did her level best at defending QE. I think she lied to us. This chart
was central to her defense of the busted policy:
Isn’t this graph nice. It shows that there is direct causality to an
increase in FRB holdings and jobs creation. For every $1mm purchase of
average life 5-year T-Notes that Brian Sack (NY Fed) makes, a new job is
created. Magical. Actually it is just self-serving bunk. Ms.
Yellen should be ashamed at using this. There is no evidence that there
is a direct relationship between QE2 and an increase in employment. I
hope some economists rip her apart.
I am not going to deny the relationship between low interest rates and
higher economic activity. That link has been proven. For example, ZIRP
can have beneficial effects. Similarly, a drop in long-term interest
rates is a pro-growth force. What the folks at the Fed have done is
assume that QE lowers LT rates and therefore promotes job creation. But all of the evidence confirms that QE2 has had the affect of increasing interest rates.
If Yellen wanted to be fair to the US citizens she would have prepared a
different set of slides. She would have shown a graph that proved the
relationship to lower (or higher) LT interest rates and economic
activity (employment). If she had shown (for example) that a 1% drop in
the 10-year bond DIRECTLY contributed to the creation of 600K jobs I
would have accepted that. I believe that most economists would have
agreed as well.
But that is not what is going on at all. LT interest rates are not
falling because Mr. Sack is doing POMO buy-ins of bonds three days a
week. LT interest rates are rising BECAUSE he is buying. How can that
be? Is the market ignoring the laws of supply and demand? Not really.
-QE2 is ending in 4 ½ months from today. (The last month will be small
amounts, totally discounted by then). There are only 87 trading days
till the (functional) end of this experiment. The market is already
looking beyond the corner on this one.
-QE2 is creating an opportunity for large holders of Treasuries to
lighten up. There is no certainty that they will return when QE2 ends.
If "they" do return, what price will “they” demand?
-QE has created uncertainty for investors. The Fed balance sheet is a
ticking time bomb that is going to blow up on them one day. How do bond
investors know this? Because the Fed has repeatedly told them so.
They have said in the press and to the public through speeches like Ms.
Yellen’s and even to Congress that they are 100% certain they can
reverse the impacts of QE. How are they going to do this? Easy, Yellen said it (again) in her speech:
raise short-term interest rates and drain large volumes of reserves
sell our holdings of MBS, agency debt, and Treasury securities
The bond market (collectively) reads these words and craps in its pants.
This is the worst possible scenario for the bond market. The largest
single holder of fixed rate paper in the world is going to become a
massive seller at some point in the future? Lovely prospect.
Think of it differently. What would happen to our capital market if
someday we got an announcement from China that they were selling their
~900b of holdings? The bond market would collapse of course. That will
(hopefully) never happen. But the Fed is now bigger than China and they
have said again and again that they are going to be a
seller. No wonder interest rates have risen in anticipation. Who would
want to own low yield, long duration paper when you are staring into a
double-barreled shotgun (Fed & Treasury selling at once).
I think the stock market looks out about six months. The bond market
looks out about a year. What is the message that Janet Yellen, Ben
Bernanke and all the others telling the bond market? The answer to that is in the chart that Yellen used to defend QE.
Notice that she has a 600b ramp up in assets. That is followed by a
run off of the portfolio less than one year after program completion. In the Fed’s own models they are assuming that QE2 unwinds starting in 2012. Just around the corner, so to speak.
There are three possible outcomes that I can see at this point.
I) QE2 will be extended and expanded. The Fed will buy an
additional 600b of bonds. I give this a 5% chance at this point. The
policy is disgraced. The Fed already regrets the timing of QE2. Heat
from Congress will tie their hands. The economy will be muddling along
and no additional “emergency measures” are justified. This is not a
strong bond market scenario.
II) Before June 30 the Fed announces that it will not extend QE2.
They confirm that they will hold the existing portfolio at the then
current level. The proceeds of any maturities of existing holdings will
be used to acquire more bonds (similar to QE-1-lite). This would
immediately make a lie of all the prior statements by the Fed that QE2
was a temporary measure. That it’s affects would be removed in due
course. This would be very unsettling to the bond market. The Fed would
be changing the rules to suit them. No one would trust any future
promises they made if they reverse course like this. This outcome is not
bond friendly either.
III)
Before June 30 the Fed announces that it will not extend QE2. They will say that they will take a wait and see policy. They will increase or decrease the balance sheet as and when they see fit.
I think the outcome will be #III. I see this as the worst possible
outcome for the bond market. The reason? This “preferred” alternative
translates into the greatest uncertainty.
Consider what the backdrop of economic news is likely to be in the
future. In 2010 the (phoney) calculations that the Fed uses to measure
inflation showed a YoY change of only 1%. It is impossible for this to
be repeated. While inflation may not get “hot” it will be on the rise.
When the monthly numbers prove that out the bond market will shudder. As
the inflation numbers move back up and pass the “desired” 2% the market
will worry every day, “When are they going to start selling” will be the only debate.
Here’s the bottom line Ms. Yellen. QE2 has added to uncertainly and
thereby increased LT interest rates since the policy has been
introduced. Increases in LT interest rates are a factor that would tend
to slow job creation. Ergo QE2 will prove to be a policy that creates a
drag (not a stimulus) on the economy/employment.
Man up Ms. Yellen. You folks have made a mistake. Don’t try to prove
what can’t be proven. Your own graphs show the lie. Your skewed
presentation is obviously flawed. You know that, the bond market knows
it. When you bluff like this it just scares the bond market more.
Of course she lied. And of course she doesn't know it. Lies are her stock in trade. She's a pol - and all pols identify their self-interest with with the truth. Even when it's a lie.
Of course she lied, how could she not?
Bruce you clearly outlined how there is no way out for the Fed. They either continue buying bonds indefinitely knowing where that dark roads lead, it stops buying leaving a big hole in the market and basically removing their ability to further influence monetary direction or they sell and send the yields rocketing up.
So can we really expect the Fed to come out and said "Hey guys, sorry. I think we messed this up so bad we need a default to clear it. Our bad."?
I still personally think they are just trying to play for time waiting for a miracle to come along.
Even going faster than light-speed, it's gonna take the Omicronians some time to get here:
http://s59.photobucket.com/albums/g303/Staar84/Futurama/?action=view&cur...
I've had a fair number of dealings with the SFFRB economists, including Dr. Yellen when she was there. As many others have pointed out, these folks are neither dumb nor poorly informed. They're fairly pragmatic, actually. Right now, however, they're simply stuck.
I have maintained for a few years now that the U.S. is facing Fisherian debt deflation, and that policymakers should follow in the footsteps of Calvin Coolidge and simply pull the plug. Get things over with ASAP. They didn't take that course, obviously, and now it's simply too late. We're f'd. Doesn't really matter what the Fed does at this point. I concur that they're simply praying for a miracle.
I've never held these people are dumb. It's a bit odd to think that every policy maker, bureaucrat, and politician is forced to undergo a lobotomy when they enter office. It's far more reasonable to assume that they act in self intrest and are not gibbering idiots. After all was Paulson "dumb", seems like he pulled out quite well. Or Greenspan, his only problem is he didn't die as Fed Chairman. That would have cemented his position as the Maestro.
They can't pull the plug without destroying the current system, arguably the point of no return was the .com bubble. Now every bank and government would go tits up. Now with the Fed's current position with the banking structure and governmental structure this is simply unacceptable. We cannot realistically expect them to do what is best for the average person when they are beholden to banking and political interests. Hell I have contended they cannot even float the idea of reform because it might spook things, and note now that the GOP is backing off on spending cuts. Boehner is now saying he can't think of anything he wants to cut :)
It's full throttle into the brick wall. In the mean time they will dance as the music plays and feather their own nests and hoping to be the last one to die. Which makes me wonder why bail out Europe? Now the Euro dieing will eventually pull down the dollar because of the interconnectedness of the ponzi, but it will boost the dollar spectacularly in the short-meduim as calls come in for dollars, and panic money flows into dollars. Honestly from where I sit, if I was Zimbabwe Ben I would be looking to kill the euro to buy time.
Sorry, didn't meant to imply that you thought these folks were dumb. They made (in my mind) some bad choices, hoping that everything would work out okay. Now they're trapped regardless.
Ironically, I think the supporting of the Euro, and indirectly the kick-the-can pandering to the banksters, may be the most humane and morally defensible path at this point. It's a choice between utter devastation immediately, vs. utter devastation with probability one at some point in the not so distant future. At least the latter circumstance allows the possibility for people to get precious metals, expatriate, start getting marketable skills, etc. Will the average person do that? Probably not. But they could, and perhaps a few will.
No, I simply wished to back you up, these people are not dumb. People are projecting their motivations on these people's actions. So to the outside it might look dumb or foolish, when in reality it's quite sane.
Now I must disagree about acting foolishly, why? Has not the banking system profited massively? Have not they been able to secure unlimited bailout money? Their bonuses look quite strong in a extremely down labor market. Looks like a total win to me. Even if they melt down the currency it's still a win in so much as it's a massive wealth transfer.
Now I will agree that I like them prolonging the agony, lets the smart little guys brace for impact. Since the impact will totally kill the economy, why not put it off as long as possible? Surely a phoney 1st world economy is better then real 3rd world economy? If I thought there was a chance to not totally melt down I would be argueing for taking the pain now. As I see there is nothing but fraud backing up the system, the removal of that fraud means there is no telling how low we can go.
My comment about the Euro is a day will come when it's going to be the Euro or Dollar as first to die. When that day comes I have no doubt the Fed will do it's best to make sure they are the last ones to die.
if the withdrawal is minimal the patient may not suicide himself whilst going through it.
there is a threshold here shameful.
you're logic only holds if we had already crossed it before frauding along.
you cannot state this to be the case without some doubt.
Crossed the Rubicon fully in 2001, but really we were dead in the 60s. The promises made could never be fulfilled. But funny thing, old folks vote. So they would never vote to reduce their benefits, as they did not properly plan for their own retirement.
Look around you, what does the US have to offer? Food, well Monsanto is doing a bang up job and the farms are corporate. What 1% of people employed there, not a growth industry for jobs. Technology? Well truth be told about 1/2 or more of our advanced students in sciences are from foreign counties. When the ponzi dies will they stay here or go back home? War? Yeah right, the Germans make weapons just as good as ours and our Mil complex is nightmarishly inefficient even if a war economy is viable which it is not.
The main industry in the US is fraud. We spin fraud like cotton candy and sell it to the world. We export fraud and dollars, and import oil and manufactured goods. It's a good deal so long as it lasts, but when it's over it's over.
There is nothing left, so there is no doubt in my mind it's game over. The patient is already dead, there is just a few drops of blood in the system for the ticks to suck out. No way to turn it around without massive political, social, cultural changes. Which could happen but not on the course we are on.
Thanks for this discussion.
You're right of course Bennie will eventually sacrifice the euro hoping to ride a strong dollar into the new post dust-up paradigm. A Chinese planner I think would anticipate this and try to queer his game by oh, maybe underwriting PIIGs.
All hail the All-Powerful Fed!
Perhaps you're giving Dr. Bernanke magical powers, while assuming Angela Merkel and JC Trichet are complete buffoons or props in a cartoon, so to speak.
And the Chinese never make mistakes?
All have an agenda to be played out. All have strengths and weaknesses. The only thing for sure is it sure will be interesting to watch this thing unfold.
Addo:
Strange things are afoot with the USDJPY pair. My spider-sense is tingling. For full details, please see a prior post here: #861812
Coupled with this article on ZeroHedge plus the fact that they're trotting out Greenspan and my conclusions may not be far off-base.
http://www.zerohedge.com/article/number-discouraged-american-workers-hit-record-high-qe3-matter-when
:D
Or they DO have a plan for some type of reset or new currency model when the existing structure fails. I can't believe that these people don't have some sort of plan waiting in the wings. These are not stupid people, although many would like to think so, they are well educated intellectuals who MUST have some "back door"...me thinks.
Perhaps a one-world currency will be the (attempted) reset. I believe I read a quote from Bernanke where he supports a one-world currency. Need to look for that quote.
Here's one idea for a "back door", last chance, exit for Friends of the Fed:
Let the stock market, and other risk asset markets, go. Scare that money into US Treasuries one last time to drive the 5 -10 year yields to new lows (ie. 10 year under 2.0%).
Of course, the Friends of the Fed having been tipped off in advance, will be long up to their eyeballs with Treasuries, ready to sell when the risk-off panic arrives.
This plunge in yields will be "sold" to the sheeple as a boost to the housing market and of course the US Treasury.
But this would be the final escape hatch, setting the stage for the long-awaited secular bear market in Treasuries, or even worse, a more severe breakdown with confidence in the US dollar.
OF course she lied. But she may believe her own lies - is that lying then?
How does that old saw go?
"When they're Yellen, you're sellin and when they're cryin, you're buyin ..."
Oh, but don't fight the FED? Because there are lies, and there are damn lies, and then there's the FED.
I think Frank Capra said it best.
Zuzu: Daddy, teacher says "For every billion of your bonds, God creates a thousand jobs."
George: That's right Zuzu. Attaboy Clarence!
Here's that little cartoon bear YELLIN' bout some more bank fraud.
http://www.xtranormal.com/watch/8242405/