This page has been archived and commenting is disabled.
Richard Koo Explains Why An Unwind Of QE2, With Nothing To Replace It, Could Lead To The Biggest Depression Yet
Over the past several days, quite a few readers have been asking us why we are so confident that QE3 (in some format: it does not and likely will not be in the form of the Large Scale Asset Purchases that defined QE1 and 2 - the Fed could easily disclose that it will henceforth sell Treasury puts, a topic discussed previously, or engage any of the other proposals from Vince Reinhart disclosed in June of 2003, or worse yet, do what the BOJ does and buy ETFs, REITs and other outright equities) will eventually be implemented by the Fed. Luckily, instead of engaging in a lengthy explanation of the logical, Nomura's Richard Koo comes to our rescue with his latest research piece. While we disagree with Koo on various interpretations of his about monetary theory (namely that the Fed is not in effect "printing" money and thus creating inflation - this is semantics and leads to a paradoxical binary outcome, whereby if there Fed was successful in boosting the economy, the economy would indeed be flooded with the nearly $2 trillion in excess reserves held with reserve banks. And good luck trying to contain this surge by changing the IOER - if the Fed indeed pushed the IOER to the required 5%+ level it would immediately destroy money markets, leading to the same liquidity freeze that marked the post-Lehman days, confirming the "Catch 22" nature of Quantitative Easing that we have observed since its beginning) we do agree with his analysis of what would happen to the economy if either stocks or commodities are in a bubble (and judging by the violent opinions out there, most investors believe that either one or the other has indeed reached bubble territory), should QE2 end cold turkey: "Viewed objectively, the central banks are trying to push up asset prices using quantitative easing and the portfolio rebalancing effect. The resultant rise in asset prices based on this effect represented a potential bubble—or at least a liquidity-driven event—from the start. The question is whether the real economy can keep pace with asset prices formed in those liquidity-driven markets. If it cannot, higher asset prices will be considered a bubble and will collapse at some point. The resulting situation could be much more severe than if quantitative easing had never been implemented to begin with." Bingo.
"In other words, if stock and commodity prices are in fact in a bubble and if those bubbles were to collapse, the balance sheets of the financial institutions and hedge funds making investments with the expectation of higher asset prices could suffer heavy damage, exacerbating the balance sheet recession in the broader economy. an increase in DCF values, either." And there you have it: Bernanke's all in gamble that QE2 would have been sufficient to restore the virtuous circle of the economy has failed with less than 2 months to go under the QE2 regime. As such, and with fiscal stimulus a dead end, the Fed has two choices: watch as the economy collapses in flames to a state far worse than its pre-QE1 outset, or do more of the same. That's all there is. The rest is irrelevant. And since the Fed will choose the latter option, the market would be wise to start pricing in precisely the same reaction as what happened following the Jackson Hole speech...although to the nth degree.
And some other key observations from Koo:
Government borrowing has supported money supply growth
The question, then, is how to explain the modest growth in the money supply at a time when private-sector credit has steadily contracted. A look at Japan’s experience shows that the answer lies in increased bank lending to the government. As long as the government continues to borrow, banks can continue lending (by buying government bonds) even if the private sector is deleveraging in an attempt to clean up its balance sheet.
If the government spends the proceeds of those debt issues, the people on the receiving end of that spending will deposit money with a bank somewhere, leading to an increase in the money supply.
In effect, the money supplies of both the US and the UK are being supported by government borrowing. If the two governments chose to embark on fiscal consolidation, their money supplies would contract.
Portfolio rebalancing effect was primary objective of QE2So what are the actual problems inherent in QE2? Mr. Bernanke has stated from the beginning that QE2 would not lead to an increase in the US money supply.
If so, why did the Fed carry out QE2? The simple answer is that it believed QE2 would result in a portfolio rebalancing effect. The portfolio rebalancing effect can be described as follows. When the Fed buys a specific asset (in this case, longer-term Treasury securities), the price of that asset rises. That prompts private investors to re-direct their funds to other assets, which leads to a corresponding increase in the price of those assets.
Private-sector sentiment may improve as asset prices rise, and if that prompts businesses and households to spend more money, the economy may improve. In effect, the Fed hopes that quantitative easing will lift the economy via the wealth effect. Inasmuch as the balance sheet recession was triggered by a drop in asset prices, monetary policy that serves to support asset prices may also help pull the economy out of the balance sheet recession.
Reasons for divergence of liquidity supply and money supply
The decline in private-sector credit in the US and the UK is attributable to both the unwillingness of banks to lend and the unwillingness of the private sector to borrow. The two factors are rooted in balance sheet problems and are indications that both countries remain in balance sheet recessions.
When a bubble collapses, the value of assets drops, leaving only the corresponding liabilities on the balance sheets of businesses and households. To fix their “underwater” balance sheets, companies and individuals do whatever they can to pay down debt and avoid borrowing new money even though interest rates have fallen to zero. Banks, for their part, are not interested in lending to overly indebted companies or individuals, and often have their own balance sheet problems. With no borrowers or lenders, the deposit-growth process described above stops functioning altogether.
US banks now appear slightly more willing to lend money, although that is not the case in the UK. In neither country, however, are there any signs of greater willingness to borrow among businesses and households.
Unable to buy more government bonds or private-sector debt, investors have few places to turn
In the hope of producing a portfolio rebalancing effect, Chairman Bernanke declared that the Fed would purchase $600bn in longer-term Treasury securities between November 2010 and June 2011. This was roughly equivalent to all expected Treasury debt issuance during this period.From a macroeconomic standpoint, these purchases of government debt meant that—in aggregate—private-sector financial institutions would be unable to increase their purchases of US Treasury securities, because all of the growth in Treasury issuance would be absorbed by the Fed.
The fact that US businesses and households were rushing to repair balance sheets by deleveraging meant that—again, viewed in aggregate—private investors would be unable to increase their purchases of private-sector debt.
With the private sector no longer borrowing and all new issues of government debt being absorbed by the Fed, US institutions found themselves with few investment options.
So funds found their way to equities and commodities
The only remaining destinations for these funds were equities, commodities, and real estate. Real estate had just been through a bubble and remained characterized by heavy uncertainty. In commercial real estate, for example, banks—at the request of US authorities—are engaging in a policy of “pretend and extend” and offering loans to borrowers whose debt they would never roll over under ordinary circumstances. That means that current prices do not accurately reflect true market prices. Housing prices, meanwhile, resumed falling late in 2010.UK house prices have been falling since mid-2010, and the Halifax House Price Index dropped 1.4% in April 2011 alone (the decline was 3.7% on a y-y basis).
The only remaining options for private-sector investors have been stocks and commodities. That, in my opinion, is why both markets have surged since the announcement of QE2.
And the conclusion:
QE2 was Bernanke’s big gamble
When the situation is viewed in this light, we come to the realization that Mr. Bernanke’s QE2 was in fact a major gamble. It was a gamble in the sense that the Fed tried to raise share prices with QE2. If the wealth effect resulting from those higher prices led to improvements in the economy, the higher asset prices would ultimately be supported by higher real demand, thereby demonstrating that prices were not in a bubble.
However, I cannot help but feel that the portfolio rebalancing argument was putting the cart before the horse, in the sense that it is ordinarily a stronger real economy that leads to higher asset prices, and not the other way around.
It might be possible to sustain the portfolio rebalancing effect for some time if conditions were such that investors were totally oblivious to DCF values. But with market participants paying close attention to DCF values, any delay in the economic recovery will naturally bring about a correction in market prices, thereby causing the portfolio rebalancing effect to disappear.
Full report:
»
- 37772 reads
- Printer-friendly version
- Send to friend
- advertisements -
That's right.
I've been telling you all that for several months now. No qe3 until people are begging for it. He won't have any credibility if he launches qe3 before there is a consensus.
good point.
What Ben gambled?!
Selling puts is the last bullet?
This is all one big joke right
He is forced to do it. Otherwise it'll be riots and his head on a pike... Oh wait a minute... maybe he shouldn't do it then.
Anyway if he does QE3, the nationalist party in Taiwan will lose the January 2012 election, and then it could get ugly real fast.
but there you have it - all the candy coated reasons for the government's actions have left the masses bickering about trivial nonsense to the point where they can't possible tell any hard truths without showing all the lies for the last 40 years or more.. why didn't we just say, hey we are going into Iraq to save the dollar for another 10 years.. or we are going to Afghanistan since we might be able to get some good business with pipelines (they can keep the CIA poppy farms their one secret)
Why not?? Well, because these interests are not for the general public's benefit, that's why. It's not like the American people get a windfall from these ventures.. we just put some elites in place instead of some local yokels taking the profits and helping their people.. so our government is robing BOTH countries on all these ventures.. ours and whoever's backyard they are plundering..
+1 but
CIA poppy farms are not exactly a secret these days, even the BBC trotted out a graph of opium production in Afghanistan by year, and it's difficult to miss the the +200% rise every time the Americans are in-country. Peter Dale Scott did a solid piece of about it too in Global Research.
For those who don't know, when the Soviets were there in the 1980's, Afghanistan produced around 30% of the world's opium. Then when they left, production soared to 70%, then when the Taliban came into power, production was almost halted to zero as they deemed it "un-muslim". After the US invasion of 2001, opium production started up again and Afghanistan now produces around 92-93% of all the World's opium to the present day. You just can't miss the connection, besides all the testimonies from DEA and UNODC agents. These CIA heroin labs get supplies of chemicals by the tanker load through major transit points and not a single seizure ever happens.
Considering the fact that around 10,000 European citizens die of opiates every year, and many times that number around the world, shouldn't NATO be bombing Langley to stop these monsters? Drugs are the reason why Afghanistan is listed #176 out of 180 countries on an international index measuring corruption, drugs are the reason why large parts of cities in developed countries are cess pools, and drugs profits are certainly the reason why the top echelons of America's security apparatus have ordered that these heroin labs thrive under their care. Douglas Feith, Paul Wolfowitz, Zalmay Khalilzad, and their patron Donald Rumsfeld have a lot to answer for.
http://news.bbc.co.uk/1/hi/6239734.stm
http://lukery.blogspot.com/2009/05/who-is-protecting-afghanistans-heroin.html
http://www.globalresearch.ca/index.php?context=va&aid=13524
We don't seem to care about afghanistan poppy production because it mostly ends up in russia and europe.
We are in a Depression now.
Not yet. But the Greatest Collapse in history is yet to come.
This is exactly why it won't stop. You can't reverse it. Why would they go to all that trouble to stop? They will do it wether you see them do it or not
***** “QE2 was Bernanke’s big gamble
When the situation is viewed in this light, we come to the realization that Mr. Bernanke’s QE2 was in fact a major gamble. It was a gamble in the sense that the Fed tried to raise share prices with QE2. If the wealth effect resulting from those higher prices led to improvements in the economy, the higher asset prices would ultimately be supported by higher real demand, thereby demonstrating that prices were not in a bubble. However, I cannot help but feel that the portfolio rebalancing argument was putting the cart before the horse, in the sense that it is ordinarily a stronger real economy that leads to higher asset prices, and not the other way around. It might be possible to sustain the portfolio rebalancing effect for some time if conditions were such that investors were totally oblivious to DCF values. But with market participants paying close attention to DCF values, any delay in the economic recovery will naturally bring about a correction in market prices, thereby causing the portfolio rebalancing effect to disappear.” *****
Well folks.. what we need now is an adjustment.. downward..
Cracker ass cracker.
Give him a break, he's inland.
thats my people! no worries..
QE2 is a method for the Bernanke to attempt paying the bill with cheaper dollars. And to make the elite bankers richer. As always, this is rule one. Keep the banking cartel above the rest. That's all folks.
"Keep the banking cartel above the rest."
And it should be no surprise, as bankers SHOULD love (fiat) money more than others. I say let them have that crap! Let's just continue to work outside of Their system...
Animal spirits.....the reason Keynes called them that is because no one knows how to get them moving in the right direction......Bernanke is just guessing.
HP memo leak - I suggest this is not the only CEO sharing with his senior management team the probability that future quarters don't look so hot. Slowing economy, supply chain problems, the consumers didn't drink the cool aid and are learning to live with less . . . oops, someone let the media hear - and MSM actually reported it. Not because they want to assist economic literacy, but because by being a leak it had a tabloid prurient feel.
Pathetic!
we need to see steve liesman apologizing in tears
well we need to get rid of this debt money system.
Just print the fuckin money so we know what we are dealing with. For centuries, people stockpiled assets and production as insulation against this monetary machination bullshit.
But since the FDR seizure, people have been railroaded into paper that is controlled by others. This is a precarious situation. Hand it over to a computer like Friedman said.
lol.
-"Open the pod bay doors Hal."
-"I'm sorry Dave, I can't do that"
+1
Trav7777 you are either a sock puppet or Cliff Claven, I've never in my life seen someone with so much expertise in Comcast Cable, Silver, Physics and Economics, etc.
http://trololololololololololo.com/ h/t akak
LOL, that is the funniest thing I've heard all day.
I remember a Trav7777 with the same avatar a year or so ago talking about how he owned 200K in physical silver, why he would be bashing it now makes no sense unless he was just trying to fit in a year ago if you know what I mean.
I can't believe I watched the whole thing.
Muir should put his avatar on a webpage.
The only problem with stockpiling is that it is an inefficient use of capital and societies where there is that much fear and distrust wont operate as efficiently and productively as economies which dont stockpile and which put capital to more productive uses than hoarding.
Stockpiling is a very rich avenue for utilizing capital...if you have capital.
Distrust and inefficiency only exist in a system that is rampant with fraud and corruption. A small group of men with the authority to run a monopoly of money and credit sets just the precedent for such distrust and inefficiency.
Not one American elected Fed governors....yet they control your life by controlling your money
capital sitting around gathering dust as inventory is not helping to grow your business, or the economy.
"it is an inefficient use of capital and societies where there is that much fear and distrust wont operate as efficiently and productively as economies which dont stockpile"
---
'efficiently' & 'productively' as who??? The USSA???
"FDR seizure"... get a grip. This is all such an old story. It's not like it just started happening with FDR. FDR was no more than what the System wanted; if not him, then someone else.
Everyone lambasts the bankers, but the ones really setting the tone were the industrialists. Yeah, the big PRODUCERS. Of course, since they were what every capitalist aspires to we can't dig those bones, can we?
Everything that is happening is happening in order to hide the realities of the WORLD. The WORLD has been pummeled and can't shit out enough oil and other resources to keep the game going. Go ahead, remove FDR from the history books, write whatever history that you want and let's see how YOU play it out. I doubt that anyone is going to avoid the same trap that every civilization to-date has tripped up on.
Makes diabolical sense. QE to infinity with a recess to take air out of the bubbles and redirect what's left of any capital. The magic trick is deflating the bubble gradually or it all blows to hell.
.... praise to the Bernank. May he rule a hundred years.
Ah, but the politics of the thing suggest Ben needs a trigger event to justify QE3.
Just as there was a pause between QE1 and QE2, there will be a pause before QE3.
Last year, the spectre of Eurozone conflagration paved the way to QE2.
Any bets on this year's trigger?
......war would normally be an odds on favorite, but we already have a few of those going on already. I'm stumped.
My bet is on two quarters of negative gdp growth. I dont think anything else that is likely to happen would be sufficient.
You get a silver star for rational thinking... a gold star if you'd bet on one minus quarter.
"Likely to happen"
Might want to keep the bird watching binoculars handy.. could be a black swan out there somewhere.
My hunch is that they will lose the handle to something completely unexpected.
I don't know what.. a radioactive flash solar tsunami earthquake or something.
One would believe that the "liability management exercise" or "re-profiling" of Greek debt followed by Portugal and then Ireland, would probably be a decent trigger.
Well - It does happen to be the 10 year anniversary of 911...
And now that Bin Laden is gone, somebody must have some new strawman in the queue
I don't see any reason why it won't be the Eurozone again. Or, maybe Japan? Whichever the case it'll be to shake down China (or continue to paint them as the bad guys- it's easier to default against the bad guys than the good guys).
I think the trigger will be the massive losses from the US companies that cannot produce due to lack of parts and supplies formerly produced by the formerly first world nation of Japan.
These losses will start erupting in June/July and start to shake down the economy in August. Leading to QE3 in mid-September/early-October.
My thinking (and I'm an idiot so humor me) is that QE3 will take the form of direct FED purchase of corporate assets (I suspect at acquisition cost rather than book value). This would infuse cash into these corporations, boost profitability, raise stock price and provide a wider base of corporate bonuses. An added plus is that since the cash would not be locked up by banks, a more significant inflation stimulus would be provided as the money would be spent back into the economy in the form of luxury goods purchases.
Of course, initially the corporations benefiting from this cash inflow would be publically traded and have a predominantly union workforce. Later would be the publically traded, less predominately union workforce. Then the publically traded non-union workforce.
Privately held Main Street corporations, of course, would be told to pound sand, again.
Does anyone remember, three years ago, ideas about giving every citizen age 50 and older a million bucks with only a couple stipulations...like they had to buy a new car, a new house, and one T-bill...seems cheaper every day, doesn't it?
If this were BO Term II (were he already reelected), there MIGHT be poisoning of the well move by the DEMs but I don't even know if they would have the stones to do that. With Term II election in sight, I bet heavily on QE3.
Which has been what I've been saying publicly for the last two months. IF the government STOPS borrowing, the FED effectively loses it's ability to create inflation (on a meaningful enough scale) by monetizing debt, via primary dealer proxy, vis-à-vis the largest debtor nation in the world.
This is (one of) the main reasons you have the dichotomic heritage of international financiers (Rubin, Geithner, Bernanke etc etc.) expressing their view that a failure to raise the debt ceiling is "unconscionable"
In fact, it was through the imprudent decsions of these same people that has lead us to the point of looking at our own demise in the face....and cowering in fear, once again.
As my god Hayek has pointed out, even a failure to spend at previous accelerating levels can bring on the deflation. If the tea party cuts the gooberment 10 percent look out below!
That's the thing.
There is one outcome of only two eventualities.
The first being, we raise the debt ceiling and the dollar collapses. If the debt ceiling get's raised without dollar-for-dollar cuts than it is clear our government doesn't give a shit about the dollar...subsequent collapse in coming years in which the poor get hit the hardest as the rich diversify into foreign holdings.
The second being, we raise the debt ceiling simultaneously cutting spending dollar-for-dollar, and raise taxes. This is obviously the right solution, but the difficult one, as politically you are taking welfare babies off the welfare tit. Seeing as 1 in 7 are on food stamps you can see how politicians are reluctant to make the RIGHT decisions, as their constituents would prefer to vote themselves gifts from the public treasury ad infinitum.
The bottomline is that the tough decsions are going to be made. At this point it is only a question of how. We can do this the right way, or, we can do this the wrong way. The choice is now in the hands of the people we elected to represent us. I hope they choose wisely.
I still think it may be possible with money illusion and keynesianism applied perfectly to make it to a sustainable recovery where in aggrwgate we are all a bit poorer. This scenario requires all the world to cooperate and congress to execute perfectly also, in addition to ben applying the exact dose at exactly the right time.
My view is that we need deflation.
I had a lengthy conversation with a realtor today in a Mid-Western territory:
Her view on housing was that it is the worse she has ever seen it. I asked her, "worse than 2008?" she replied "Oh yea, much worse..." And went on to describe why, which in large part had to do with how banks were handling loans.
She went on to tell me how bad she felt for the homeowners she sold homes to whom are now negative in equity. She than talked about the shadow inventory that the banks had that would be dumped on the market as soon as homes sold. She told me in the last two weeks she showed 10 homes in the 150-250k range and the buyers weren't willing to pay more than 80-90k...
...so I asked her "Do you think a first time home buyer would like to buy a home for 100k for a home that was worth 400k 4 years ago? She replied "Of course"
I than asked her..."Well, let's say someone bought a home @ 300k that lost 100k in value, but was than able to buy a BIGGER home for 200k maybe 5 years down the road once their credit was repaired....was anything lost? She replied "no"
She brought up an instance where "What if you had no money down, and purchased a 100k home that is now worth 50k?" I said...."If you purchased a home using that type of financing, you probably couldn't have afforded the home to begin with.....right?" She replied "Well...yea"
So...you see, deflation is the CURE to the excess. How awesome is it to buy a home for 250k that was once worth 500k, or 550k? It's a good deal right? But only if the prices are allowed to fall where people can afford it.
Obviously there are some people who will lose money in a deflationary spiral. They may even need to file for bankruptcy. But guess what? People have been going bankrupt for hundreds of years....shit, Donald Trump holds the record for bankruptcies.
We need to bring the economy in line with reality and put REALISTIC goals in front of the populace.
There is one big reason why what you wrote will never (voluntarily) happen, and we're seeing it in Euro-land. Because bankers never will agree to taking haircuts on their bad loans. Deflation means debt-destruction and writeoffs and the banks hold the debt.
I couldn't agree more.
That's why I'm hoping (after the mid-term election results) we will have some reps. that will stand firm and make the right decisions.
I am hoping...not counting on...but hoping, they stay firm and make the right choices.
"I am hoping...not counting on...but hoping, they stay firm and make the right choices"
"HOPE" is soooo 2008...
The theme for 2012 is... "COPE"
By 2016 it'll be "ROPE"
Fair enough.
I'd like to see the rope around the appropriate necks.
Example...Angelo Mozillo should be tied (with straps and a ball gag) into a tanning bed located in Daiichi rx#3
Excellent! May I borrow that?
you're channeling Woody Allen
"More than at any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly."
Bingo.
When we bailed out the banks we had the opprotunity to do this, for .gov to restructure and reduce homeowners debts instead of tossing the bankers some bonuses. I think we could have avoided much of the recesion if we would have kept homeowners in their houses with enough bucks leftover to help keep the economy rolling. I am glad they didn't.
I am most excited about this mess because I enjoy experiences. I look forward to the possability of me having to find nutrition through hunting and gathering, look forward to the life experiences I will acheive that wouldn't have happened if I were stuck working my life away (not that I'm working anymore anyways, it is much more pleasant). I only hope I can live long enough to see the formation of what the world has in store next, in terms of path for civilization in the US. Hopefully there is first some de-evolution because American's as people have been on the wrong path for awhile now imo.
Falling housing prices does not mean deflation, nor is it a cure from it either.
Without addressing the root cause of this madness (the FED itself) with respect to FRL and legal tender laws, this solves little.
"We need to bring the economy in line with reality"
Ya think? :-)
Problem is, the "economy" is growth-based and the "reality" is that there's not enough ability to churn through resources (whether due to an inability to expand the market because of excess debt by consumers, or because the earth ain't giving up resources as readily/cheaply as in the past). That is, we can no longer produce crap for cheaper because we're losing volume due to debt build-up. I can see how people might believe that we can purge and start a new cycle, but I don't see it: once economies of scale take hold the unwind will be like the hounds of hell have been unleashed).
So Ron Paul advocates the US selling it's gold? I guess that's one way to find out if there's any there.
LOL - indirect audit - what do we have to sell
I guess that's one way to find out if there's any there
---
Present it as a bill & put it on Nancy Pelosi's desk... She'll get everyone to sign it to SEE WHAT'S IN IT...
Koo = Nomura, right?
If so, then this is the guy who never met a bubble he didn't like. The Krugman of Japan
(slam dunk captcha...I will play lotto tonight)
The ChairSatan is promoting global hyperinflation which means the death of money that global banksters are so keen to keep as 'money'
A drunkard will do anything to keep his habit going, an addicted gambler in severe debt will do anything to keep his habit going, the US in severe debt will do anything to keep his habit going
But instead of keeping the pyramid scheme going, it will collapse and they will have produced a society where different forms of tokens will then be exchanged instead that are backed by either doing some form of real work or actual real value instead of useless toilet paper.
What good economically has QE actually done? It's done nothing but drive up the stock market, drive up dollar priced commodities and bail out some institutions that generated no real economic benefit in the first place, that's all... nothing of any real tangible economic benefit.
More QE will kill the dollar dead forever and drive up the cost of commodities...
... citizens will get fooked good and hard from high living costs and low purchasing power... they may, shock horror, even start to complain and do something to stop this.
My guess is: There will be no QE3 unless it is accompanied by a world war, that's the only way they'll get away with it.
It's kept some banks alive (banks = political donors)
I see you've found a copy of their playbook.
Did you notice that it only has one page?
Here's the short version.
Principle can never equal principle plus interest. The money supply either inflates to infiniti and beyond or deflates.
It's the usury, stupid.
By allowing extend and pretend, the Fed is trying to rescue its banking buddies who, in a normal cycle, should be forced to raise equity or face an orderly liquidation. The result is a real estate market that can not reach an equilibrium and recover from past mistakes.
ah but they have huge reserves now.
My spec portfolio is still in bernanke bucks.......just waiting.for the sheeple to puke up their risk assets so i can buy at a discount.
be careful what you wish for. what can you do if you are drowning in vomit
Good point.
I am hoping for moderate hysteria, not complete mob level insanity and teotwawki.
I think that vomit might be a description of folks' worthless assets; that is, assets that aren't really worth anything outside of someone's fake ledger.
Hummers, granite counter tops, McMansions, condos, big-screen TVs... yeah, they'll be pretty cheap, but they'll be essentially worthless. All part of a big fad (the oil fad?).
http://www.zerohedge.com/article/russell-napier-bear-market-bottom-will-...
05/17/2011 - 16:59
ABOUT ONE HOUR AGO
Tyler:
"A complete deflationary collapse could very well happen... and will be met by an equal and opposite response by the Fed. Will it be successful is absolutely unknown, but what is absolutely certain is that the USD will be sacrificed in the process before the Fed gives up. After all, the value of the dollar - a liability on the Fed's balance sheet is contingent on the value of the assets held by the Fed's balance sheet."
_____
You are again postulating an inflationary scenario while admitting just an hour ago the possibility of a complete collapse.
If "A complete deflationary collapse could very well happen" it's game over, period.
Do you still not understand that every deflationary action has a Federal Reserve reaction? We may get deflation, very possible in fact, which will only incentivize the Fed to react even more boldly with a (hyper)inflationary response (read currency and debt destroying).
The bottom line is that the economy will swing from one hyper-___lation extreme to another with ever wider amplitude. Forget price stability. Volatility is about to come back with a vengeance.
and China will get mad at us and take away all our Chinese things and make North Korea nuke us. That's when you need a George Bush in charge. We would retaliate by invading Paraguay.
Invade Andorra, baby! They need our help!
Considering Obama has only gotten us more involved in military action, y'all are starting to sound psychotic.
It takes more than two to take over Andorra?
Funny thing is, this isn't out of the realm of possibility... But, thanks for the chuckle! :-)
Disinflation gives Ben reason to print.
Disinflation
http://en.wikipedia.org/wiki/Disinflation
@Tyler
"every deflationary action has a Federal Reserve reaction? We may get deflation, very possible in fact, which will only incentivize the Fed to react even more boldly with a (hyper)inflationary response (read currency and debt destroying).
The bottom line is that the economy will swing from one hyper-___lation extreme to another with ever wider amplitude. Forget price stability. Volatility is about to come back with a vengeance."
__
I can't disagree with that. In fact the analysis is brilliant.
And, I freely and humbly admit that you are by far more brilliant than I ever was or will be.
My point is twofold:
1. Firstly, in this scenario of as you point out"swing from one hyper-___lation extreme to another with ever wider amplitude" things could break. At a certain "amplitude" things break.
THings spiral out of control fast.
2. "every deflationary action has a Federal Reserve reaction" This is true. So far. It's not inevitable. Maybe I give you too much credit, but what if, just what if, the truth is slowly being outed, by yourself and other good souls like you. What if strong resistance is met? Small chance of that? True. But stranger things have happened.
_
There were some good charts up the other day that did a pretty good job of showing this "cyclical" effect. Looked like a harmonic that was building towards that moment of failure, akin to the Tacoma Narrows Bridge. Wish my memory was better was, or I would link to them. I suppose I deserve a junk for having a crappy memory.
Actually good point, I didn't think of it at the time, but it should be possible to analyse the frequencies and phases in the waveform.
"it should be possible to analyse the frequencies and phases in the waveform."
---
I think we're already seeing the effects of phases in the waveform on Muir's bouncing jugs avatar... Probably more analysis is required...
Inflationary pressure (ie; a bubble) CAUSES a deflation which always follows.
Deflation meanwhile CAUSES the Fed to start inflating.
Thus the see-saw ride gets wilder until one of the kids gets thrown off and breaks an arm.
In a fiat system inflation always has the last laugh.
Human nature...that's just the way it is.
I disagree with your cause and effect. The bubbles do not cause the deflation. The bubbles support the required inflation which keeps the system from deflating. The system is not broken because it is fiat. The system is broken because of the usury. Take away the usury and you could build a stable system with fiat, gold or food. But keep the usury and you can't build a stable monetary system no matter what money you use.
It's pretty clear to me that the Japanese and US housing price deflation's were caused by the preceding unsustainable debt fuelled bubble in those same assets.
But then I'm not a harvard trained economist...
Therefore I am clearly mistaken.
But what would have happened if HUD, Fannie, Freddie and whoever else did not force that debt creation. What would have happened without the housing bubble. You're thinking in terms of the housing market, where as I am talking about money supply and debt service.
By forcing those loans alot of debt/money was created. That debt/money was then used to pay off the debt owed from previous bubbles. More and more debt/money must be created, by borrowing, until the money supply reaches hyperinflation. If the debt/money is not borrowed into existence than there is no money to pay the outstanding debt and then it deflates.
Anytime we aren't in a bubble, what does the gov do? C + I + G = y. They borrow debt/money into existence to fill the gap left by the private sector.
My argument is that the bubbles are a banker invented bandaid solution that temporarily props up a rigged and criminally usurous monetary policy that is predetermined to fail before the first debt/money enters circulation..
Check this out
http://www.debtdeflation.com/blogs/2011/05/02/house-prices-and-the-credi...
That seems to agree with me doesnt it? The boom doesnt cause the bust. It's the monetary policy (usury) that causes the bust which means that it's the boom that delays the bust. The more booms you can stack, the longer you can delay the inevitable bust.
Of course when you have a central bank attached to the government you dont need a private sector boom to inflate the debt supply. The government can step in as the borrower of last resort.
Yes I'm sure that the Fed simply was/is trying to start another bubble to counteract the bursting of the last one.
It's just that commodities is not what they had in mind.
You know the saying about the best laid plans.
It gives new meaning to what soros calls the "Ultimate Bubble"
ul·ti·mate/??lt?mit/Adjective: Being or happening at the end of a process;
Hmmm...
There hasn't been a great deflation since the world went off the gold standard.
Banks can create fiat money and eveything will maintain or increase in "nominal value". Eventually, this could result in hyperinflation a la Weimar Germany and Zimbabwe.
Gold and silver remain "money" in such a situation.
"There hasn't been a great deflation since the world went off the gold standard."
What would you call the Nikkei plunging from nearly 40,000 in 1986 to under 10,000 today?
That is a drop of 75% over 25 years...I call that deflation.
NO!
It was merely the collapse of an asset bubble.
The last time I checked, equities were not money.
'Banks can create fiat money and eveything will maintain or increase in "nominal value". '
Would that really be nominal "price?"
Hyperinflation as I've come to know it is more to do with a total loss of confidence in a currency. Might be just a chicken-and-egg kind of deal...
Here's my visual take (swinging bridge):
http://www.youtube.com/watch?v=v7GvGqJquCU
I remember seeing that as a kid and it scared the crap out of me. The nice thing though is that someone in one of the cars invented the traveling coffee mug with the fit tight top and the slidey thing.
As close to flying cars as we got...
Now I'm even more confused about phys PM's, although my pamp's look so nice. I'm just to lazy to go sell them. Volatility could be good to get more supplies, no more PM's unless prices drop like crazy.
You still don't seem to understand that the fiat price of metals, especially gold, silver to a somewhat lesser extent, is irrelevant.
The VALUE never, ever, ever changes. Price simply does not matter.
Save in gold, speculate (trade vol) in silver.
Never sell. Spend it.
We will all need it when hyperinflation hits, which it will.
imho.
Uh, yeah, price DOES matter. If you have $10,000 Bernanke bucks to spend on PMs, would you say it is better to buy silver at $25/oz or $50/oz?
If price doesn't matter, I'll sell you 100 silver eagles for $500 each right now.
Does price matter now?
The point is the value, not the price. You are still thinking in dollars now; you won't be in a few years, maybe less.
No, the point is the price, since I'm buying with dollars. Maybe in a few years I won't be, but right now I am, so price does matter.
But if price doesn't matter to you, my offer still stands, 100 silver eagles at $500 a pop. You in?
You are right that we still buy in dollars right now, so no.
I'm buying now, I'll buy at $50, $100, $500....if there are still $'s around.
Maybe trade you a nice car for a couple in a few years though.
What kind of car? I might be interested, if we can still purchase gas at the corner store in a couple of years.
By the way, the reason I took the stance I took is because I have limited dollars to spend, and I see prices coming down for a while before ramping back up, and if I can by 400 silver eagles in a couple of months, versus the 200 I could have bought last month, I'll wait. The dollar isn't going anywhere for a while. Silver is psychotic, compared to gold. I like 'em both.
So, assuming such a scenario...... (i'm stil trying to imagine this with all its consequences)..... wouldn't this mean that the only things that strongly matter, would be land and commodities which you personally need? Basically massive stockpiling in "downs" to survive the "ups"?
Food, Shelter and Water. I thought that everyone has heard this at one time in their lives... I'll admit, though, that it did take me a while to wake up to this fact.
The real question is can how long are they willing or wanting to go to fraud extremes in the paper market to crush the perception of value of hard commodities and if and.. at what point price discovery decouples from rigged exchanges?
out of stock == exchange irrelevant
P.S.: Another thing to consider..... even just strong shortages and thus long delivery timespans open up the potential for markets that do price in supply. After all, if in one exchange one needs to wait 8 weeks for delivery, then someone will be willing to pay a little extra for quicker delivery from another exchange. How would that other exchange then get the goods? Distributors: Make money by buying cheap but with long deliverytime from exchange A, and then sell it for premium at exchange B.
"Volatility is about to come back with a vengeance"
---
Time then to create a huge paper derivative market on it and make massive short bets on it using more counterfeit clown bucks...
Isn't that how it works?
Ya unless there is a political "gain" to be maid ( :P) by the using ICBM's on a BBQ/wedding in Pakistan.
Everyone understands that Up and Down markets are political in nature.
Some Just dont want to believe it.
The bottem line is that it's politics not capital that influences the markets most.
I'm starting to wonder if its cheaper to rally and supply a 100 man army who will "advance, kill, Burn or crush all things before them".
Or is it cheaper to just go with the flow?
It't starting to become cheaper to raise an army every day.
I can get a 100 strong stupid army of youth 17-28 now for less then 100k a year.
These Punks in office should think about that.
Of Zerohedge or other organiztion was wanted an army it could grow to 1million in a matter of 6months.
Its not a problem its only an organizational detail.
Like banging on a large Silver bell with a Golden Hammer...The ringing is gonna shatter eardrums, probably lots of skulls! :>(
d,post
d'post
koo-koo-ca-choo
Expert textpert choking smokers,
Don't you think the joker laughs at you?
You, sir, are the walrus
Peter Schiff i'view on CN(BS)C about 2 hours ago? QE2 isn't the training wheels of the eocnomy, it's the only wheels.
http://video.cnbc.com/gallery/?video=3000022569#eyJ2aWQiOiIzMDAwMDIyNTY5IiwiZW5jVmlkIjoiMDRTbk1EMkRQSDhOViszb2p5OWhEUT09IiwidlRhYiI6InRyYW5zY3JpcHQiLCJ2UGFnZSI6MSwiZ05hdiI6WyLCoExhdGVzdCBWaWRlbyJdLCJnU2VjdCI6IkFMTCIsImdQYWdlIjoiMSIsInN5bSI6IiIsInNlYXJjaCI6IiJ9
Koo-dos to Koo!
This is the same as going on a road trip for a month with your family in a small RV. You give all the kids some crack to keep em busy for the 1st 3 days then you run out.
But... <play loop> "are we there yet?" :-)
Under QE:
1. Bank collects interest payments, loan repayments, new deposits.
2. Bank uses this money to purchase a Treasury from Uncle Sam (which then spends the money).
3. Bank holds the Treasury for a week or so, then sells the Treasury to the Fed for a small profit.
4. The Fed pays for the Treasury by crediting excess reserves to the bank's account at the Fed.
Without QE, banks could have simply collected interest payments, loan repayments, new deposits and deposited them directly into their Fed accounts as excess reserves. But since these excess reserves are not being spent, they have zero velocity and so this increase of excess reserves would have removed money from the system, resulting in deflation. QE allowed the Fed to compensate for the creation of excess reserves by releasing an equal amount of new money into the system.
So what happens after QE depends on what the banks do. If the banks continue to increase their excess reserves, that would lead to deflation. But if the banks decide that they have enough excess reserves, then QE is no longer necessary and in fact continuing it would lead to inflation. In a post-QE world the flow might be something like this:
1. Bank collects interest payments, loan repayments, new deposits.
2. Bank uses this money to purchase a Treasury from Uncle Sam (which then spends the money).
As long as banks don't increase their excess reserves there shouldn't be any deflation.
And as long as banks don't decrease their excess reserves, there shouldn't be any inflation. If banks do decide to decrease their excess reserves, the Fed could sell Treasuries purchased during QE to remove money from the system and prevent inflation.
I don't see a rope or bullet in that equation.
Huh? What about the loan repayments? They cause deflation.
If the bank takes the loan repayment and loans it back out to the government or someone else, that should not cause deflation. It would just be replacing an old loan with a new one.
But if the bank takes the loan repayment and deposits it as excess reserves in its account at the Fed, that would decrease the amount of money in circulation and it would cause deflation.
I suspect that the Fed has informal talks with the heads of the larger banks and asks them whether or not they are planning to increase their excess reserves. If they are, then I think the Fed will go for QE3. But if they say they are not planning to create more excess reserves, then there probably won't be a QE3. And so I don't think that the end of QE will be as traumatic as some people are fearing. (At least I hope not!)
excuse me for my stupidity but, since the FED/Treas. is paying these banks INTEREST(TAXPAYER MONEY) on the EXCESS RESERVES(TAXPAYER MONEY), why don't they cap the amount they will hold for said banks? Say at a TRILLION EACH!
Big Ben the Bernank ?
The hit to reserves was due to decaying property values. This hasn't changed, and given that employment numbers and wages are in a downward spiral I'm just not seeing how the decay in property values isn't going to continue, thereby continuing the pressure on banks' reserves.
The logical reflex when the car's engine is sputtering is to push down harder on the accelerator. This, however, won't put gas in the tank...
If at first you don't suk seed, keep on sukking til you do suk seed.
- Timmay to Bernank, or is it the other way 'round?
Cut the Bernak some slack.
In the jugular or carotid?
dup
Good one.
Did you hear the Trav7777 theme song yet? Give it a listen.
http://trololololololololololo.com/
That cracks me up so much I have to listen to it every time someone posts it.
Thanks for your gift akak, there's just so little to laugh at these days.
Now that is some funny sh't !!
(Hope I can still register the trolololololololololol-o.com url ...)
... dsk ?
Burn baby burn!
Crash motherfucker!
Koo is worse than I was in the last year of pony playing. There comes a time when overanalysis bites.
Especially on a crooked track.
Tyler, the facebook share link for this article points to the wrong message board post, please fix it, thanks!
The U.S. and much of Europe (excluding Russia) are bankrupt.
They either default or monetize debt.
Either way, it's going to be ugly.
I predict Door #2. Gold and silver will be "gold" and "silver".
god I hope you guys are right.. if there is no QE3 and we have longterm deflation I am screwed.
Time to shit or get off the pot. Go long FRNs if you think inflation or go long PMs if you think inflation. Simple.
I went long physical silver big time, including cashign out 401k. I am fully commited. ofcourse the latest pm beat down has the wife all over me.
What's your time frame?
I hope you bought in low or bought in gradually.
Wait until the price comes back up (which it will after the rotation grinds through it's cycle).
QE3 will come, and I'd bet PM's are back up above their highs this Fall/New Year.
When the prices come back up, buy some gold, and some TIPS and rotating CD's to remain liquid and insured by the FDIC wouldn't hurt either.
This is what I would do if I were you.
Realize that the PM crushing (drubbing) was orchestrated to try and spook you out of the physical and into equities so don't buy high and sell low.
Best of luck.
+5430
The morgue is stuffing their new vault ...
So.... just go.... long?
Exactly.
Trav7777 theme song: http://trololololololololololo.com/
Oops, I meant go long FRNs if you think deflation.
Yep. Cash is king in a deflationary environment.
Does this still hold true for good imported into the US?