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On More QE and the Recession that won’t end
Boy does the economy stink! The GDP report from the BEA was about as bad as it could get. I think the economy is rapidly approaching stall speed. The insanity in D.C. has already put an additional damper on the prospects for the future.
Many places that I read jumped on the BEA data and concluded that QE3 is imminent. I think that is all wrong. From the BEA report:
The price index for gross domestic purchases increased 3.2 percent in the second quarter, following an increase of 4.0 percent in the first. Excluding food and energy, the price index for gross domestic purchases increased 2.6 percent in the second quarter, following an increase of 2.4 percent in the first.
In the past six months core inflation has been rising at an annual rate GREATER than 2%. What does Ben Bernanke say about core inflation? When does the Fed get nervous about this measure of price change?
Bernanke has said a half dozen times that he felt that core inflation “around 2%” would be the upper bounds the Fed would tolerate. Anything beyond the 2% level and easy monetary policy would no longer be justified.
In his June 22 press conference he underscored that with this:
We do have to pay adequate attention to our dual mandate.
And this:
It's not clear we can get substantial improvement without inflation risk.
Yes, it’s correct that Bernanke’s definition of inflation covers a longer period of time than six months, and yes, the last six months is not what he is focusing on. But it is also correct that neither he not his cohorts can ignore what is happening on the inflation front. We are already running a rate of core inflation that is hotter than Bernanke has promised to deliver.
My conclusion is that monetary policy is on hold. The economy would have to be evidencing negative growth for the Fed to act. That is unlikely to happen before 2012. If you’re waiting for a QE3 miracle, you’ll be disappointed.
Change direction back to how very bad the economy is. It’s worse than we thought it was. (At least it’s worse than those who believe in the MSM spin)
Economists try to define things. (It makes them feel better) One big definition these economists use is Recession. A recession has three parts to it. The first leg is a decline in GDP from a peak to a trough. (This is the actual “Recession” part of the cycle) The second leg is called Recovery. This is the time it takes for the economy to recover output so that it equals the prior GDP peak. The third leg is called Expansion. This would mark a recovery from the recession. A typical recession would look like:
With that definition in mind consider the (significantly) revised GDP results for the past few years. The revisions by the BEA yesterday make for some interesting conclusions. Consider the quarterly GDP numbers since 2007.
Note that the peak in the most recent economic cycle occurred in the first quarter of 2008 when GDP was growing at an annual rate of 13.310 Trillion. As of the end of June there has been a recovery (13.270T), but we are still below the peak. ($61B shy).
So if you’re out there feeling and seeing that the economy is a piece of crap; that it has been a piece of crap for nearly four years now. You’re right. The media has been telling you that the recession cycle has ended and we are back to growth, well, they’re lying.
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Ahem. Bruce, the Bernank gives a flying *uck about inflation.
And on all the things he said, it will go with "was kümmert mich mein dummes Geschwätz von gestern" (German chancellor Konrad Adenauer)
Translated: "What do I care about my silly talk from time before?"
My guess is the Fed will follow a two-pronged strategy:
1) QE with derivatives hidden in "other" b/s account,
2) Change the way CPI is calculated, again; and keep cooking the numbers of course.
I wish I was kidding...
Bruce:
Does the fact that M-1 and M-2 growth has picked up significantly in recent months, suggesting an increase in Velocity of money, make you feel even more confident QE3 is off the table?
Thanks for your post.
Let's see, myself, my wife, and about 80% of my friends are not working right now. Not an exageration. So the 'worse than expected' point of view is complete bullshit around here. Nothing ever recovered from my perch, it's just got worse. GDP's, record corporate profits etc don't pay my bills last time I checked.
The Bernank is in a very difficult position similar in a way to Volcker in the Fall of 1981. Mainstreet is in deep recession with sectors of serious disinflation (RE, retail for ex..since no one needs a house or more clothing) as some other sectors (commodities for ex) are soaring as a reflection of The Bernank's expansion of the money supply.
At the same time, wages are stagnant and employers are trying to max profits by cutting the work force.
Simultaneoulsy, some sectors feel no pain; namely the financial industry...same as 1981-1982 recession.
Gievn the above I suspect The Bernank will execute some form of QE3 which includes injecting "Hi Powered Money" into the system thru the present rolling over of MBS into Treasuries. The money supply will continue to expand as a result but The Bernank will do this to avoid a worsening of this recession...then commodities will continue to rise again but RE will not fall as fast and hard but keep falling slowly over the next decade.
Whatever sector you're in GL! As Buffet said early on, "it will be long and painful."
JMHO but then again, I'm a nobody.
bernanke is a jerk. it doesn't take much of an idiot to see that each time he does a Qe it actually slows things down by raising commodigy prices. at teh start of the financial crisis the flood raised oil to 147 and made the recession much worse which made the housing crisis much worse. He and other economists (krugman in particular) don't seem to grasp the knock on effects of their policies. Or they do and it is just about helping the rich and hurting the poor.
Let's be real clear of the policy objectives of the Federal Reserve. THEY WANT HIGHER INFLATION. Along the way the do help the rich and hurt the poor.
bruce, its getting late in the day to apply an objective inference from subjective and massaged gov data. while i disagree with your opinion on monetary policy being on hold, i do agree that negative growth is a catalyst for more Qeasening. I do believe thats well on its way. Central bankers are creatures of habit.
the rich will party on and on
the poor will starve and die
the middle class will whither
and our mothers they will cry
http://thepeakoilpoet.blogspot.com/2011/07/fred-and-bill.html
Bruce, of course you realize that you are using nominal dollars for the GDP stats.
What would happen if you applied inflation adjusted figures for the last 12 quarters?
What would happen if instead of applying bogus US government CPI figures, you were to use John William's ShadowStats inflation figures?
Now how do those numbers look?
Hmmmmm.
What would those numbers look like? Write a blog, I'm curious.
Beacon of light? Or a steady ship captain in stormy seas? Or...Whatever Krasting IS, he IS all of that.
Right or wrong. Right or wrong is complicated in the "Zero Hedge World." All I ever demand is a straight shooter. A straight shooter puts the ball BACK in YOUR/MY court. The heat that Rosie took in the last 24 months shows a short-sighted element who didn't like David's talk.
[of course we missed part of the big rally in the S&P but....if you cashed out on Oct 15, 2007 and had it parked at 4% (nest egg stuff) that is equivalent to approx. SPX 1800]
So if the major stuff is in 'stable principle' and equal to 1800 SPX why would you dick around with that simplicity?
Yeah. Have fun chasing yield. Stable for the bulk and hyper-speculation for the small. Knowing since 2006 that the world is crap doesn't make for good trades. 5 years later things are changing. I'm amazed it took this long and still the masses are clueless.
P.S. Bruce. As a side note I created two new jobs. The equity I built now is housing a guy & gal on SNAP. The equity required no IRS form. Now they have safety and security. My equity approach - doing everything myself - is now giving this property a boost. And now the premium shelter encourages at least a 110% output for maintenance and farm growth. Team players. Happy Team Players. Why not? Paradise?
Starve The Beast. No one can get jobs here. seriously. And this is Obama's "Birthplace" (look: the Hawaiians are tired or that narrative)
I'm pushing the equity build to the max. After a decade, income ex-USA is going to be the MO. Let's hope we are shrewd enough to pull it off. Or pay the mortgage.
No formalized QE3 is necessary. Remember, the current maturity of the fed's 'asset' portfolio is maturing at $30bn a month. In a few months I'm sure that maturity rate will get closer to $100bn a month. Since they 'reinvest' the maturity, that is de facto QE. Tyler you have these numbers for us?
I disagree. The Fed policy is to maintain the existing balance sheet. When something rolls off, new stuff is acquired. I do not see this an an incremental stimulus. It just keeps the existing level static. It is not additional QE.
Listen, Krugman is right, we just haven't done enough stimulus!!
http://metthatceleb.blogspot.com/
"when GDP was growing at an annual rate of 13.310 Trillion"
GDP was not growing at a rate of 13.310 Trillion. GDP was 13.310 Trillion on an annualised basis. First derivatives etc.
Of course, if inflation is understated, which it is with the government's calculations, "Recovery" is a lot less than even the reported numbers show.
Exactly. Bruce is right on QE3 not coming anytime soon, but he's all mixed up about GDP numbers showing no recovery. Recession ends and recovery begins when contraction ends and growth starts. A recovery always has to proceed for some time before GDP surpasses the previous peak.
That said, lowballing of inflation does inflate official GDP growth, so the recovery has been much weaker than stated, even in these new revisions.
Keep in mind that these are by no means the last revisions. GDP is only really thouroughly counted once every seven years, and the results of those counts are published with a seven year delay.
And even then, "real" GDP and inflation rates are made up largely of arbitrary decisions. "Real" GDP and average inflation rates exist only in theory, not in nature. It is impossible to objectively judge how much of the price difference between one period's products and another period's products is due to inflation or deflation and how much is due to quality changes.
All this QE has proved beyond a doubt (for anyone with at least half a brain) that Bernank CANNOT print wealth. It is an illusion and I think very shortly US govt bonds will go from being the "safest" instrument to junk status as these holders soon realize the Fed has run out of its options. Dumping bonds for liquidity (cash) will become the rule.
I have no doubt that there will be no formalized QE 3, however, our government is addicted to spending at levels far higher than it can possibly receive in income or even in loans.
I am paying attention closely, and feel strongly that the money printing will have to resume shortly after this current debate is over, regardless of its outcome.
The "easy-money" hangers-on (Banksters, Armies, Social Security recipients, Medicare malingerers, etc) are demanding it, so yes, the printing presses will continue to roll!
"The economy would have to be evidencing negative growth for the Fed to act. That is unlikely to happen before 2012. If you’re waiting for a QE3 miracle, you’ll be disappointed."
WHAT!? It's already happening. Yes, nominally it's not negative, but in real terms it's been negative for some time now.
As you yourself point out, "In the past six months core inflation has been rising at an annual rate GREATER than 2%" And that's just the official inflation number. We all know real inflation is MUCH higher.
Care to reconsider we're not in negative territory right now?
If a different measure of inflation (CPI-W) was used as the deflator we would have had negative growth. So you're right.
I don't think QE3 is coming for the exact same reason. The Bernanke admited as much that QE2 contributed to higher oil and commodities. Unless he thinks $120 oil is going to kick the economy out of this recession, the Bernanke has already shot his load and he's out for the night.
Bernanke's shot his load over Blankfien's face and is pistol whipping him saying 'You like that QE baby?'
i apologise for my sick imagination....
George Bush had his "Fiasco" in Iraq.
Barak Obama now has is "Fiatsco" in America.
And of course "this is his (and our) gift to the world." Alas it appears someone has come to town and is looking for something that's theirs:
http://www.youtube.com/watch?v=YQfiuHK_U84&feature=player_detailpage
would you like an egg, Mr. Angel?
The FED's dual mandate will mean absolutely nothing when we don't have enough buyers of treasuries....and enough to keep rates low. August will be one of the highest months of the year in terms of treasury auctions. There are about 500 billion in debt maturities. You better believe that if there is even a close to a failed auction the FED will step in....
Yields are getting crazy low right now. Someone is buying already. My feeling is someone will be buying in August, September, October. Everyone who is short UST is getting their face ripped off. "Flight to safety" right now? I can't all be flight to safety. I think there is something going on behind the scenes. The FED will not let yields rise, no matter what. This will be the path to more inflation - the FED buying treasuries like mad as everyone else more and more searches for yield in stocks, Forex, metals, etc...
Though the desire to "stimulate" the economy is part of the equation (as is inflation), I think you are right that ensuring a market remains for USTs is the crux of the issue.
The Fed Gov't's continued deficits require issuance of new USTs. Who is going to buy them if the Fed is no longer there? Seems to me rates would have to rise significiantly. Not only would this increase the deficit further and slow the economy, it would seriously impair the value of the Fed's balance sheet, which ZH has demonstated is very sensitive to interest rates.
Like any Ponzi, I think they have no choice but to continue monetizing the debt, regardless of the method or terminology they use.
I admit I have underestimated FED's willingness to keep the Ponzi going (perhaps we are already beyond the point of no return?) and the worlds acceptance of their actions. FED's balance sheet is currently more than 50 times leveraged so how much can it really be expanded from here? At least one big sovereign wealth funds used the latest EURO crisis to swap USD positions into Euro positions so isn't it a fair assumption that the world has had enough of the financial hocus pocus? How long can a system with FED being the only buyer of new UST issuance (and likely positions of current holders being dumped) continue? Doesn't a Ponzi collapse when everybody involved realize what is going on?
FED has put the accounting framework in place to avoid the technical insolvency a "big" rate increase would lead to (this is a great article on the matter previously refereed to here at ZH):
http://www.hussman.net/wmc/wmc110411.htm
I can't see a happy ending even short term.
When bank/government revolving doors need greasing, most of the Econ departments of academia, and the jobs of thousands of propeller-headed pencil pushers salaries depend upon the Ponzi? How could there be any other outcome?
And how do you secure demand for treasuries? I would say work on a strong (at a minimum stable) dollar and inflation low enough to have a reasonable real return. All FED's actions creates the opposite so, in my opinion, the more they do short term the bigger the problem medium term.
Put the global economy in the crapper, make default a reality in the municipal and junk sectors, and precipitate a systemic financial crisis in the EU.
DONE, DONE, and DONE. Eezy peezy japaneezy.
I'm looking forward to watching that little monkey in the bow tie ("I'm short Treasuries as we speak!") start puking blood this week. Nice call, Jimmy -- no wonder George gave you the boot.
Outstanding point Bruce.... thanks much!
and the definition of "a Recession that won’t end" is...?
A) Green Shoots (thanks Erin Burnette for coining that)
B) Summer -2010- of Recovery (thanks CNBS/WH Press office for coining that)]
C) Give it more time (thanks to all the m'effers out there who have propagated that meme)
D) Japan
E) Depression
D) We'll be able to define it when/if we have a chance to look back at some point in the future
One of the Obamabots says there is no chance of a double dip recession. This guy Sperling is Obama's chief economic advisor !!
http://www.reuters.com/article/2011/07/31/us-usa-debt-sperling-idUSTRE76U15T20110731
You sound surprised. What did you expect him to say? Fox News thinks that Democrats/liberals are evil and can't do anything right. Dog bites man -- big news.
Don't be a tool.
Collapse.
Recession?
DEPRESSION!
"Hey everybody
Nothin' we can buy
Chump Hare Rama, ain't no good to try"
I love FZ, thanks DavosSherman
The following link does not contain new information. But it's still worth rereading.
For what it is worth see:
http://www.boston.com/bostonglobe/ideas/articles/2008/11/16/depression_2009_what_would_it_look_like/
But this time will be different from the last Depression. We have Dancing with the Stars, American Idol, Androids, Ipads and Facebook ... we won't even notice as long as they keep filling the SNAP card and no one collects the mortgage
Yes, there are diversions, but this time is not different. The Depression had marathon dancing, The Landlord's Game (precursor to Monopoly), and the first air-conditioned movie theaters. Look at the movies. Lots of upper crust people singing and dancing, drinking, having elevated conversations about goofy problems that the rich have. It's all of a piece.
And then one day you go to the supermarket with your SNAP card, and find that a gallon of milk is $10. and a loaf of bread is $8. and a six-pack of beer is $15.
However, the amount embedded on your SNAP card remains the same as it was last month.
And every month, those figures rise by 10%, but your SNAP card amount remains the same.
Now, what do you do? Dancing with the Stars doesn't fill your belly, and the iPad gives you no buzz at the end of the day.
oh snap!