07/16/2011 - 22:04 | 1462991 snowball777

4) The "benefit" (if you can call it that) is priced in BEFORE the POMO and has a half-life measured in weeks you can count on one hand.

Sat, 07/16/2011 - 20:46 | 1462901 TimmyM

Bruce, please don't be distracted into thinking this has anything to do with managing the economy. It is all about perpetuating the crony capitalist status quo. Printing money is a regressive tax. Creating bi-flation just steals from the poor to prop up the cronies. It is so nice for them that it temporarily finances their crony socialism as well.
Obviously price fixing does not work. Please do not give credence to the idea that fixing the price of money or securities is any less invalid. All price fixing misallocates resources. While the below optimal allocations are difficult to measure, they are penultimately logical. There is no reason to model anything. Do you desire to model why gravity works? Personally I just accept it. When someone refuses to accept on it's face that price fixing does not work, they just look like a dweeb.

Sat, 07/16/2011 - 20:45 | 1462896 knukles

Methinks before any conclusion might be drawn as to Ben's statement as to the efficacy of the POMOs, it is necessary to see the analysis which they performed to arrive at such a conclusion.

Note, he said analysis. No modifiers or descriptors such as rigorous, research, detailed, quantitative, in depth....
Analysis. Like the back of a cocktail napkin whilst under the influence for all we know. Like an series of insignificant anecdotal evidentiary statements over coffee.

We do really request a review of said "analysis". In fact, it would be a wonderful piece for publication in any one of the Regional Bank's monthly publications. Or even a wonderful, cutting edge, ground breaking (It's never been done, observed and analyzed real time, before!) tutorial as to the efficacy of monetary policy whilst approaching the event horizon of a liquidity trap. Indeed, it represents landmark research and thus deserves publication.

Sat, 07/16/2011 - 20:17 | 1462853 Shineola

A system where money can be printed grants a technically legal license to steal the governing authorities. This fact has been clearly proven, time and again, in many countries around the world.

We are still thrashing about with this age-old problem because currently, people believe it is wiser to trust authoritarian governments, acting in their own intrests, than to trust cooperating individuals acting in theirs.

Sat, 07/16/2011 - 23:27 | 1463111 IQ 145

Yes. very good.

Sat, 07/16/2011 - 19:49 | 1462835 dcb

It goes something like this. By causing inflation I force people to spend what they have instead of save and that helps the economy (this is fed think, they don't think I have to save my money because things are getting expensive). they have the same fed speak with deflation. Because things are getting cheaper I won't purchase now and that will hurt the ecnomy. Instad of I don't have to worry about future inflation so I can spend some now instead of having to save to fight off inflation. Or the idea that because things are on sale (deflation) I will buy more. For instance I have been looking for a certain type of pants for a long time. Because the price was on sale I bought 6 pairs and covered my need of this type for a few years (I can now get rid of my old ones that are wearing down).

Anyone that follows Bens logic knows he is full of crap. if the goal is/ was to help housing long term interest rates went up, and the fact is that because other asset classes went up, so did short term bonds. If you want to lower interst rates have deflation. Just look at interest rates in Japan. The fact is Ben is a pathological liar and at this point can't even keep his own story straight. But he gets a pass from the corporate controlled media of the united states. I can't figure out why he has his job, why he hasn't been laughed out of town. The reason is he is a 'team" player, meaning he will always give to the banks. Which of course helps to keep banking lobby money flowing. He serves theinterest of the elites, and they make sure he goes nowhere because it doesn't matter that he is screwing 95% of us. The worst part is the sheep keep buying it

Sat, 07/16/2011 - 18:30 | 1462669 ZackAttack

Why is it so hard for economists to grasp that broke-ass people without jobs can't buy stuff?

Sat, 07/16/2011 - 18:21 | 1462638 Vorpal1

The real game is to deconstruct the tools of the rich, without which they would have nothing, and ZH groupies just keep playing those up, like pawns in their game.

Sat, 07/16/2011 - 20:23 | 1462862 Shineola

+1 You nailed it, my friend! Time to take a Random Walk, away from Wall Street.

I laught at the carefully selected names like Fidelity, Guaranty, Provident, just carnival barkers, one and all.

Step right up and play the market!

Sat, 07/16/2011 - 17:15 | 1462521 hbjork1

Bruce, <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

All, IMO of course, the statement, “What I get from this is that Bernanke believes
(or he trying to convince us) that QE has a lasting and permanent consequence
(until the QE action is reversed). I
don’t believe that is correct.” Is
perfectly on target. In fairness to Bernanke, given the very
complicated issues created by human emotional and reasoning processes, I would
not believe that it can be quantified.

And thanks for your numerical example. Helps to “smoke out” the BS.

And, in my mind, there is the question of calling the Keynesian
Theory a theory. In science I am sure
that many would question whether it rises above the level of hypothesis. In my
only econ course there was a “fudge factor” called propensity to
consume. Practice was to measure it for
the existing situation and ASSUME that it would be constant for the time
needed.

Thanks again for your postings.

Sat, 07/16/2011 - 17:10 | 1462511 Goldtoothchimp09

in financial markets -- everything is determined by the last trade. The last trade may, in fact, be consistent with --

"our actions (QE2) to be roughly equivalent to a 40-100 basis-point reduction in the Federal Funds rate."

Now - the market may reverse tomorrow and invalidate that statement whether QE was still ongoing or not.

Of course, you could also state --

our actions (QE2) to be roughly equivalent to a disastrous inflationary tax on the middle class thru higher fuel and food prices -- all in an effort to inject newly printed cash into banks. All hail our banking overlord masters.

Sat, 07/16/2011 - 16:21 | 1462432 Iam Rich

Bruce,

Hussmann has one or two Commentaries on this "topic". This one in particular

http://www.hussman.net/wmc/wmc110411.htm

Might fit the bill for you, perhaps filling in a detail or moving you in a direction you need to go to answer your "question". I just can't quite say...I am a noob at this.

Sat, 07/16/2011 - 16:24 | 1462443 the grateful un...

Hussmans the guy who calculated how much of a rise in interest rates would bankupt the Fed, and their only exit strategy was to shrink their balance sheet? and of course that raises some issues, like where do we find the money to buy a few more drones?

Sat, 07/16/2011 - 16:13 | 1462420 the grateful un...

rates went negative in Japan once upon a time, and the recent rush into paper tends to support the Bernank, but this guys is Travis Bickel talking to the mirror, you talkin to me, yeah you, you talkin to me. i got my QE right here.

Sat, 07/16/2011 - 15:57 | 1462392 Eireann go Brach

Obama..the US is not Greece or Portugal!..famous last words by the clown!

Sat, 07/16/2011 - 15:46 | 1462378 ViewfromUnderth...

Il garde la vie de Ponzi, merci L'Amerique!

Sun, 07/17/2011 - 07:07 | 1463337 LMAO

Il garde ?

Lagarde, la vie de Ponzi, merci France!

There's a quick fix for yah.

LMAO

Sat, 07/16/2011 - 18:10 | 1462627 snowball777

Tu n'es pas drole et ton moment viendra bientot, Fifi.

Sat, 07/16/2011 - 15:42 | 1462373 Hannibal

The solution is in our wallets, don't spend, quit being the chump consumer!

Sat, 07/16/2011 - 18:15 | 1462634 oldman

Best post of the day, hannibal!!

You have cut through all this time consuming drivel to arrive at the do-nothing solution.If everyone joined us for a single month----this is the revolution, man-----there is nothing more to say except thanks, you made my day

Sat, 07/16/2011 - 14:58 | 1462274 oldmanagain

I think it is more about derivatives, blowing against the contraction headwind.

Stimulus, Keynes, etc. don't cure much, the whole idea is to stop the contraction. In the current case the derivatives dwarf solutions.

I doubt 5% of the Keynes critics know anything at all about actual Keynesian theory. Most critics are duped into Austrian concentration of power and wealth is good propaganda.

Sat, 07/16/2011 - 14:50 | 1462259 barliman

Bruce,

My answer to you is there are no lasting beneficial effects from QE. Indeed, the lasting effects from Bernanke's QE series is that it has made a terrible situation irreparable. None of this has to do with complex global financial models, negative interest calculations or the interaction of nation states.

This is based on behavioral psychology and the direct consequences resulting from choices made at a variety of levels.

Whether you are a parent or a manager, you learn early on that rewarding bad behavior creates a mindset that future bad behavior will be rewarded. (Anyone objecting to this theory, please go read several of the thousands of books on parenting or management that provide you with ample evidence.)

We know that Bernanke has never been in real world management. Based on his press conferences, we know that his facial tells and voice quavering (in response to "friendly" questioners!) would let any teenager know they can get away with anything. All "Dad" Bernanke was going to do, regardless of what you did, was to pay for any damage you had done (asset purchases) and give you a lecture about what society expects of you.

The "systemic risk" in September of 2008 was not a liquidity problem. It was based on the global Ponzi scheme of MBS's, CDS's, CDO's and every other "we're insured" derivative. When it began to collapse - Paulson and Bernanke's approach was "We will pay for the damages".

Just one problem, the damages exceeded the net worth of the United States.(If you don't believe this to be true, go back and read the numerous articles documenting that fact that have been posted on ZH over the last 2.5 years)

That fact was the reason TARP never resulted in a Resolution Trust Company. It was seed money for a larger ponzi scheme - Ben Bernanke's QE series. I won't revisit the details of QE. I just wanted to highlight the path that led to QE as the "answer" for all problems.

The TBTF committed individual and collective crimes - bad behavior.

I gag on comparing any government or its parts to management or responsible parents, but ... the fools responsible for punishing bad behavior decided "There is no such thing as a bad TBTF, they are just misunderstood" and decided to hide the damages (assets) behind the inpenetrable curtain known as the Fed. The TBTF? No perp walks. No fines. Bernanke's answer was to include them in the coverup, up their allowance (rolling over USTB's for a profit) and give them something productive to do - "rally" the stock markets.

The same fools knew the neighbors (other sovereign nations) would not accept this as the solution - so they hid the damages from their "misbehaving" children and encouraged their neighbors to take the same approach on how to deal with the consequences. Most of the neighbors took that advice.

Three years later - the most of damaged assets (MBS's, CDS's, CDO's and every other "we're insured" derivative) are worth less and have cross contaminated everything else. The United States has only one hope with regard to paying its future bills - devalue their currency on a massive basis. Just one more problem, the neighbors have discovered your approach (currency devaluation) means they are having to pay more (inflation) for everything because your TBTF's are using their new found liquidity/wealth to run a new ponzi scheme (commodity speculation) in the neighbor's back yards.
Back to the results from QE question you posed.
There are only three possible results:

1) QE has a permanent consequence on monetary conditions (until reversed).
It can't be reversed. Including the TBTF's in a bigger crime gave them permanent leverage over Bernanke and the rest of the fools.

2) QE has only a very short-term consequence. The benefit of a POMO operation is transmitted within 24 hours. Once transmitted it has no lasting consequence.
The POMO operations cause the market to be overvalued until it stops - permanently. You know more than I do about how markets respond when the are massively overvalued and even the Bigger Fools stop buying - which has already happened.

3) Something in between 1 and 2.
Nope, move directly to choice 4.

4) Collapse of the markets. That is the lasting effects of the QE series. Once this happens, S&P at 666 won't be seen again as a high.

Not saying you don't know some or all of this - just wish you would write more directly about topics. I feel like you are using a Socratic approach in your articles sometimes.

barliman

Sat, 07/16/2011 - 23:15 | 1463096 IQ 145

Very good.

Sat, 07/16/2011 - 15:52 | 1462386 Hedgetard55

+55 billion, barliman.

In 2008 I figured there were two big questions to ask.

#1. Would the bill for the financial collapse be paid by those who caused it, or the taxpayer?

#2. If the taxpayer, would he be able to afford it?

We know the taxpayer has been handed the bill on a large protion of the collapse, and I think I agree with you that there is no way it can be paid by the taxpayer - it is just too big. They would have to debase the dollar to near zero for that debt to be manageable, but the end result is the same - financial collapse.

Sun, 07/17/2011 - 09:02 | 1463386 Bicycle Repairman

#3 Will the US military go and collect it from someone else or get the debt cancelled.

Sat, 07/16/2011 - 14:28 | 1462217 bigwavedave

face it. fat assed yanks are fucked. lets see consumerism down to 40% of GDP and govt decimated through layoffs. lol

Sat, 07/16/2011 - 14:15 | 1462188 John_Coltrane

Bruce,

Isn't it all about reviving the risk taking "animal spirits" and confidence? Otherwise people will hunker down, work hard, pay off debt and hoard capital-as they really should given our 2 decades long inflation party. Its sort of like, "if you believe things are better then they are better". Unfortunately, as in the physical world, not believing in gravity will get you killed, ignoring conservation of energy isn't possible, nor can entropy (disorder) be reduced except using real energy and work. And the latter is what all forms of life is really all about-creating order out of chaos. It can't be done with perception alone-though that can be a motivation.

Sat, 07/16/2011 - 18:05 | 1462618 snowball777

And it's really difficult to maintain your "wealth effect" with all those creditors ringing your phone off the hook.

Sun, 07/17/2011 - 00:56 | 1463200 HungrySeagull

What phone? Magic jack hooked into a non audio laptop does well enough.

Sun, 07/17/2011 - 04:12 | 1463311 Arkadaba

Skype!

Sat, 07/16/2011 - 17:30 | 1462550 Goldtoothchimp09

agreed - the FED is the public face of the confidence game we call our Federal Reserve fractional reserve banking fiat financial system.

It is a confidence game. Whether or not you aree to take a Federal Reserve Note to settle a transaction -- comes from what confidence you have of exchanging that FRN later for something else at a fair value.

Sat, 07/16/2011 - 14:00 | 1462176 Smiddywesson

QE doesn't change the economy any more than getting an increase in your line of credit changes the financial well being of your family finances. It does lead to more spending in some areas, and some winners and losers (banksters vs savers) but it actually makes things worse. It obscures what is really going on in the economy. All the normally phoney numbers by which they measure the economy become even more unreliable, because they are throwing chaff into the radar dish, confusing the economic measures for the real economy. At this point, they could show me 10% GDP growth and I wouldn't believe it. The tools to measure the economy are as broken as the credibility of those that cite those numbers.

I never trusted stimulus or Keynes. After "successfully stimulating" the economy, there is no evidence to show what would have happened if you had just refused to intervene. Those who stimulate can always claim success, even if the reality is the economy would have been better if they had stayed their hands. EXCEPT, when stimulus utterly fails during a real bad recession, then you see its true nature, what it has been doing all along but never had to answer for the effect. Stimulus never works, it is just moving the furniture around to the benefit of some at the expense of others.

Sat, 07/16/2011 - 13:44 | 1462157 equity_momo

Real rates will stay negative , and in fact the negativity will increase , as the economy worsens. QE will continue but in my mind it will not recycle through risk assets or push the Dow higher - at some point , whether it is QE3 or QE10 , the market will realize the truth : this is not cyclical (see Japan and their stimulus packages since early 90s) and companies can only cannibalize and juice earnings for so long...

Quantifying how nominal QE effects real rates is impossible once we go beyond the zerobound. And that is what Bernanke does not understand. He doesnt understand he is pushing on a string. He doesnt understand there is debt saturation and for each dollar of debt we see a negative impact on GDP.

Dropping rates from the highs in 07 didnt prevent a massive flight to safety away from risk. In the interim , governments have basically nationalized markets and forced stocks higher as market participants still beleive this is cyclical and therefore follow the maxim of low rates = good for stocks. But the next step will be to shun debt and excess liquidity to move into gold.

The Depression will deepen , real rates will go even more negative , stocks will sink , and gold will rally in all currencies. Its a confluence of events that put us in worse shape than Japan of the last 20 years but the general problem is the same : we cannot grow anymore with the debt burden we have created.

Prepare for the purge.

Sat, 07/16/2011 - 17:07 | 1462512 DoChenRollingBearing

+ 100

Very perceptive analysis, equity_momo.

There is no way out of the box without a lot of pain.

Preservation of capital is key now. A big of the answer for us as individuals is to buy PHYSICAL GOLD. The sooner the better.

Sun, 07/17/2011 - 08:07 | 1463352 mind_imminst

Unfortunately, if there is a HUGE move into physical gold that threatens the ponzi-riffic statist economy, TPTB will just confiscate the gold. Everyone here must know that, right? If it comes to that, they WILL pry your gold from your cold dead hands.

Sun, 07/17/2011 - 10:55 | 1463487 bigkahuna

Then they will preside over the heap of rubble left over.

Sun, 07/17/2011 - 08:59 | 1463381 Bicycle Repairman

How does a huge move into gold threaten the ponzi scheme? In the current situation they are already planning on confiscating a chunk of your gold thru taxation. If the ownership of gold is widespread, why go door to door to try and find it? Better to drain national treasuries where there are big piles of it with no domestic consequences. Have they scooped up the gold of Iraq or Libya, yet?

Sat, 07/16/2011 - 13:43 | 1462155 oldmanagain

An early frost can hurt a crop. Although temporary, the damage is permanent.

What Bernanke may be saying is that benefits restructure, delay, mitigate, whatever, which then is part of equation. A bump in the right direction. That there is some tail. I don't think he has oversold the operation.

He may be also looking at funds created as a working fund, extended tail.

IMHO. It quickly, in market time not historical time, becomes pushing on a string, markets compensate quickly. In this sense, the tail is short.

Our real long term resource headwinds are defeating historical answers to recessions. The basic pricing out of resources is not becoming cheaper. This is basic stuff and printing does not produce more stuff.

However, this also divides econ(stocks) into winners and losers. And society. Robots versus workers. Goggle Earth vacations. The USA is mainly waiting for the markets to decide, while France, China, etc. are frontrunning. By almost all measures from education, health system and costs, infrastructure, acceptance of science, etc. etc. etc. we are going in the wrong direction.

Sat, 07/16/2011 - 13:39 | 1462148 lizzy36

Interesting that Bernanke did not make any claims about what QE2 did for employment.

Various Fed governors made claims about QE(s) and employment. The anecdotal evidence certainly lends credence of the view that Bruce puts forward about the effect of QE being very short-lived.

Janet Yellen, the Fed's influential vice chair, has argued that the latest round purchases will translate into 700,000 new jobs, with the entire $2.3 trillion asset purchase program contributing to the creation of as many as 3 million jobs.

Private sector economists are more conservative. Lawrence Meyer, a former Fed governor now at the consultancy Macroeconomic Advisors, believes Fed asset buys raised the level of gross domestic product by between 1.5-3 percentage points over eight quarters. That, he says, would be consistent with new jobs for between 1.5 million and 3 million Americans.

Between January and June of 2011 the unemployment rate went from 9% from 9.2%. Netting out the Birth/Death in the BLS a rough estimate would be around 250K actual jobs were created.

Btw, if larry meyer is correct (hahaha) since goldman (as of last night) estimates Q2 GDP will be 1.5%, QE2 is all that separated the US from outright GDP contraction in the 2nd quarter

Sat, 07/16/2011 - 13:29 | 1462136 Imminent Crucible

Bruce, I think the answer to the question depends on which effect of QE you're looking at, as well as the size of the intervention. If you're looking at the effect that monetizing Treasury debt has on long interest rates, the effects are "highly likely to be transitory"--I had to work that in. That's because the supply of Treasury bonds, as well as other long-term debt, is constantly increasing. There can be no permanent effect on interest rates by a limited intervention in a dynamic and constantly increasing market.

On the other hand, if you're looking at the inflationary effects of monetization, the impact will be more or less permanent until reversed, and reversal is not an option at this point. Monetizing Treasury issuance by definition increases the money base, and the effects on consumer prices will continue until either the surplus money is withdrawn (repo'd) from the system, or GDP eventually grows to balance the increase in money supply.

Some very astute analysts have determined that there is a lag of 18 to 24 months between Fed policy accomodations and increases in headline inflation. This means we have not even begun to feel the inflationary effects of QE2; what we're seeing now is the result of QE1, QE Lite and the TARP program and other liquidity facilities following the Lehman collapse in 2008. Much higher consumer prices are ahead of us.

Sat, 07/16/2011 - 14:09 | 1462185 Bruce Krasting

Well said.

"There can be no permanent effect on interest rates by a limited intervention in a dynamic and constantly increasing market."

I'm in your camp. It's not permanent. But now the harder question. How long is the benefit if it is not permanent? Over or under six months??

Sat, 07/16/2011 - 18:28 | 1462664 Imminent Crucible

Bruce, as for the harder question of how long the effect of QE monetizations can persist in the bond markets, I don't yet have a conclusive answer but I believe it will be a very fleeting effect, certainly less than six months.

My reason is that past monetizations failed to keep yields from rising as long as the risk trade was back on. Note that long bond yields were near 4.70% and the shortest bill around .16% when Feb 2011 came in:

http://www.treasury.gov/resource-center/data-chart-center/interest-rates...

But now the risk trade is off as the equity indices look wobbly and Europe is coming unglued. The Fed likes to imagine they are working in a vacuum, but the Treasury complex is subject to any number of exogenous influences that render their textbook theories moot. If Treasury rates stay low over the next six months (without a QE3) it will be because of Euroland disruptions, equity volatility, oil shocks, etc rather than brilliant Fed policy actions. Clearly they have no plan.

This is the reason that rates must rise sooner rather than later:

http://research.stlouisfed.org/fred2/series/BASENS

A question for Bernanke

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