Monetary Policy

Forget Competing Theories … What Do the Facts Say about Quantitative Easing?

Krugmann fails to address even a single one of the arguments forwarded by Spitznagel. This is no surprise, as he has often demonstrated he does not even understand the arguments of the Austrians and moreover has frequently shown that his style of debate consists largely of attempts to knock down straw men.  After appraising us of his economic ignorance (see the idea that time preferences can actually 'go negative' implied by his argument on the natural interest rate above), he finally closes a truly Orwellian screed by claiming that everybody who is critical of the Fed and the financial elite is guilty of being 'Orwellian'. As we often say, you really couldn't make this up.

In perhaps the most courageous (and now must-read) speech ever given inside the New York Fed's shallowed hallowed walls, Economic Policy Journal's Robert Wenzel delivered the truth, the whole truth, and nothing but the truth to the monetary priesthood. Gracious from the start, Wenzel takes the Keynesian clap-trappers to task on almost every nonsensical and oblivious decision they have made in recent years. "My views, I suspect, differ from beginning to end... I stand here confused as to how you see the world so differently than I do. I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality." And further..."I scratch my head that somehow your conclusions about unemployment are so different than mine and that you call for the printing of money to boost 'demand'. A call, I add, that since the founding of the Federal Reserve has resulted in an increase of the money supply by 12,230%." But his closing was tremendous: "Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats."

The balance sheet recession diagnosis of many of the world's developed nations remains among the clearest explanation linking the failure of textbook monetary policy to the dismal multipliers, transmission mechanism breakages, and sad reality of a recovery-less recovery. Whether you agree with Richard Koo's traditional but massive Keynesian fiscal stimulus medicinal choice is a different matter but the Nomura economist delineates the three problems (two macroeconomic and one capital flow) exacerbating the eurozone crisis and notes that "bulls have gotten ahead of themselves". Noting that the central bank supply of funds may help address financial crises but cannot resolve problems at borrowers, and that authorities have never admitted they were wrong, Koo stresses the three key reasons that bullish speculation on eurozone is premature - monetary accommodation's ineffectiveness when the private sector is deleveraging, active fiscal retrenchment by the core when fiscal stimulus is the only plus for aggregate demand, and Japanese and US lagged-examples of that dash any short-term hope that structural reforms will lead to growth. Even his solution to the European debacle - one of financial repression limiting the sale of government bonds to each nation's own citizens - while retroactively limiting a nation's largesse seems to only lead to the inevitable Japanification we have discussed at length. In the meantime, Koo appears far less sanguine than the markets about the prospects for anything but further demise in Europe (and the US).

Better late than never. All you need to read. 

Between credible and non-credible political and fiscal policies and a reflationary or deflationary monetary policy aimed at the financial system, Morgan Stanley provides a quick-and-dirty 'map' of where Europe finds itself and the four different scenarios that await this troubled region. The 'Quantum Leap' of credible fiscal integration with term liquidity support and even easier monetary policy is where everyone hoped we would be by now (especially post the October 26th Grand Plan decisions). However, the sad truth in reality is the drop in credibility of political will (or direct nationalism emerging) combined with some concerns over inflation and the dramatic fading of the liquidity impact of the ECB's latest actions means we are drifting rapidly towards 'Debt Crisis Derailment' as the elite continue to confuse insolvency and illiquidity and stick their heads in the sand with regard the reality they face under the restrictions of Maastricht. With implicit monetary conditions dramatically easy and peripheral banks over-stuffed with sovereign debt, there is little room for anything but more encumbrance or ECB-Treaty-busting direct printing (which is the rumor floating all boats this morning).

As if our recent discussion of Austerity were not enough, Citi's Steve Englander invokes 'String theory' to open the door to multiple universes, and in one of them Paul Krugman is undoubtedly Fed Chairman. Start with the assumption that a Paul Krugman Fed would advocate strong fiscal and monetary measures and tolerate a significant run-up in inflation. The question is how the USD would respond in this world. The presumption is that the Krugman Fed would cooperate by financing the fiscal expansion, allowing government spending or (or in a very strange Republican Krugman parallel universe) tax cuts to have a real impact without affecting government debt, making a strong distinction between pumping liquidity into the banking system and directly into the real economy. In conventional terms,  this is Financial Repression 101, but inflation is desired, achieved and beneficial. As Krugman points out there is a cost to an extended period of long-term unemployment. The bottom line is that unless you make low inflation a canonical virtue, you have to compare the long-term losses from lower credibility (if they exist) against the long-term gains from moving to full employment quicker (if they exist).

Support for gold is at $1,612/oz and resistance is at $1,663/oz and $1,684/oz.

We pay homage to one of the architects and chief implementors of quantitative easing and discuss the end game for the Fed.

All you need to read and more.

We start today's story of the day by pointing out that Deutsche Bank - easily Europe's most critical financial institution - reported results that were far worse than expected, following a decline in equity and debt trading revenues of 23% and 8%, but primarily due to Europe simply "not being fixed yet" despite what its various politicians tell us. And if DB is still impaired, then something else will have to give. Next, we go to none other than Deutsche Bank strategist Jim Reid, who in his daily Morning Reid piece, reminds the world that with austerity still the primary driver in a double dipping Europe (luckily... at least for now, because no matter how many economists repeat the dogmatic mantra, more debt will never fix an excess debt problem, and in reality austerity is the wrong word - the right one is deleveraging) to wit: "an unconditional ECB is probably what Europe needs now given the austerity drive." However, as German taxpayers who will never fall for unconditional money printing by the ECB (at least someone remembers the Weimar case), the ECB will likely have to keep coming up with creative solutions. Which bring us to the story du jour brought by Suddeutsche Zeitung, according to which the ECB and countries that use the euro are working on an initiative to allow cash-strapped banks direct access to funding from the European Stability Mechanism. As a reminder, both Germany and the ECB have been against this kind of direct uncollateralized, unsterilized injections, so this move is likely a precursor to even more pervasive easing by the European central bank, with the only question being how many headlines of denials by Schauble will hit the tape before this plan is approved. And if all eyes are again back on the ECB, does it mean that the recent distraction face by the IMF can now be forgotten, and more importantly, if the ECB is once again prepping to reliquify, just how bad are things again in Europe? And what happens if this time around the plan to fix a solvency problem with more electronic 1s and 0s does not work?

In the science of physics, we know that ice freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed.. There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry. And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. It is as if one were to assume a constant relationship existed between interest rates here and in Russia and throughout the world, and create equations based on this belief and then attempt to trade based on these equations. That was tried and the result was the blow up of the fund Long Term Capital Management, a blow up that resulted in high level meetings in this very building. It is as if traders assumed a given default rate was constant for subprime mortgage paper and traded on that belief. Only to see it blow up in their faces, as it did, again, with intense meetings being held in this very building. Yet, the equations, assuming constants, continue to be published in papers throughout the Fed system. I scratch my head.

All you need to read.

Trading in Goldman Sachs Group Inc.’s gold ETF in India surged almost 11 fold, leading an advance in gold securities, as investors bought gold to mark the auspicious Hindu festival of Akshaya Tritiya. Volumes in GS Gold BeEs, India’s biggest exchange-traded fund backed by gold, was 937,816 units on the National Stock Exchange of India Ltd. at 4:54 p.m. in Mumbai, up from 85,376 units yesterday and more than the 101,914 average daily volumes in the last six months through yesterday, according to data compiled by Bloomberg. This is significant volume. Each unit represents about 1 gram of physical gold and therefore 937,816 units is the equivalent of some 29,170 ounces of gold which at today’s prices is some $47 million of daily volume for just one gold ETF in India. The Goldman Sachs India gold ETF is just one of many new ETFs in India. Trading in Kotak Gold ETF jumped more than eightfold to 226,032 units. Gold demand in India, the world’s biggest importer, may climb as much as 25% to 15 metric tons on Akshaya this year, according to Rajesh Exports Ltd., the country’s biggest gold-jewelry exporter. Assets held by local gold funds reached a record 98.9 billion rupees ($1.87 billion) at the end of March, according to the Association of Mutual Funds in India. GS Gold BeEs had assets worth 29.6 billion rupees (some $563 million (USD)) as of March 31, data from the association showed. Trading in UTI-Gold Exchange Traded Fund climbed more than fivefold, while volumes in Reliance Gold ETF, the second-biggest fund, was up more than sixfold, data shows.

Economic Debunker Steve Keen is interviewed by outspoken Irish journalist Vincent Browne and no holds are barred as he describes the Maastricht Treaty as a suicide pact of critically poor central-planning design of a supposed market-economy, based on financial crises never occurring, locking European governments into an austere path when stimulus is required. "Ultimately the Euro has to fail and the longer we continue the farce of believing we can make it function the larger the ultimate crash will be" is how Keen portrays the situation and describes the foreign-exchange, fiscal policy, and monetary policy shackles that have created and exaggerated the situation. This leads into a longer discussion of the state of the World and its inability to 'export into the ponzi' like Japan could from 1990 to 2010 since the entire developed world is trying to do the same thing and "there is no ponzi scheme on Mars that we can export to" leaving the globe without Japan's initial way out. The must-watch 10 minute interview goes on to discuss the endgame (a break in the political compact based on austerity pressures and military or political coups) as Keen sums up "it's amazing to see us repeating the same mistakes that were made during the 1930s but we are doing just that." ending with some potential solutions noting that there is no easy way out of this.