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QE 4: Folks, This Ain't Normal - What You Need To Know About The Fed's Latest Move
Submitted by Chris Martenson of Peak Prosperity
QE 4: Folks, This Ain't Normal
What you need to know about the Fed's latest move
Okay, the Fed's recent decision to boost its monetary stimulus (a.k.a. "money printing," "quantitative easing," or simply "QE") by another $45 billion a month to a combined $85 billion per month demonstrates an almost complete departure from what a normal person might consider sensible.
To borrow a phrase from Joel Salatin: Folks, this ain't normal. To this I will add ...and it will end badly.
If you had stopped me on the street a few years ago and asked me what I thought would have happened in the stock, bond, foreign currency, and commodity markets on the day the Fed announced an $85 billion per month thin-air money printing program directed at government bonds, I never would have predicted what has actually come to pass.
I would have predicted soaring stock prices on the expectation that all this money would have to end up in the stock market eventually. I would have predicted the dollar to fall because who in their right mind would want to hold the currency of a country that is borrowing 46 cents (!) out of every dollar that it is spending while its central bank monetizes 100% of that craziness?
Further, I would have expected additional strength in the government bond market, because $85 billion pretty much covers all of the expected new issuance going forward, plus many entities still need to buy U.S. bonds for a variety of fiduciary reasons. With little product for sale and lots of bids by various players, one of which – the Fed – has a magic printing press and is not just price insensitive but actually seeking to drive prices higher (and yields lower), that's a recipe for rising prices.
Then I would have called for sharply rising commodity markets because nothing correlates quite so well with thin-air money printing as commodities.
That's what should have happened. But it's not what we're seeing.
Instead, stocks initially climbed but then closed red. Gold was mysteriously sold in the thinly-traded overnight markets and again right after the announcement in large, rapid HFT blocks that swamped the bids. U.S. Treasury bonds actually sold off on the news. The dollar hardly budged. Commodities were mixed across the board but more or less flat on the day, with the exception of the metals, and especially the precious metals, which were sold vigorously.
The markets are now well and truly broken. Not because they don't conform to my predictions, but because they are no longer sending useful price signals. Instead, my hypothesis here is that the markets are now just a giant and rigged casino, where a relative handful of big firms and other tightly coupled players are gaming their orders to take advantage of this flood of money.
When your central bank badly misprices money and then bids up everything related to bonds, nothing can be reasonably priced. Risk is mispriced; the few remaining investors (as distinct from speculators, which are now the majority) are forced to accept both poor yields and higher risk – so we know the price of everything, but the value of nothing.
QE4
So what exactly is this new thin-air money printing program all about? Well, unlike any prior Quantitative Easing (QE) announcement, this one was tied to a fuzzy and quirky government statistic: the unemployment rate.
QE4 is Just-In-Time Fed Policy to Avoid Calamity
Dec 13, 2012
We got the most thunderous Just-In-Time monetary policy today that is a substitute for the absence of any degree of stimulative fiscal policy.
You might say that QE4 is now going to act as both monetary and fiscal stimulus– another $85 billion worth of Fed accumulations of Treasury bonds and mortgages- that is meant to keep stock prices moving higher and residential home sales climbing briskly.
The goal is to drive economic activity, especially residential home building, so that unemployment drops from 7.7% to 6.5%. The surprise move is meant to signal the Fed’s awareness of the softening economy; it sees the gritty numbers before we do.
Getting unemployment down to 6.5% without inflation rising to a level higher than 2.5% is not expected to happen until 2014 at the earliest. And it could go longer if there is no deal and we go over the cliff.
But, you should know that the only reason unemployment is 7.7% is because hundreds of thousands of males have dropped out of the search for regular work. A very depressing tale.
The key point here is that the Fed is now actively running both monetary and fiscal policy because it will now be in the business of funding nearly 100% of all the new government deficit spending in 2013. And it is pumping a bit more than $1 trillion of hot, thin-air money into the economy as it does so.
The odd thing here is that by tying their policy to the unemployment rate, we could be in for a very long wait for the stimulus to end. The reason is that the unemployment rate has a couple of moving pieces, one being the number of people who are unemployed, and the second consisting of people who have given up looking for work, which is tracked in something called the 'participation rate.'
As more people leave the labor force and the participation rate goes down, the unemployment rate goes down, too. Somewhat confusingly, as more jobs are created, the unemployment rate goes down, too. As you can see, these numbers work in opposition to each other because as more jobs become available, more people re-enter the work force.
Before the crisis struck, the participation rate was around 66.5%. But now it sits at just 63.6%, meaning that, at roughly 1.4 million jobs for each percent, a bit more than 4 million jobs would have to be created just to absorb the folks who left the labor force but presumably would like to work again. As those 4 million folks come back to work, the unemployment rate will not budge at all.
It will require two full years of 150,000 jobs per month just to absorb the 4 million missing workers, which means that this QE effort will be with us for a very long time. Three to four years is my best guess, and that's only if the economy magically recovers. And I have very strong doubts about that.
This means that the Fed is most likely on track to increase its balance sheet by another $3-4 trillion. Ugh. That's 300% to 400% more money created in the next year than was created than during the entire 200 years following the signing of the Declaration of Independence.
The other part of this new QE policy is that they will continue this as long as inflation remains below 2.5%. Again, this is a very fuzzy government statistic subject compared to the usual massaging and political biases, but it has top billing as the one that is most likely to force an early termination of the thin-air money printing efforts.
However, I remain convinced that the Fed will change any rules and move any goalposts it needs to in order to continue its mad money printing experiment. Because there really isn't any other alternative at this point.
Secretly in the Open
Once upon a time, it would have been considered in bad taste to suggest that the world was being centrally managed in secret by a small-ish cabal of bankers whose actions served to either prop up the excessive spending habits of the very governments that conferred upon them the power to print money, or to bolster the health and profits of the banks they mainly serve.
That was then. Today you can just read about it in the Wall Street Journal:
Inside the Risky Bets of Central Banks
Dec 12, 2012
BASEL, Switzerland—Every two months, more than a dozen bankers meet here on Sunday evenings to talk and dine on the 18th floor of a cylindrical building looking out on the Rhine.
The dinner discussions on money and economics are more than academic. At the table are the chiefs of the world's biggest central banks, representing countries that annually produce more than $51 trillion of gross domestic product, three-quarters of the world's economic output.
Of late, these secret talks have focused on global economic troubles and the aggressive measures by central banks to manage their national economies. Since 2007, central banks have flooded the world financial system with more than $11 trillion. Faced with weak recoveries and Europe's churning economic problems, the effort has accelerated. The biggest central banks plan to pump billions more into government bonds, mortgages and business loans.
Their monetary strategy isn't found in standard textbooks. The central bankers are, in effect, conducting a high-stakes experiment, drawing in part on academic work by some of the men who studied and taught at the Massachusetts Institute of Technology in the 1970s and 1980s.
While many national governments, including the U.S., have failed to agree on fiscal policy—how best to balance tax revenues with spending during slow growth—the central bankers have forged their own path, independent of voters and politicians, bound by frequent conversations and relationships stretching back to university days.
If the central bankers are correct, they will help the world economy avoid prolonged stagnation and a repeat of central banking mistakes in the 1930s. If they are wrong, they could kindle inflation or sow the seeds of another financial crisis.
If it feels like you are part of a very grand, high-stakes experiment, congratulations! You're exactly right. We are all collectively prisoner to whatever outcomes are in store.
The rather politely ignored truth right now, at least by most news outlets and politicians, is that the world's central banks have wandered very far off the reservation and are running an experiment that really has only two possible outcomes. One is a return to what we all might call 'normal and stable' economic growth. The second is the complete collapse of the fiat money and their attendant financial systems and markets.
While it is technically possible to achieve some other middling outcome, that possibility has been receding to ever more remote territory with every passing month and new round of money printing.
The basic predicament here is that more and more money is being printed while the world economy, predictably for those who follow the net energy story, has been entirely stagnant and constantly threatening to slip back into economic retreat. Of course, more money + the same amount of (or even less) hard assets = the perfect recipe for inflation.
So the rise of inflation will signal the beginning of the end of this slow-motion tragedy. I use the term 'tragedy' here because it doesn't have to end this way. We have other options; we could make other choices and use our time and resources to try and do something other than maintain a broken financial system that desperately needs to be changed.
In Part II: It's Better to Be a Year Early Than a Day Late, I explain the facts behind why I am more convinced than ever that this all ends in one of the most disruptive financial and currency events ever seen on this planet. And while the repercussions will be felt by all, taking prudent action while there is still time can greatly improve our individual odds of weathering them safely.
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Briefing on the Fiscal Cliff at Congress
by Steve Keen on December 11th, 2012 at 7:41 am
http://www.debtdeflation.com/blogs/2012/12/11/briefing-on-the-fiscal-cli...
.
debt is money, becomes deflated and then transferred,
redistributed to the fraudulent lender of thin air
variety as new "money" or bank back bone deposits to
maintain liquidity or employment or warm weather?
aka.. stealing from the sovereign general trust directly
into the coffers of the fraudulent overlord banksters.
by law in the land of overlords.
" the constitution is just a piece of paper."
someone said it.
I believe that the whole QE action is based on a fallacy. Printing too much money causes unemployment rather than cures it, and is self defeating.
They will get unemployment down, but only by changing the way its measured. Using Shadowstats data, which is the way the government measured unemployment in 1990, it currently sits around 23%..the idea that 6.5% true unemployment is coming soon is about as stupid as thinking the fed can print ua back to health.
It's Christmas. The goose has been cooked. No more golden eggs.
As a goose, I have had my time but, never figured that my little gooslets would be denied the pond and a fighting chance to live free.
Mea culpa.
Deus animae tuae misereater.
Should just build some iHelicopters, Benwanke needs appropriate infrastructure investment.
FARPs bitches
What's normal?
Around here it's things being designed to break, profitable too.
http://www.youtube.com/watch?v=GQNLncyodZ4
Like this Mr. Martenson:
Angels - Between the eyes
https://www.youtube.com/watch?v=WSBD3JFIgVw
More money = inflation and the financial crisis i ongoing. Fixed it for you.
Not quite. As the re-entrants come back to the labor force, they typically re-enter first as UNemployeds (they restart the search process). In the determination of the unemployment RATE, the no. of unemployeds appears in both the numerator AND denominator, making both bigger. The effect on the denominator operates to lower the unemployment rate, while the effect on the numerator works to raise it. However, the effect on the numerator is disproportionately larger and so, at the beginning of a REAL recovery, the unemployment rate should naturally RISE. Because of all the chicanery w/the unemployment statistics, however, it has been steadily falling as people previously classified as unemployed are defined out of the labor force (a fact detailed numerous times on ZH).
Deliciously ironic is it not? If the unemployment rate keeps falling b/c of statistical gamesmanship, this false signal will tell the Fed to begin raising rates, even though in reality, things will not have improved (which of course depends on their being true to their word--always a dangerous assumption). How rich that, in this hall of mirrors, the Fed finds itself in a box of deceit wrapped in lies, and tied up w/a pretty bow of chicanery.
The Fed will not (cannot, in point of fact) raise rates.
Why do you think they have two all but mutually exclusive criteria for "exit", both of which are imaginary numbers completely within their control?
The Fed may as well have said, "We'll be doing QE until further notice."
plus many entities still need to buy U.S. bonds for a variety of fiduciary reasons. With little product for sale and lots of bids by various players, one of which – the Fed – has a magic printing press and is not just price insensitive but actually seeking to drive prices higher (and yields lower), that's a recipe for rising prices.
It's called the secondary market where China and other foreigners will be dumping their bonds to repatriate their dollars for hard goods.
This is not an experiment as characterized by those who are participating in this current foolishness. This is just a rehash of the justifications writ large of the modern attempts in Zimbabwe, Argentina, Mexico, Chile, (Weimar) Germany. Those who refuse to learn from history are doomed to repeat it.
All I can say is keep stacking physical!!
"...predictably for those who follow the net energy story,"
Which just happens to be complete BS. Given the chance, energy producers around the world will make natural gas too cheap to meter.
Dup -touch screen
"Given the Chance..."
And the only thing stopping them is Geology
Markets are cracking.
NASDAQ100 Daily closed below long term resistance.
http://bullandbearmash.com/chart/nasdaq100-daily-gaps-below-channel-supp...
I'm finding more and more people willing to barter and use gold/silver vs. dollars.
If they are at 2 trillion and that hasn't worked, why do they think doubling down will work?
No hyperinflation yet, so why should doubling down cause it? People are just too obsessed with hyperinflationary fantasies. Everyone wants to trash their currency, so we all just stand in place in relation to each other.
Hyperiflation starts with loss of confidence in the currency. People spend it faster and faster and and suddenly there is too little. And that´s when the real printing starts.
worse than that, people can simply stop accepting the currency. There is really no such thing as "deflation" as getting anything done or made actually requires real work input. Lots of people looking for work or working in any manner they can to survive, the level of goods and services remains pretty flat. More people fighting for the same pool of resources, from a work perspective, hyperinflationhas already begun. The talking heads and MSM have been serving to simply keep people calm for quite a while. 2001 was a distraction to maintain control, in 2008 they almost lost control. How long can the fascist corporations keep this shit-show going? Place you bets.
And actually the hyperinflation has already happend. You don´t have to print another dollar, already a done deal.
"The Fed will not (cannot, in point of fact) raise rates."
Of coarse they can raise rates. They choose not to. The idea that the FED cannot raise rates is silly, for whatever rationale you want to use. The world is not going to end if the FED raises rates. The FED just acts as if it will end.
"Markets are cracking.
NASDAQ100 Daily closed below long term resistance."
Markets are cracking, or is it Apple is cracking, considering it is the 800 pound GORILLA in the QQQ.
"However, I remain convinced that the Fed will change any rules and move any goalposts it needs to in order to continue its mad money printing experiment. Because there really isn't any other alternative at this point."
Of coarse there is another alternative. They just won't entertain it.
The minimum wage was once 1.35 an hour. It is over 7 now? Shouldn't everyone be doing well at a minimum of over 7 an hour?
Just how well is no alternative working out? 47.7 million people on food stamps. A new record.
Weimar pretended they had no alternative and look what that got them.
Excellent article!
"... markets are now just a giant and rigged casino, where a relative handful of big firms and other tightly coupled players are gaming ... a small-ish cabal of bankers whose actions served to either prop up the excessive spending habits of the very governments that conferred upon them the power to print money ..."
IN FACT, the whole world is dominated by the runaway triumph of the biggest gangsters, the banksters, who are trillionaire mass murderers, who plan on consolidating their global hegemony, in the ways that Carroll Quigley explained. Furthermore, since those are THE FACTS, the only genuine solutions would have to be based on the fundamental basis that civilization is based on the principles and methods of organized crime, and, on that basis, work to negotiate a better ecological balance of the rates of robbery and murders, which are phenomena which MUST exist in the real world.
Since that is practically impossible, since it would take a prodigious series of political miracles to change from where we are at now, (namely, 25% of the masses of muppets supporting the political puppets) to having at least 25% understand THE FACTS, and responding sanely on the basis of THE FACTS, there can be no reasonable doubt what the more probable future scenarios will be: "complete collapse of the fiat money and their attendant financial systems and markets."
That means that the most probable futures, barring some series of political miracles, will be collapses into chaos, causing genocidal wars, along with democidal martial law. The ONLY better solutions require the series of political miracles whereby enough people understand the combined money/murder systems in order to better balance them. That series of political miracles appears to be so extremely improbable that the only real ways that the current systems have actually prepared is for wars and martial law. The ONLY genuine alternatives would have to be based on profound paradigm shifts in militarism, understood by enough of the people, so that the natural, human and industrial ecologies were governed in ways that were no longer based on runaway triumphant frauds.
Since anything saner like that is practically impossible in the current political context, and yet, nothing less could possibly work enough, I agree with this article that says:
"I am more convinced than ever that this all ends in one of the most disruptive financial and currency events ever seen on this planet."
Therefore, I believe that these "most disruptive financial and currency events" are being deliberately driven towards genocidal wars, along with democidal martial law, since those are the ONLY realistic and practical ways that these problems could be resolved. Without some series of miracles, embodying wide-spread basic paradigm shifts in political science, then THE FACTS indicate runaway triumph of frauds, eventually resulting in the psychotic collapse of the systems based on that fraudulent foundation. Indeed, it appears that the ONLY ways such political paradigm shifts become "possible" are through those processes of psychotic breakdowns, IF some survive enough through that?
And taxes keep going up to cover the generous public pensions and salaries.
Eventually everyone is going to be squeezed further to the point where a great deal of their income will be used to cover higher and higher taxes.
Obama (halo around his head, media proclaimed messiah ) has determined he has the goal of taxing and spending to infinity. Just like Bubble Bernanke thinks QE to infinity will solve all ills.
Remind us, how many bailouts have both parties signed off on? Left... right... left... right...
That's a good sheep.
"...drawing in part on academic work by some of the men who studied and taught at the Massachusetts Institute of Technology in the 1970s and 1980s."
Hmmmm? Wasn't Pauly Krugnuts at MIT in the 70s and 80s?