The Real Reasons the Fed Announced QE 4

Phoenix Capital Research's picture

On December 12, the US Federal Reserve surprised yet again by announcing QE 4: a program through which it would purchase $45 billion of US Treasuries every month.



Between this program and the Fed’s QE 3 Program announced in September, the Fed will be monetizing $85 billion worth of assets every month ($40 billion worth of Treasuries and $45 billion worth of Mortgage Backed Securities) ad infinitum.


Indeed, the Fed’s new policies are anchored to its goal of getting employment down to 6.5%. This means the Fed will buy these assets non-stop until employment gets down to 6.5%.


I’ve spoken to a number of people in the financial community as well as outside investors and no one seem to grasp the significance of this announcement.


First and foremost, QE does not create jobs. The UK has announced QE efforts equal to an amount greater than 20% of its GDP and has not seen any meaningful job growth. Similarly, Japan has announced nine rounds of QE for a combined effort equal to 20% of its GDP over the last 20 years and job growth remains dismal there.


Based on this, the Fed’s decision to anchor its QE efforts to employment is a bit hard to swallow. Indeed, I would argue that the Fed’s moves have very little to do with employment and instead are meant to address the following:


  1. The US economy is nose-diving again and the Fed is acting preemptively.
  2. The Fed is trying to provide increased liquidity going into the fiscal cliff.
  3. The Fed is funding the US’s Government massive deficits.


Regarding #1, the November ISM report indicates the US economy is again contracting. Looking at the chart, you can sense why Bernanke and the Fed are getting concerned: the similarities between the recent downturn of the last few years and that going from 2004- 2008 are striking. It’s obvious helicopter Ben doesn’t want us breaking into the mid’40s range.



Similarly, the ECRI, which has proven a far better judge of the onset of US recessions than the NBER, has stated that the US likely slipped back into recession in September. Bernanke and the Fed have close ties to the ECRI. I believe they’re moving preemptively based on this announcement.

We get additional indication of things worsening in the US economy from the NFIB’s Small Business Optimism Index. This measure has entered an absolute free-fall, posting its single largest drop in over 30 years. To put this into perspective, this indicates that Small Business Owners are becoming less optimistic about the future of the economy faster now than they were after Lehman failed.


In additional to this, small business earnings are have rolled over sharply since the beginning of 2012. Small businesses account for 70% of jobs. To see both small business owner optimism and as well as small business earnings cratering is a bad sign for the US economy.


Bernanke firmly believes that the single biggest reason the Great Depression lasted as long as it did was because the Federal Reserve didn’t do enough to fight it at the time. This is the driving thesis behind his life’s work and his tenure at the Fed.


With the above information making it clear that things started to get quite ugly in September, QE 4 should be seen as his attempt to act preemptively to stop another 2008-type economic plunge.


In addition to this, we know that Bernanke has stated point blank that the Fed does not have the tools to deal with the fiscal cliff.


The U.S. economy is already being hurt by the "fiscal cliff" standoff in Washington, Federal Reserve Chairman Ben Bernanke said Wednesday. But Bernanke said the Fed believes the crisis will be resolved without significant long-term damage.


The steep tax increases and spending cuts can be avoided with a successful budget deal, Bernanke said during a news conference after the Fed's final meeting of the year. The Fed's latest forecasts for stronger economic growth next year and slightly lower unemployment assume that happens…


Bernanke repeated his belief that if the scheduled tax hikes and spending cuts do take effect in January, they will have a significantly adverse effect on the economy, regardless of what the Fed might do.


"We cannot offset the full impact of the fiscal cliff. It's just too big," Bernanke said.


Given Bernanke’s extensive connections on capital hill, the move to implement QE 4 should also be seen as a warning that we will very likely be going over the fiscal cliff; not having the tools to deal with the aftermath of this mess, the Fed is moving preemptively to prepare the system for what’s coming.


Finally, and most critically, the Fed’s implementation of QE 4 represents the Fed’s full commitment to finance the US’s deficits.


In 2011, the Fed bought over 70% of US debt issuance. Based on the projections for QE 4, the Fed will buy upwards of $480 billion of the $918 billion in new US debt to be issued next year: roughly 52% of all new debt issuance.


Between this and the Fed’s monthly monetization of $45 billion worth of Mortgage Backed Securities, the Fed will be soaking up 90% of all net new dollar-denominated fixed-income assets next year.

There are several implications to this.


  1. The US will be lurching ever closer to an EU-style debt crisis.
  2. There will be an even greater shortage of high quality collateral in the financial system going forward.
  3. Inflation will continue to rise.


Regarding #1, by soaking up so much of the US’s new debt issuance, the Fed is permitting the US Government to continue overspending at a time when the bond market would normally begin raising interest rates.


Last year the US paid $454 billion in interest payments on its debt. This was at a time when the average interest rate was only slightly above 2%.


During the same year, the US only took in about $2.3 trillion in tax revenue.  So, even with interest rates at historic lows, we’re spending about 20% of tax receipts on interest payments.


Now let’s suppose that interest rates rise to an average of 4%. At that rate, the US would owe nearly $900 billion in interest payments: enough to soak up nearly 40% of all US tax receipts. And this is assuming tax receipts don’t fall as the economy contracts (historically taxes do fall during times of contraction).


This is why the Fed is committed to keeping interest rates low: if interest rates were to rise then the payments on the debt would send the US into an EU-style debt crisis along with the commensurate intense austerity measures being implemented.


Having said that, the bond market may force the Fed’s hands, at which point it’s Checkmate for Bernanke.


On that note, we’ve recently prepared a Free Special Report outlining how to prepare for this as well as the coming economic collapse. It’s called: Preparing Your Portfolio For Obama’s Economic Nightmare and it outlines several investments that will profit from Obama’s misguided economic policies, including one targeted at potentially huge returns when the US Debt bubble bursts.


You can pick up your FREE copy here:


Best Regards


Graham Summers


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
rsnoble's picture

Our fastest, most effective way of getting down the unemployment rate is having people drop out of the workforce. That means we need to lose more jobs.  This program will be a huge success. LMAO.

Of course im sure this went thru everyone's head here lol.

Rathmullan's picture

Thank God for the Fed and its singular focus on reducing unemployment. A real champion for the working man the fed is. That the banking cartel benefits enormously from those same policies that "creates employment" (well, maybe someday) is a mere coincidence.  

Clesthenes's picture

Pity the little ones.  That should have been the reaction to passage of the Federal Reserve Act 100 years ago.

The purpose of a central bank is to monetize governmental debt… to make it unnecessary to retire government debt… which makes destruction of the currency in question inevitable.

Governmental debt is the process by which one generation of people financially cannibalizes following generations.  It has been going on so long that now there is enough such debt to cannibalize following generations of Americans to the end of time.  Don’t take my word for it; a former comptroller of the US and a few private advisors will echo my message.

We were all, at one time, “little ones”; and now we pay the penalties of crimes perpetrated by those who came before… a situation mandated by the Federal Reserve and Congress.

It shifted into high gear with the bailout of 2008, which was triggered, according to FR data, in the first week of 2007 December when the Fed stripped $5 billion from the banking sector just to see what would happen.  What followed is history; and hardly anyone is aware of unprecedented crimes depicted on the Federal Reserve balance sheets.

Element's picture

First we weren't getting QE3 - no-way-Jose!

And now we're told exactly why we're getting QE4!! ...

dunno grayham ... this looks a bit sus mate ...

"... Similarly, Japan has announced nine rounds of QE for a combined effort equal to 20% of its GDP over the last 20 years and job growth remains dismal there. ..."

That would be because they had effective nearly full-employment almost the entire time.

Why is Japanese unemployment so low?


What a relentless bullshit artiste grayham!

mt keller's picture

Well ... couple of days ago I got 2 notices in the mail...

1. Social Security increase says inflation was 1.7%.

2. Power company slams in an increase of 14%.


(Who would you say is telling you the truth ? Ben Bernake, or the check you'll now be writing every 30 days?)

Element's picture

green electron subsidies and infrastructure are grossly inefficent, cost way more, for no practical reason or real benefit whatsoever ... enjoy!

donsluck's picture

Except less deaths due to air pollution, less deaths due to water pollution, lower incidents of lead poisoning in children, all, in your words "no real benefit whatsover". Even if you have a point, you should balance your thinking with the opposing side to get a clearer image of the situation.

Element's picture

Strawman rubbish.  As if people are dropping dead everywhere of the things you asserted. We live longer than ever before. How you can twist 'logic' around to think your absurd strawman 'justifies' the massive and accelerating inflationary rip-off that's plainly occurring in utilities all over the western world, is just fucking beyond comprehension. But somehow I'm sure you're more than comfortable with delusion. Get a clue or go read facebook.

Beau Tox's picture

How I am so sick of the poorly spelled and edited crap that passes for commentary on the internet.

Jendrzejczyk's picture

A silly mistake, but if we continue on the current course, we may get "employment down to 6.5%".

Beau Tox's picture

The author doesn't know the difference between employment and UNemployment.

Winston Churchill's picture

I've been sort of planning on 2014 before the UST bubble bursts.

I'm keeping it as the backstop year but maybe we will see the 'pop' in 2013,

at the rate this is going.

Got to give it to Zimbabwe Ben.Hes kept a  collapse at bay for 4 years,

but buggering a dead horse is still bestial  necrophillia, even if he calls it quantative easing.

shovelhead's picture

Why do I find that imagery strangely arousing?

Dollar Bill Hiccup's picture

Et voila.

Jobs shmobs, we've got some banks, the government and corporate profits to take care of!

worbsid's picture

I have a VISA due on the first and a Mastercard due on the 15th.  the Discovery and the American Express are in there somewhere.  What the Bernak and Timmah are doing works for me.  I'm 80 years old and I think I can juggle those balls for several years and then die.  Tim and the Bernak will be out of office and just a historical (histarical) footnote.  No BFD.  Lots of illegal aliens comming so they can pay it off.  Oh, wait ...

According to this

I owe someone somewhere $142,689 and if that is the Fed ... screw you Bernake.      

FreeMktFisherMN's picture

The money that's already been printed ALREADY is massive inflation, and that will be showing up in prices way more than it even has now, with even now already being 9% price increases/year. 


'Shorting' the market will continually mean shorting the real market with PMs and commodities. Nominally things might well go up, but priced in real things, 'assets' and equities and fantasy wealth is going down. I'm a bear on the real market but as far as stock prices actually going down it just doesn't happen hardly ever. Every little reason 'they' can find to get a melt-up whether it is a rumor of an Obamao/Boehner meeting or some tweet crushes UVXY/TZA/SPXU. 

And the printing with no bounds that was QE3 (not that QE2 really was bounded as the Fed buys securities via PPT/FRBNY) is just a huge tailwind for stocks nominally to go up. That's just what I've seen since I started following these markets a few years ago as a college student.

Errol's picture

This analysis looks valid...does Bernanke's admission that monetary stimulus cannot entirely substitute for fiscal stimulus imply that he won't be able to levitate equities single handed?  Or is it just that he wants a steep slide in order to motivate Congress to continue fiscal stimulus?