Van Hoisington On Why QE2 Will Be Either A Small Or Massive Failure

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Gloomy's picture

A Spooked Economy in October By: Ron Paul | Monday, October 11, 2010

Last week we received worse than expected unemployment numbers, challenging recent claims that the recession has come and gone. Also, as the economy continues to suffer the after effects of the Federal Reserve-created bubbles of the last decade, there is renewed interest in gold. Fears that the Federal Reserve will pump even more money into the system had caused the price of gold to reach new highs. Also contributing to enthusiasm for gold is continued instability in the banking industry, symbolized this week by fraud allegations that have caused many banks to halt foreclosure proceedings, thus further destabilizing the housing market. Yes, October has a reputation for being a scary month economically and this month is shaping up to be frightening, as well.

The Fed has been wreaking havoc and devaluing our monetary unit steadily since 1913, and greatly accelerating it since the collapse of the Bretton Woods agreement in the 1970s. This severing of the dollar's last tenuous link with gold allowed the Fed to create as much new money as it pleased, and it has taken full advantage of this opportunity.

In 1971, Gross Domestic Product (GDP) was $1.29 trillion. Today it is $14.6 trillion, nominally. But adjusted for all the inflating the Fed has been doing, it is only $2.73 trillion, which constitutes only a 1% real increase per year! So with all this extra money going around, we may appear nominally wealthier, but the reality is, we have barely moved at all. This is unfortunate especially for the prudent, conscientious savers, whose nest eggs are constantly being devalued. Unless of course, they have saved in something out of the Fed's reach, like gold. While the economy has basically been in a holding pattern against the leeching of wealth by the Fed for 39 years, gold has seen an inflation adjusted increase in value of over 5% per year, if measured in 1971 dollars. This is due to the Fed's ability to make dollars plentiful. And yet, this is the only tactic the Fed can come up with to rescue an economy already devastated by "quantitative easing", as they call it.

The turmoil in the housing market demonstrates how disastrous it is to flood the economy with fiat money. Latest events with foreclosures are good examples of mistakes made in the market, in this case, by the banks, in the rush to soak up manipulated currency. This is why the truly free market depends on sound, honest money, free from false signals of artificially low interest rates.

The government finds ways to spend money even faster than the Fed can create it, bringing our national debt well past the point of the taxpayers ever being able to pay it off. Other nations who, in the past, have eagerly bought up any amount of debt we produced are now starting to resist. We are reaching a crucial point at which the dollar will no longer function, and in the absence of a functioning dollar, restoring sound money will be the only alternative.

The truly scary notion is that those in power might allow our system to collapse so chaotically to the detriment of so many people rather than simply obey the Constitution.


Mark Beck's picture

Gold price is not unlinked, upside is dollar downside. Fundamental behavior. Unfortunately, not a currency confidence effect.

It is interesting to try and determine the strength in gold relative to dollar debasement. The vast majority of investors are blind to ongoing debasement as an effect. A strange form of denial. It is hard for holders of dollars to see value, or the absence of value. This is, however, the nature monetary inflation. It is a stealth tax (negative real worth).


The article bases FED action on economic theory. This no longer applies. The FED exists to fund government, it is monetizing the debt and will be until it controls enough of the buy. After which it will 'own' the market and control rates. The simple reality of monetizing the debt in the open. Rates must be controlled. The stall for time is to push rates to zero.

What does a zero rate look like to an investor? How about 0.02% The ultimate confidence game, pushed by primary buy resale. The market is controlled by the FED. So I would ask what does price really represent?


ARRA Grants have moved 3%, 50% to 53% in the past three months during the summer of recovery, why?


Funding states are the priority (government). But, more importantly, my feeling is Treasury does not have the proper cash flow for all of the outlays. To say it another way, the FED is telling Treasury to slow down or there will be disruptoions in the bond market.

The FED/Treasury are walking a very fine line. We are at the point now where any large disruption will cripple organized control.

Mark Beck

Bringin It's picture

Gloomy - Thanks for the Ron Paul post.

Sarah Conner's picture

There are no cures for this economy except bedrest and time. All of these other "elixers" just postpone the pain...

John McCloy's picture

Great Ron Paul video discussing the ills of the Fed. There has never been a more clear and distinct choice for the reversion to American founding principles than Ron Paul.

GlassHammer's picture

Might as well make it massive.

I have the same mindset when it comes to fishing.

This is why I fish with a hook the size of an anchor because to quote Bender from Futurama: "If I'm not going to catch a fish, I might as well not catch a big fish."


bugs_'s picture

NIce to see an article touch on the money velocity component of this.  A lot here will have to re-read.

IQ 145's picture

 The article is propaganda; it is entirely fallacious. The appeal to authority and the attempt to browbeat with statistics are classic. The point everyone needs to keep right in the front of their mind is that there is no known or predictable value to the unit of account.  At one time we had a dollar; it is now dead and gone. The dollar had a wonderful reputation, when they killed the dollar by making the unit of account disconnected from silver or gold; they kept the name. That's all that survived; the name. Alll the wonderful lofty analysis about the value of bonds is BS because no one knows what the purchasing power of the numbers will be. The Zimbabwe stock market appreciated a great deal; but not in purchasing power. The article contains a statement that inflation is at 1%; this is completely false. Bonds are instruments of guaranteed confistication; they will not pay off in "real" terms; consider what this means, in purchasing power.  The major capital markets of the world, which include the precious metals markets, and the bond markets, are not little machines that respond to calibrated inputs to your choosen parameters with calibrated outputs; this is a delusion. These markets consist of people voting with their checkbooks every day; they operate on human emotional principles. I'm sorry if you don't like it, but that's the way it is. Buying bonds now in the expectation of capital appreciation, in real terms, (what other terms are there !!); is not a good risk / reward situation.  Human "opinion", which is all there is, is swinging against you. In conclusion; it's  not 1930; no rational estimate of the unit of exchange over the next five years, for instance, is possible.

i-dog's picture

Oh good ... I'm not going [totally] crazy ... at least someone (with an IQ of 14.5!) agrees with me that this is a propaganda piece. God knows who rated it 5 stars ... do Bennie and the Inkjets visit here?

buchesky's picture

Almost as good as Howard Dean's "weeyahooie", but not quite...

doolittlegeorge's picture

okay.  let's "cut through the bullshit of excess reserves" and end it once and for all.  REAL ESTATE IS GOVERNMENT BUSINESS. Banks once lending into that world SHOULD know that "this really is a one way street should it head south" and "when it did head south only one got the memo" in the form of JPMorgan, although I'm still trying to figure out Citi myself.  What happened with the Justice Department going "all in vis a vis foreclosure" is to be expected. PERIOD.  Yes, it surprised you, but that's because some guy claiming to be "George Washington" is running your government desk.  Needless to say "the losses are in the trillions" and this DOES include the government.  OUR government.  With "bailout nation" full on we're now moving to stage two, namely: "the stick up at the government bank."  They also go by the name "campaign contributors" some of whom go back "decades" and have already given "hundreds of millions."  What IS new is "the war" or more accurately "Obama's war."  There now is an "opponent of that war" as National Security Director.  Geee, "where did he use to work"?  Can you say "I'm now a banker and scared to death"?  If you're BofA, Wells Fargo, and pretty much any local one "damn skippy."  And of course "these are banks that give to democrats."

Babalooee's picture

Pleased to introduce you...Mr. Van Hoisington meet Mr. Ben Hosingnation

ewmayer's picture

Matt Taibbi's latest Rolling Stone blog entry is on QE2 - ZeroHedge gets a nod by way of the recent video of Bill Gross, "the bond king", inadvertently admitting he gets a steady feed of insider info with which to front-run the Fed on its bond purchases:

gwar5's picture

But a failure -- sweet.

The Central Planners are debating gold vs new world (fiat?) currency standard amongst the currency chaos.  Either way USD gets crushed in any revaluation or conversion to reset the clock. You can bet that within the IMF and G-20 the West is pushing for fiat and arguing respective exchange rates.

The Fed and Gov Corp. have, in fact, been acting like someone who is running up the credit cards right before they file Chapter 7.  They'll point the finger at those well meaning internationalist types when we get cornholed. 


Smokey1's picture

Heed anything Van Hoisington puts out there. That mfkr knows his shit cold. Lights out.  A history of being right and doesn't give two shits whether Wall Street agrees with him or not.

HarryWanger's picture

I think QE2 will happen but it won't necessarily be a failure. Other than employment not getting better, we're seeing stability in some key economic indicators. Before you fly off the handle, I said "stability" not growth.

So for QE2, it could be the boost we need. For example, remember that ECRI number that was so eagerly put up every Friday when it went below -10? Well, since it's not posted here due to its IMPROVEMENT, it now sits at -7. Still negative but certainly reversing weekly.

Pretty much the same story with BDI and rail traffic - both are improving. Nothing to jump up and down about but a reversal from the downward trajectory of recent months.

So maybe QE2 does create the "wealth effect" we're seeking. It's like trying to push a heavy wagon, starts out slow until it gets moving, just needs another boost to keep up the momentum.

minus dog's picture

"Other than employment not getting better, "

What exactly do you expect all these unemployed people to do?  BDI and rail traffic mean fuckall to these people.

We're long past the days when someone could simply revert to being a dirt farmer.  The skills and tools aren't there, and even if they were it is increasingly hard to do so without running afoul of the law or running aground on property taxes and having all your shit taken by the state.  Entrepreneurial activity is becoming more difficult by the day and millions of these people can't sit around and wait forever for some mythical recovery in the job market.

HarryWanger's picture

BDI and rail traffic mean fuckall to these people

Wait a minute - all I saw on this site every Friday was how ECRI was falling and certainly pointing to a "double dip". Post after post. Some featuring Rosie as he pointed out continually. Post after post pointing out that analysts were stupid because they said it didn't matter that ECRI was -10. 

But then something strange happened - it reversed and went higher and continues pointing higher again. Still negative but now at -7. 

So what's it going to be? Should we follow the ECRI since when it's -10 it does "mean fuckall to these people"? Or do we just play off when the scenario didn't play out and say it doesn't matter?

honestann's picture

Unfortunately, virtually ALL official statistics are totally bogus, as well as virtually ALL private statistics that are based [in part] on official statistics.  Therefore, a large majority of analyses, even by some fairly honest and intelligent people, are massively misleading and wrong.

In pattern, the "recession" and "economy in general" are simply large versions of the following farce, which measures the economy of your neighbor next door.

Year after year, you wait to buy a new car, or improve your home.  Year after year, you observe your neighbor purchase larger and larger goodies.  First, a few years ago, it was a central air conditioning system.  Then it was a massive upgrade of his yard.  Then you saw some workers haul away his entire house full of adequate but ordinary looking furniture, then carry in replacements of gorgeous, obviously expensive new hardwood furniture.  The following year you see two new SUVs in the 3-car garage they just had added to their home.  Then just last year, you watched workers built a big, fancy swimming pool in their back yard.

Last week, they invited you to a party at their home.  You're not a nosey person, but on your way back from the bathroom you wandered into an open room, his "office", and noticed some statements on his desk.  The balance in the account on top said $3,850,000.  Four million bucks!!!

What you don't see or know is, something went wrong with the FICO computer, and your neighbor has managed to borrow $8,000,000 in the past 5 years.

The fact is, over the past 5 years, his "annual income" has increased from $32,800 to $2,800,000...... when measured the way "official statistics" are measured.  What you don't know about your neighbor OR your country is... that extra $8,000,000 isn't really income, it is a loan.  Or to make this analogy more accurate, that $8,000,000 is a loan of counterfeit money from the mafia (albeit at reasonable interest rate, due to your mistaken FICO score of 999).

The only reason the economy has SUPPOSEDLY exited recession is... by ignoring debt, and by counting all sources of funds (including loans and counterfeiting) to be normal salary and income.

FACT:  The USSA is in a massive depression that can only get worse as long as the predators-that-be remain in power.

reading's picture

This is the bounce you are getting excited about?

By the way the bounce from -10 was discussed here...feel free to search the archives.

Hellholeratrace's picture

One thing I've noticed recently is that the malls where I live are getting crowded again. I think what may be happening is that those people who managed to hang on to a job are tired of not spending money because they're plain addicted to it.  These people can show some paper wealth and maybe found a long lost credit card in their pocket. Hell, it's probably because they quit paying their mortgage. I think any of this improvement will be short lived.  The boat still has a gaping hole in it. We may be able to speed up to stay afloat for some time, but the hole will just keep getting bigger to the point that we will eventually sink. Plus any little "shock" to these consumers will make them immediately stop spending. One thing we can't underestimate though is the American people's propensity to take on debt for instant gratification. But it really doesn't matter because of my previous sentence about "shocks". We may be able to reflate temporarily but the busts and crises will get closer and closer together until it's game over, boat sinks.

reading's picture

Be sure to pay attention to whether all the people at the malls actually have bags -- I noticed more people during one visit a few saturdays ago but strangely lots of "lookers" but no real shopping (ie, bags).  It was pretty interesting -- almost like a field trip.  I also noticed about an hour later the traffic was much lighter.


contrabandista13's picture

He's missing the whole point of his point...

I have a difficult time with these chaps that are so focused on the minutia.  I agree that there are unintended consequences of QE...  Duh....!  I further agree that there will be unintended consequences if further quantitative easing is implemented.  

In short, for those of you who understand what a backgammon prime is, America is primed.  It can give the cube and it can take the cube, it can even beaver the cube, however, however, the last pip will soon come off the board and we are screwed...  big time...!

fiftybagger's picture

"Currently, inflation is tracking at a 1% annual rate"


That's all I need to read, Van hosehead is a complete and utter moron...

IQ 145's picture

 Yeah, it's a sophisticated form of propaganda; it offers an insight into how the authors convinced themselves of their thesis; but the conclusion, that people can buy bonds in the expectation of capital appreciation; has a very poor probability of transpiring; the mechanism of prediction they offer is useless.

brushfire's picture

If you use the CPI as your inflation input, then real yields are positive and bonds are not in a bubble. If you account for real inputs that are not reflected in the CPI number, inflation is substantially higher (just north of 4% according to Shadow Stats) and real bond yields are negative. This places bonds unequivocally in bubble territory.

minus dog's picture

You wonder what is up with some people, then realize they don't actually go shopping for their own food.  Explains so much.

cxl9's picture

Indeed. Also: what would yields look like if the government was not purchasing its own debt?


CrashisOptimistic's picture

What sort of payroll / budget does Williams run at Shadowstats?  Does he publish a list of academic credentials necessary for getting hired at his vast agency to make the required phone calls to sample what % of total household spending a given category might be?  Is his survey team numbered in 100's or 1000's?

Don't bother looking.  I'll tell you.  He has no staff.  He makes no phone calls to conduct surveys of consumers to determine what they spend on and how much.

Why would he be quoted?

99er's picture

The money is going abroad.

(Reuters) - Asian authorities anxious about currency appreciation moved to stem foreign capital inflows on Monday while a European official stepped up rhetoric about a strong euro after IMF meetings failed to defuse tensions about exchange rates.

China temporarily raised reserve requirements for six large commercial banks, four sources told Reuters, a surprise move aimed at draining cash from the economy.

Thailand, also on edge about a rapidly rising currency that has alarmed exporters, said it may impose a tax on foreigners' bond purchases.

With interest rates in the developed world at record lows, investors have poured money into higher-yielding emerging market assets, driving up local currencies in the process.

IQ 145's picture

 THE fundamental error in all of investing; chasing interest rates.

AUD's picture

"They are feeling the political pressure to act, even though the problems facing the economy are not related to monetary policies."

I agree with the first bit, but the second is bunk, so I read no further.

buzzsaw99's picture

QE is about wall street bonuses, period.

buchesky's picture

Your avatar picture is sooo gross!  I think I recognize it from Total Recall.  Just wanted to let you know that it probably had the intended effect...

Lux Fiat's picture

Kuato led the Martian mutant resistance to a tyrannical gov't.  Don't think that "gross!" is the intended message.

ewmayer's picture

Harry, "wealth effect" is just another way of saying "free lunch". If it really were consumers' "irrational fear of spending too much and taking on too much debt" which were the driver of the current recession, then sure, "stimulating willingness to spend" by pumping up paper asset valuations could work ... but this is a different kind of beast altogether, it's that mythical beast the Keynesians thought they had banished forever, the "balance sheet recession". And the only real cure involves painful detox by way of deleveraging and forcing all the bad debt out into the open.

That has pretty much become my quick-response sanity check of any economic or financial proposal of late: "Does it equate to a free lunch?"

By the way, all those who in Krugmanite fashion keeping screeching that "QE will work ... it just needs to be big enough" conveniently forget that we just recently had what amounted to the biggest fiscal stimulus of the post-WW2 era - yes, I'm talking about the late, great Greenspan housing bubble. That produced a really frickin' huge "wealth effect" of the kind you describe. How'd that work out for us?

HarryWanger's picture

Can't compare the housing bubble with QE2. That was a big ponzi get rich quick scheme and stupid people bought into it. And the banks were more than willing to let them participate. Two guilty parties.

The theory with stimulus is to create a wealth effect by investment into business. Force rates negative and the money has to go somewhere else. Hopefully, it gets invested into business development which in turn leads to hiring and jobs. That cranks the whole machine up again and gets it running. It has nothing to do with a "free lunch".

Something has to give the economy (and jobs) a boost. QE2 is needed precisely for that reason. Otherwise, let's just sit back and whine about no jobs, slow economy rather than trying to create growth which begets jobs and pumps the economy.

Deep's picture

Harry you are very mis guided in your optimism. QE2 will do nothing. Our economy is built on credit expansion, when people are dead broke and living pay check to pay check, they are not going to take on more debt. This economy needs a reset, now i am not saying dow 2000 r 5000, the ultimate bottom i will let the market decide.

The sooner we take our medicine, the sooner the recovery. All this  bullshitQE2 talk, it will do nothing. we have massive structural problems that have to be fixed before we can have the next sustainable bull market.

Rates have been negative in Japan, have they not, what happend there.


StychoKiller's picture

Sorry, when the insulation on the motor windings is burnt off, increasing applied voltage is precisely the wrong solution.

Put a freeze on Govt spending and regulation for long enough, and the motor would heal itself.

MoneyMagician's picture

If you subtract, or zap away the bubbles, you get the real economy, which grows very slowly. 65,000, to 75,000 private job creation is actually pretty normal in the past 20 years. Sure the housing bubble damaged housing very badly below historical trend lines, but that's what bubbles do. At least we got something out of the NASDAQ bubble. Fiscal stimulus will only increase the trade deficit, and monetary stimulus won't do anything, because there is no new mania to fill. Of the jobs that are created, they are mostly health care, burger flipping fair. Manufacturing jobs have been bleed, and is still bleeding from the american economy. Regulations, and taxes are the culprit, along with bad global monetary policy. If you really think about it, the economy has been damaged for many years, think decades. QE2 is good for the stock market in raising nominal values.

Burnsy's picture

I agree, QE2 is not as malicious and fraudulent as CDOs etc, of course not. But it is misguided. At what point are excesses allowed to be cleansed from the system, Harry? Household leverage is still close to all-time highs, government debt is at all time highs, zero % financing is back...this system is not healthy, and we should not prop it up again and again.

In a capitalist system, we can't just skip creative destruction when it suits us because we want to avoid the social cost. The final social cost will be far worse, and far more dangerous if we never change our ways. Serious economic upheaval is potentially the precursor to another war. Keynes, a widely misunderstood eceonomist it seems, is used as an excuse to please campaign contributors and ignorant masses and insulate them from economic realities. Hopefully (I'm not holding my breath) more politicians will realize that the path we are currently on is wrong and speak the truth even if it costs them politically, and the masses econmically for a while. That is our best hope for long-term growth now.

Hang The Fed's picture

When the system itself is what's broken, strapping on some more band-aids can only work for so long.  I wouldn't be inclined to offer nasal-spray to someone dying of cancer, so why do so many people think that it will work in this case?  I smell only the stink of corrupt flesh, infection, and death in what's going on these days.  LOL, god's chosen, we are...go on, now...pull the other one!

Lucius Cornelius Sulla's picture

This war is too important to be left to the politicians!

Is Bernanke General Ripper's protege?


gnomon's picture

QE2 will be the epitaph engraved on Bernanke's tombstone.  And that epitaph will not be one of sweet remembrance.

HarryWanger's picture

QE2 will be the epitaph engraved on Bernanke's tombstone.

Why? I've laid out reasons why it could work, you tell me why it you think it won't. Or in your words, why it "will be the epitaph on Bernanke's tombstone?"

Big Ben's picture

QE1 roughly doubled the monetary base. This has not caused inflation (yet), because the QE1 money went into excess banking reserves which are not used to purchase goods and services and hence have zero velocity. But this also means that they are not doing anything to create jobs or spur economic recovery. Basically all that it has done is to sow the seeds for future inflation.

QE2 would be more of the same.

Iam Rich's picture

The article above has laid out the case.  The banks don't want to lend, can't find credit worthy businesses, or businesses are not looking for credit.  I think Art Cashin mentioned a few weeks back, "don't give me credit, give me customers".  Hence, QE2 ends up in commodity prices (gold to grains) and asset prices.  Increasing commodity prices = increasing business input costs = margin compression = no new jobs = no spending power = buy less stuff (Apple, Netflix, etc.) = contraction = QE3 = increasing commodity...

Certainly simplistic but -7 is still contracting.  BDI and rail traffic run right into over the road trucking cratering.  You would think after QE1 + QE2 + Tarp + $3T in fiscal deficit (fed gov't alone...can't forget we need to add in the states), we would be seeing a bit more stabilizing at + numbers.

Gunther's picture

Only if the official CPI-numbers are taken seriously the bond-argument holds.

If one uses the 'old' methods of calculatig the CPI the real yield (10 year yield - CPI) is negative since 2000.

See the green curve here: