Guest Post: What’s Wrong With Quantitative Easing?

Tyler Durden's picture

Submitted by David Howden via the Ludwig von Mises Institute of Canada,

Since the crisis erupted in 2008, the new buzzwords in central banking have been “quantitative easing”. The Federal Reserve embarked on a series of them, with the most recent one colloquially termed QE? to denote the open-ended nature of its latest venture. The venerable Bank of England has been a guilty belligerent. The Europeans under the sway of the ECB, itself created in the shadows of inflation-fighting German Bundesbankers, has increased its foray into this new untested policy with every new Euro-crisis. Japan, where the term was originally coined earlier in the 2000s, has been the guiltiest party and its new era of “Abenomics” promises to continue with this innovation.

Quantitative Easing, despite a fancy name, is not a complicated process. While some use it as an analogy for printing money, this is a little disingenuous.

The vast majority of monetary policies by a central bank are aimed at increasing the money supply. This can either be done by increasing the currency in circulation (i.e., printing money), or by creating electronic book-keeping entries. The latter is the primary result of the quantitative easings of the past five years, and has resulted in the large increases in reserves that many have commented on elsewhere.

From the central bank’s point of view, it doesn’t matter much if the increase in the money supply is in the form of electronic reserve or currency in circulation. It accounts for each in the same way – as a liability on its balance sheet.

The real action with quantitative easing is on the asset side of the central bank’s balance sheet. As we can see below, the central banks of the U.S.A., U.K., and Eurozone have all exploded since 2008, and especially over the past year.


cb assets


Central banks increase the money supply by purchasing an asset from a financial institution. The payment for this asset increases the amount of money in circulation (either by directly increasing the currency in circulation, or by creating a larger reserve balance for the bank that sold the central bank the asset in question). The more assets the central bank buys, the more the money supply will increase by.

Many commentators have warned that the growth in “central bank balance sheets” over the past five years is worrisome. By this they mean that central banks purchasing more assets is somehow potentially destabilizing.

The fact of the matter is, QE policies are really not so different from how central banks functioned back in the “old-normal” days of the earlier 2000s. They still just bought an asset and paid for it by increasing the money supply.

One critical difference is that in order to increase the money supply by as much as they did, the central banks of the world had to change the scope of assets they were willing to buy. In the United States, for example, the Fed commenced purchasing lower quality federal agency debt (Freddie Mac and Fannie Mae bonds), and then eventually also mortgage-backed securities.

Herein lays the rub. By expanding its range of acceptable assets, the Fed created a market for these assets that did not exist. As a result it maintained their prices above which the market deemed necessary to clear – an essential occurrence in market economies.

Consider what would have happened if the Fed had not purchased Freddie Mac, Fannie Mae and mortgage-backed securities throughout the crisis. The prices on these assets would have fallen, as would the profitability of dealing in them. As a consequence, housing prices would have decreased to clear the excess inventory while the financial sector would have shrunk in size as it lost profitability from one of its previously high-flying components – mortgage debt.

To partake in a counterfactual, the usual man on the street would have seen housing prices fall to reasonable levels so that he could afford to buy a home again (Toronto, Vancouver and Montreal homeowners take note). The much bemoaned “too big to fail” financial sector would have been brought down a notch to a size that was consistent with what consumers want.

Instead, by expanding its asset purchases through quantitative easing policies, the effects we see are unreasonable prices among some financial assets, and a housing sector unable to sell its unsold inventory.

Much as this outcome seems completely ridiculous, it is no different than the outcome we always had under central banking. Instead of propping up the financial sector, however, central banks supported the government.

“Regular” monetary policy always purchased government bonds as the offsetting transaction in monetary policy. With a large, ready and willing buyer of government bonds, interest rates on these securities fell below what they would otherwise be, and gave the government a free lunch. With lower interest rates, governments could spend more than they otherwise would and incur more debt to pay for the services they provided.

Today we have a situation where government debt is worrisome. It didn’t come from nowhere, and a large part came into being because central banks previously proved to be hungry customers to buy it.

When commentators point out that the quantitative easing policies of central banks today are harming the average Joe and enriching some preferred bankers’ pockets, they would do well to keep it in perspective. This is what central banks the world over have been doing for centuries. The only difference is that it used to be governments that were aided, and the over-indebted problems we see today are a direct result of such policies in the past.

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TeamDepends's picture

And now central banks are buying gold.  Hmmm....

NotApplicable's picture

While I agree with everything this article states, I'm at a loss in trying to determine what the fucking point of it is.

kaiserhoff's picture

The point is that markets give us accurate price information and sane economic feedback.

Soviet Central Planning does the opposite.  Nice piece.

SWRichmond's picture

What’s Wrong With Quantitative Easing?

Easy: it fools people into conflating money and credit.  It tries to replace destroyed credit with new money, and by so doing it destroys the store-of-value function that money MUST have but which credit CANNOT EVER have.


Manthong's picture

What’s Wrong With Quantitative Easing?

It results in qualitative squeezing.

Buck Johnson's picture

And that is why many funds have closed shop and rich have went to gold and other commodities.  Because they can't trust the information anymore coming from the market.  Our economy doesn't support the market that is being shown everyday on televsion on CNBC. 

Alexandre Stavisky's picture

What's wrong with check-kiting.  What's wrong with con games which divert wealth from true producers to oily swindlers?  What's wrong with selling merchandise, except that there is no merchandise only the most beatiful packaging promising your heart's deepest wish.  Inside is pustulence and maggots for your consideration.  What is wrong with necrophilia?  Loving up a corruptible rotting corpse whose soul has gone to its maker?

Very fine arguments may be made that all these things money good, true and worthy, in fact equal substitutes. But a child knows folly and an infant can sniff out tiny frauds.

So is token creation which surpasses the object it is made to quantify or objectify.  Truly there is great, great sin in idol worship. And the most foul idol is paper debt money which is so divorced from its pure derivative that it can never reconnect. List the objects of your heart's desire.  Beautiful partner, bountiful gardens, wisdom earned in hardest endeavour,  quiet pride in long achievement and sully it.  Sully it to the point that its every observance is repulsive.  Necrotic, oozing, repugnant, repulsive to the point that your body and mind act in open rebellion, demoralizing, demonizing.  This is money creation which is a claim now of debt upon money upon resource and labour but so intensively abused that no one any longer understands the chain of claim or can accurately vouch that the chain is still unbroken.

The Central bank franchise of usury and quiet imposition of slavery upon mankind is dying, near dead.

Like all the big movement trades, there must be devastating losses imposed upon the small traders until they are demoralized, BK'd, or pressed from the fray.  Examples:  US index flash crashes, bond gyrations, USDJPY and JGB whipsaws.  It is the financial EMPs which clear the hull, destroying the small fry.  Thereafter the big entities with government's kindly countenance may enter and all money creation is funnelled to its intended purpose. Markets of every colour and stripe now exist to serve LevIathan with a second propaganda feature which the small unwashed use as the wind indicator or mood ring direction finder.

In other words, the usury system we've renamed Ponzi and represents all who've MadeOff with unearned gains has reached its brownout phase.  Every legitimate enterprise, every secret sophisticated con, every surreptitious connivance of counterfeit has been so exhausted that the high order gov'ts must resort Open Lies and ugly behaviour in pure sunshine.  They put flying monkeys of spin doctors to counterdict pure math and convince the sub 120IQ crowd  that artificiality is sustainable reality.

Every nation state a field with some in flower, others in fallow.  15th century Chinese would have laughed up their sleeve to consider any western nation a presumptive contender for culture or technology.  The USA believes that land, structures, Potemkin markets, and bond/currency fraud are sufficient to create wealth.

Meanwhile their vassal, Edo, languishes as their energy plans are demolished, their markets sacked by other Asia, their debt and currency under seige like a fat bellied whale left defenseless to a pack of blood sharks.  This is why they have smoked through 10 finance ministers in six years.  It is because Japan is different.  Culture is unlike anything in the Anglo-American fabric.  They look forward but deeply back.  They revere the past, they revere their elders, they worship their ancestors.  And most reverent to uphold is the old social distinctions.  Nobles or warrior class who kept the peace, maintained social harmony, dispensed justice, and tinkered upon high culture to the farmers who produced the fuel upon which the entire nation's bellies depended.

Last was Eta similar to untouchables in the subcontinent.  Dealt with death, touched the dead, buried the dead.

Japan's latest crew of political assignees are ETA.  They are the new NokanShi.  See Departures (the movie).  They prepare (in the open eyes of all mourning invited) the body.  Ceremoniously, with deep dignity and beauty, unsparing of expense for robes, cypress coffins, every contrivance.  But they touch the dead, they prepare the dead for the send off.  They console themselves that they are gatekeepers sending the soul to its next existence.  But they are ETA.  Highly compensated, indistinguishable by cursory glance, but ETA.

Japan is Dead.  and Nokanshi are its leaders, now become ETA.  And the Anglo-American banking system is the furnace into which all this elaboration is tossed.  And consumed.  Producing nothing but smoke and ash and everywhere grayness where once was beauty and industry.

Since free market capitalism has been  abandoned, all is brownouts systemically with the worst effect and side symptoms masked by thin air money creation.

If freeloaders throughout the world began passing handwritten IOUs to further their indulgences, creditors would quickly put a stop to that.

How different then is it to take state printed goofy paper the same or worse?

Open air secrets in plain sight.  Build a better mousetrap and the world beats a path to your door.  The best mousetrap--FIAT.  Sub120 mice run to the cheese under the ever heavier backloaded spring in plain sight.  And never look up.

SunRise's picture

Insight from GOD wrote this!

cdskiller's picture

You are at a loss because the author flips his rhetoric at the end to serve a philosophical agenda. Most of the piece makes the point that quantitative easing is theft (it is) and that Fed policy since the crisis began has been dead wrong and is certain to be disastrous. Saying "same as it ever was" at the end is sophistry and disingenuous. The cult needs to believe that free markets will get them into heaven. They are not the panacea, obviously, however. The Central Banking system is criminal, yes, and has always been so. That does not change the fact that what is going on now is unprecedented theft.

Dingleberry's picture

"What's wrong"? 

Ever hear of "inflation"?


Steve in Greensboro's picture

"...Instead of propping up the financial sector, however, central banks supported the government..."

And why did the central banks support the government?  Because CENTRAL BANKS ARE PART OF THE GOVERNMENT.  Central banks are government agencies, either de facto or de jure.  The Federal Reserve is just as Federal as the Federal Bureau of Investigation.

nope-1004's picture

The Federal Reserve is a private entity, whose membership comprises of the largest global banks and richest people in the world.  Don't be fooled by the name..... it is not Federal at all.  It is a self serving cabal that could give a rip about the President or other Federal agencies.

A Wikipedia contributor has been trying to get the facts printed about the Fed, to no avail.  Here is some of the convo (pg 2 "talk")


Privately owned

Why this is being kept removed? Is it so bad for everyone to know Fed is privately owned bank? What is the specific Wiki rule for removing this? Give me a quote and link or rather shall put back this vital information! -- (talk) 12:51, 20 November 2012 (UTC)

Interesting is that I have tried to post it for second time and both times it has been removed less then in hour. Comparing to other undos and edits it is really fast. Why is so? -- (talk) 12:53, 20 November 2012 (UTC)

Dear User at IP Please review Wikipedia rules and guidelines. No, you are not allowed to repost information over and over that is being removed by other editors. Reposting in that way is called edit warring and it is not allowed.
One of these is not like the others..'s picture

This is a CLEAR opportunity for those who are interested to join in the fray.

YOU outnumber THEM.

Those of you who give a jot about this issue COULD easily go and edit the information back in from multiple directions thus negating the rule currently being used against the OP. Collectively YOU can devote more resources than are available to any criminal organisation who wishes to hide the information!

DO you care enough to take ACTION, where your "vote" will really make a difference to a system that many of you despise? Lets see what happens, eh? Do you americans have any fighting spirit left? You could easily stop this fact from being obscured...


Scro's picture

Do your homework (slow) Steve.

The Federal Reserve Bank is not federal, it's not a reserve and it's not a bank.

The Creature from Jekyll Island is a good place to start.

lotsoffun's picture

scro - he's right in a way.  sad as it is.  nobody gets to elect the head of the fbi or the cia for that matter.  and nobody gets to vote on who they want to 'take out' as well as how much bennie 'helicopters'.


Steve in Greensboro's picture

The Federal Reserve was created by an act of Congress on December 23, 1913.  Its Chairman is appointed by the president and confirmed by Congress.  The Federal Reserve Board are also appointed by the president.

The activities of the Fed are directed by presidential appointees, so the Fed is a de facto part of the Executive Branch of the U.S. government.  It probably more closely resembles a fascist institution rather than a communist institution, but the distinction between fascism and communism has always been more of a distinction without a difference.

Regardless, the Fed is certainly part of the Progressive project to implement the Total State.

The reason progressives like Dennis Kucinich like to argue otherwise is that they love the Total State, except when it does things they don't like.  Well sorry.  You don't get to have it both ways.  The Fed is part of the Total State.   If you don't like the Fed, then don't vote for Progressives (of either party).

Midasking's picture

Central banks have one purpose.. to clip coins for the gov! this is nothing new and it always ends the same.. the natives are going to get restless.  checkout to see what I mean. 

proLiberty's picture

What is wrong with QE?

QE is another name for creation of currency out of thin air with the goal to substantially suppress the time-value of money. In the process massive amounts of new currency are created. Government uses the newly created money and debt to buy things and pay people to the benefit of government. It is embezzlement of private wealth on a scale that makes the excessive salary of any CEO so small by comparison that it is less than rounding error.

TrustWho's picture

Exactly, the Fed is the enabler of the crony-capitalist.

“Regular” monetary policy always purchased government bonds as the offsetting transaction in monetary policy. With a large, ready and willing buyer of government bonds, interest rates on these securities fell below what they would otherwise be, and gave the government a free lunch. With lower interest rates, governments could spend more than they otherwise would and incur more debt to pay for the services they provided.

Amerrica has a $17 trillion debt because the Fed enabled Congress to spend without pain. The Fed fueled the housing crisis of 2007-08. They did all this damage prior to a $trillion balance sheet. From 2009 - today, they expanded another $2.5 trillion. Can you imagine the destruction they have rained on the ordinary citizen while subsidizing the rich.

IPA's picture

That was the first time I have seen it called "QE?"

kito's picture

What’s Wrong With Quantitative Easing?....


boy...wait till that headline makes it into mainstream media................should be a hoot..................

Freedumb's picture

If it ever does make it into mainstream media, the article will say "Whats wrong? Nothing at all! Buying opportunities don't get better than this folks. Only a fool would let their wealth sit all tied up in their home equity. Mortgage it all now and set yourself up for permanent wealth!"

Midasking's picture

get a tax write off on the interest! dont' be a fool... tap that equity!

miker's picture

The Fed thinks it is easing the pain of the housing bubble by buying up all this distressed crap.  Well they are.  But at the same time, the moral hazard they are creating is huge.  Large apartment complexes are going up all over and pretty much financed and supported by the moral hazard of the Fed. 

No one wants to let the market function anymore.  Too much pain.  Well the pain will be alot worse when reality finally takes over.

Promethus's picture

The fed needs to learn the first rule of holes: When you've dug the hole too deep, STOP DIGGING!

lotsoffun's picture

and the comments are correct - they bought plenty of mbs and drove up the price.  but he doesn't mean what that did also - for the real junk.  anybody remember 'maiden lane 1 and 2 ( and 3)?


PiltdownMan's picture

just attended a conference in NYC on the future of us housing finance. The Fed person who sits on the swaps desk says QE is working as planned. claims the rise in housing prices is evidence of good Fed policy.

I thought I would have a stroke!

NihilistZero's picture

Is the Housing Bubble 2.0 "PoP" that is happening as we speak part of the plan as well???  When will they learn they can't fight gravity...  Think about the unleashed American consumer if home prices (and coresspondingly rents) fell to market rates.  We'd be in a genuine boom right now.  Of course returning power, purchasing or political, to the people is not in their interests.

yogibear's picture

Up until the plan doesn't work anymore.

Their options shrink as time goes on. Their getting themselves into a trap.

l1b3rty's picture

The Fed is just holding out for a time machine to take us back to pre-1971. Interesting bet.

Go Tribe's picture

Just another simple explanation for why it's all fucked up. We need one of those every couple of weeks.

Being Free's picture

Quantitative Easing, despite a fancy name, is not a complicated process. While some use it as an analogy for printing money, this is a little disingenuous.

shouldn't there be a sarc tag after a comment like this?  In a fiat world there is NO fucking difference between adding "money" electronically and printing up the FRNs.

IridiumRebel's picture

"Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."

-John Maynard Keynes

yogibear's picture

The Fed is loaded with PhD egotistic madmen.

They'll keep printing until a currency crisis is created.

China doesn't have to go to war, the US is doing all it can to loose it's reserve currency status and it's wealth. Selling state and federal property to overseas investors as well as destroying it's manufacturing, research and technology. 

IridiumRebel's picture

Death by a thousand cuts, self inflicted, by "educated men". 

Promethus's picture

"To partake in a counterfactual, the usual man on the street would have seen housing prices fall to reasonable levels so that he could afford to buy a home again."

The way to make housing affordable is not lower interest rates, it reasonable home prices.

Kirk2NCC1701's picture

< Everything's wrong if you're the Bottom 99%

< Nothing's wrong if you're the Top 1%


IridiumRebel's picture

I'm Warren Buffet and I approve this fleecing. 

Mr. Hudson's picture

"Quantitative easing" is translated from a Yiddish phrase that means taking a large quantity of a violent laxative.



nathan1234's picture

QE is an addictive Laxative.

Once started need it every day to go into the next.

When not taken or delayed the stink hits the high heavens.

Fully dependent on Ben's press and Ben's finger on the computer.

When Ben's press and the computer stop  the stink will build up till the dam bursts and the whole world stinks.



Loophole's picture

When the quantity of money is increased, someone gets the newly created money and the rest of us get inflation. Effectively, real wealth is transferred from everyone with any kind of money holdings to those getting the newly created money.

It's stealing, plain and simple. In principle, little different from what a counterfeiter does.

And, of course, real wealth is being transferred in other ways: from creditors to debtors and, today, from the savers of the country to others owning stocks, for example.

CheapBastard's picture
Chrysler to recall 630,000 SUVs worldwide




DETROIT (AP) — Just two days after refusing a government request to recall 2.7 million older-model Jeeps, Chrysler has decided to do two other recalls totaling 630,000 vehicles worldwide.

The automaker will recall more than 409,000 Jeep Patriot and Compass small SUVs across the globe from the 2010 and 2012 model years to fix air bag and seat-belt problems. It's also recalling 221,000 Jeep Wranglers worldwide from 2012 and 2013 to fix transmission fluid leaks, according to documents posted Thursday on the National Highway Traffic Safety Administration website.


aka, Job security.

yogibear's picture

What about their leaking gas tanks?

"On Tuesday, after a two-year investigation, federal safety regulators said defective fuel tanks had caused problems related to fires that occurred to some Jeep SUVs after rear-end collisions."

Guess Jeeps can be hot SUVs.

Freedumb's picture

Bullish. Jeeps burning up from rear end collisions -> consumers need to purchase cars as replacements. Plus lumber demand will go up due to increased coffin requirements.

woodbutcher's picture

My thoughts on Bernake's experiment:


Only Fools Think the Fed Has Real Options.   Our Debt Death Spiral is Here. 

Many Americans have no idea what is happening to our country’s financial condition and what it ultimately means to their finances.    People should be outraged at the twilight zone economics perpetrated by the Federal Reserve (the Fed) these last 5 years.   These are experimental economic actions that the Fed is implementing.  I will focus on one action that is easiest to understand, and the most destructive, Quantitative Easing (QE).  The Fed calls QE a “tool”.   The consequences of using the QE “tool” will be catastrophic for nearly every American. 

QE is the making of money out of thin air.     The Fed can create money in their computer accounts that are attached to all the major financial institutions in the world.  Yes, they can fill their “checking account” with unlimited amounts of money that never existed, with keystrokes on their computer.  They can essentially do whatever they please with it.   In early 2013 they are creating $85 billion of this thin air money a month to buy US Treasury debt and Mortgage Backed Securities as we speak.  In the name of using tools to help our economy create jobs, they have created $2.4 trillion in thin air money since the crisis started in 2008.   There is no end in sight to this money creation.  This money creation is not wealth, nor is it money created based on productivity of man or machine.  It is dilution of our US dollar.  The Fed is doing this because it believes it has no other choice.

Nothing I have read seems to have really summed up with simplicity where we are going to end up economically from the Fed’s actions of the last several years.   We are on the road of no return.  I felt compelled to boil it down in this article.  Without giving all the background of things like wealth being based on productivity and energy inputs, or the ownership or control of the Fed I will just explain the obvious.  I will insert clarity to the situation.

 I will boil down what the Fed is doing without having to discuss the many canards that lie in wait.  These canards confuse most people as to what the correct conclusion is regarding the Fed’s massive QE.      These canards also keep our politicians and most Americans completely delusional about our state of affairs.  A canard is a false or misleading story or explanation.  Too many people go down the path of listening to these canards.  An example of a canard related to this is that the high stock market indexes right now show we are fine and the Fed must be doing the right thing.    Watch financial media daily, like CNBC, and any number of things they point to keeps most people from actually understanding the path we are on.  Small canards are delivered constantly by the steady stream of CNBC guest carnival barkers.  All adding up to delusion for the majority of Americans.

Financial Complexity Turned to Simplicity

Our national and world financial situation is extremely complex.   More complex than it has ever been.  Tomorrow will be more complex than yesterday or last week.   Really though, to have clarity and understand our complex financial system, we have to look at the obvious and use math to project real outcomes rather than pie in the sky desired outcomes.   The mathematics of what the Fed is doing does not add up.      The Fed is breaking simple laws of financial math.  Can you imagine someone saying that Einstein’s E=mc2 does not apply anymore because we are in unusual financial circumstances?    Complex becomes simple by understanding that math gets you the answers.    Complex subjects can be summated, as Einstein did in physics with E=mc2.   The theory of what the Fed is doing now is even simpler:

E = FKeep Buying      

Where E = Endgame for the US Dollar and FKeep Buying means the Fed cannot stop buying. 

Using the math within our  financial universe and knowing that there are constants, it is obvious what the mathematics of our situation are.  Our economy is dependent on the Fed’s massive QE.   The Fed will never be able to stop creating thin air money unless they are willing to let the US and the world take severe economic pain to get through this.  They have not showed that they are even aware that is an option.   Maybe they think it will be so bad with the no QE option that it is untenable to even table.  However, what they are doing will make the outcome even worse.  There is an ultimate financial catastrophe Endgame to our pretending that we can go on like we used to.   We have been using government spending and QE in the name of keeping our economy going.   This will end sometime, and it  means we are in what I call the US National Debt Death Spiral.  

The Reason for QE and the Effect of QE

The US Treasury is the entity that collects our federal tax dollars.  It is also the entity that spends federal money.  They spend all the treasury receipts (tax revenue) and spend more than taxes provide by issuing treasury debt securities.  Each year since 2008, the US Treasury has spent over $1 trillion more than it took in.  This yearly number is the annual deficit.  The total accumulated debt from all these years is called our Federal debt.  Currently, as of April 14, 2013 it is about $16.8 trillion.

We also know the numbers that the US Treasury gives us are on a non-GAAP basis (Generally Accepted Acounting Principles).   The federal government is not accounting for all the money committed in the future, thus it is running even larger real deficits than we are told.   Let’s get something straight about the reported annual Federal deficit and the actual annual Federal deficit that the US Treasury reports.  The actual annual deficit spending is much higher than reported due to things like Medicare and Social Security.   The US Treasury is using collected tax dollars some of which are supposed to be for Social Security and Medicare in the future but using them for current normal Federal spending.  However, even with the phony non-GAAP accounting and ignoring entitlements, the system will be blown up just by normal treasury debt.   Yes, the stated annual structural deficit piled on year by year to our total federal debt will wreck the system.   We do not even need to confuse everybody and play a shell game as to what the problem is right now!    No need to introduce the canard of the real problem being the entitlement promises.    Focus on one thing, the most pressing thing, and understand the math!   The Federal debt that we add to each year even in the phony amount the Us Treasury reports will destroy our financial system before entitlements ever will.  Thanks to the Fed.

Are we living in experimental economic times?  You bet we are.

When the Fed started buying US Treasuries and continues to buy them in large amounts since 2008, it sent a signal to congress: We condone your massive debt spending.   The Fed is and has been buying treasuries to manipulate the interest cost of the Treasury lower, because it knows it has to.  The debt spending by congress is out of control and is also structural, in other words, built into our economy.  The Fed knows that the economy needs government spending to continue at high levels to prevent a severe contraction in our economy.  To help cushion the blow of potential lower government spending into the economy the Fed has to lay a bid for all durations of treasuries to keep the interest cost down for the US Treasury.    By doing this, the Fed continues to condone the debt spending of congress.     The Fed buys treasuries because if the US Treasury had to issue and refinance our annual and total debt at real market rates the cost of interest would explode the annual deficits even higher.  The Fed thinks there is not a  better choice in our economic situation!  What the Fed has done has initiated the financial end game for the US Dollar as it currently exists.   (Yes, there will be a US Dollar after the end game, but of a different value).                                 

It is the start of the 9th inning now.  There are only two options for the Fed. 

Option #1:   Keep Buying

Option #2:  Stop Buying

Option #1.   If the Fed keeps buying they risk the long term value of the dollar value against all commodities, and eventually CPI problems.    Inflation is an obvious, simple and an easy conclusion by anyone who understands economics.   However, this appears to be their best option and the option they continue to use, even stepping QE up in December 2012 to $85 billion per month from $40 billion per month.  It has no short term negative shock value as stupid Americans are too dumb to see it and speak out and stop it.  However, we couldn’t stop it if we wanted to.  Rick Santelli screams about it to deaf ears.  This is the frog in the pot option.   Just cook us slowly.   This is inflating our way out of the debt, in a backdoor way.  At some point people will come in the front door and there will be a recognition that money from the Fed is not free.    The US dollar will have a huge adjustment in value, downward, against real things like oil, gasoline, diesel, metals, and all food commodities leading to massive consumer inflation.   

The Fed knows that there is one positive to the keep buying option:  After the dollar adjustment, the Federal deficit would be much less burdensome as the value of the dollar at that time will be much less.  This is inflating away the debt.  Outcome of option #1:  The dollar is destroyed.  The national debt is minimized.  Wealth is disintegrated for most of us.

Option #2.  If they Stop buying, interest rates on treasuries rise.  Likely rapidly, but just normalizing to interest rates of 4% to 5% would be a huge problem.    The real problem with the Fed halting buying Treasuries and MBS is the US Treasury have to to do current financing and also constant refinancing  at the higher rates.  Interest cost on the Federal debt will explode the annual deficit further.  As our annual debt goes higher rates will rise further from simple supply and demand economics.   Over several years all the short term debt that is coming due has to be refinanced/sold at the higher rates.   The normal Federal monthly deficits and a large portion of the existing debt that comes due will in a matter of a few short years have to be financed at higher free market rates.

The US Treasury is running deficits of over a trillion dollars annually with an average interest cost of 2.2% in the first half of 2012.  When average interest rates on all treasuries go to 4.4% then the interest expense doubles.  You see the math.  What about 8.8%?  That would not work for whoever is the Treasury Secretary.   Talk about exploding the annual deficit and piling more debt on the stack!

This is a straight up interest rate death spiral.  There is no good way out.  Wait, there is a way out.   It is the same outcome every time.  With option #2, the Fed would have to step back in and buy everything.  That leads them back to option #1. They could step back in with thin air money, get interest rates to just about zero, like they are doing now.   Remember, bond yields are set by the price of the bond.   The Fed puts bids under every treasury or debt security, or for S&P Futures for that matter.  They just bid the amount for every duration of treasuries to yield zero, or for the longer durations what they can get away with trying to make it look reasonable.    The Fed can thus get the treasury’s interest cost on the Federal debt to any number it wants.  Even zero.    Outcome Option #2: Fed comes in and has to do option #1 and keep buying.  We know the outcome of option #1.  If they stop buying they will inevitably have to step back in and keep buying.  That is option #1.  They have set in motion an outcome that they cannot stop making thin air money.

The Fed is taking option #1 and will continue to do so.  It will talk of option #2, and all the CNBC crowd will blather about the Fed’s coming exit strategy .  It is all talk.   These fools talk of an exit strategy and the Fed is not even done buying!  There is no exit strategy because the Fed cannot exit!  They even know it.   If they don’t, they are delusional.  The world is delevering.   In our old economic times there would be a point where the economy gets over the hump and starts growing so the deficits get smaller as economic activity increases.  Not this time.  Our feeble and hollowed out economy will not get over that hump.  Option #2 is a pipe dream.  The Fed will not and cannot stop buying treasuries and other debt to attempt to keep our financial system alive.

Why is this Happening? 

The reason why the Fed has to do this is because our economy/financial system is boxed in by our stagnant economy and ever rising structural annual Federal deficits. The economy is weak because it was wrecked in the fiasco we just had,  but also from by the hollowing out of the manufacturing sector we had over the last 30 years.  It is not coming back like it was.   Our 30 year debt and consumption spree is over.    Government spending cannot be cut in any meaningful way, especially when the Fed is essentially condoning the spending by buying treasuries.  The US Treasury will not stop spending in any meaningful way because it does not have to.  We are boxed in on the budget deficit.

 GDP= Consumption (70%) Business Investment (16%) Government Spending (20%)  Net Exports (-6%)

Key Point:  The above is a simple equation of what GDP consists of with rounded numbers.  Government spending is part of GDP.  In the situation we have now, government spending is actually 23%.  Take out 10% of that spending by an across the board cut and the GDP  is missing 2.3%.  To cut spending 10% across the board the economy would be in contraction.  A recession and no growth is the outcome.  According to our government’s numbers, real GDP growth in 2012 was 2.2%.   In 2011 it was 1.8%.   Don’t even get me started on the GDP deflator.  Meaningful spending cuts put us in recession.  Government spending cannot be cut in a meaningful way.  We are in the debt death spiral, just as Greece is.


Key Point:  No growth or falling GDP results in less economic activity and therefore less tax revenue for the treasury, which causes higher deficits.  See Greece for the best example.  They are in their debt death spiral just months ahead of us.  GDP is shrinking so they bring in less money which forces more cuts in government spending resulting in even less GDP.   That is a debt death spiral, and there is no escape for Greece, and there will be no escape for us.


Meanwhile, back on Main Street. 

If the Fed backed off buying treasuries, yields would rise and money would be pulled from the stock market.  All money managers worth their salt would rebalance their bonds/stocks.  That means the stock market gets hit.  Further chaos as the boomers protect what they have by selling stocks and buying the 5% treasuries or whatever yield they have at the time.  Pension and retirement funds for everyone take a hit from lower stock prices. 

When people retire, they start using their saved retirement money.   These funds are put into the economy in all forms of the GDP, but mostly as consumption.  When stocks are low people perceive they have less financial wealth and they will cut back spending.   Further damaging GDP.  Which is it then for the Fed, save the stock market by buying treasuries, or risk losing the control of the US treasury’s interest costs?  Or, put a bid under the stock market to create the wealth effect?   The answer for the Fed remains option #1.  The Fed cannot lose the stock market.  It has to buy treasuries.

The Fed is boxed in.  Creating money from thin air does real damage to the dollar and their policy is unsustainable.  They know that but have no other option.   In concert, thin air money is being made by all central banks, and the dollar is not appearing to have damage.  On this basis the Fed is hoping the dollar stays strong enough for as long as possible so we can pay the piper as late as possible.    Obviously this is part of their thinking.

The outcome is profound and obvious.

In conclusion, the mathematics of our national debt situation in the USA are causing the Fed to use massive QE  by creating thin air money (not printed Federal Reserve notes).  This Fed action shows how bad our Federal debt situation is.  We, the United States, are bankrupt now and just in denial.    Congress people talk about the US being bankrupt sometime in the future.   Pretending to not be bankrupt by using the Fed’s thin air money is a sham!  The horse is out of the barn and trying to close the barn door with thin air money will not accomplish anything but more destruction.  With the path we are on, our deficits will continue and the Fed will keep buying even until the point at which the world pukes up nearly all the treasuries to the Federal Reserve’s bid. 

 The Fed will try all the way to the end to keep the US Treasury’s interest costs as low as possible.  It could go on for years like this.  At some point the world’s financial markets will see this.  It will be clear as a bell that we are bankrupt.  That is when we get a restart.  It will be plain to see in massive inflation and poverty here in the USA.    The end game will be an involuntary reverse capitulation by the Fed.  The Fed will be the buyer of any and all securities that need price support.  Money will also flow out of treasuries by investor to all other assets.   The Fed will be there with unlimited thin air money to fill the gap.   They will use thin air money to support any asset price that needs a bid.   The world will have become wiser at this point and will understand that dollars are much less valuable than they were before.  It will take many more dollars to buy what you need to survive.   The US Dollar will be at a value that is yet to be determined.  Destroyed by the stupidity of the Fed.

Simeon Chambers

yogibear's picture

"With the path we are on, our deficits will continue and the Fed will keep buying even until the point at which the world pukes up nearly all the treasuries to the Federal Reserve’s bid. "

Indeed! Overseas governments don't want anymore US treasuries. They tell the US they already hold too much of paper that could devalue overnight big-time. At any moment. 

LOL, wonder why Germany wanted it's gold back??? And the BS it will take 7 years. The Fed had to buy it back recently at cheaper prices.  

Other countries have done what the Fed is doing throught history. We know what the eventual outcome is. This is not an experiment, other countries have tried to print out of debt and they had hyperinflation. Bernanke and the Fed are blowin smoke about saying it's never been tried.

venturen's picture

Simple answer....because banks no longer have any focus on lending. They make their money at the casino. CDO, Hedgefunds, Bond scamming, HFT, DARK POOLS,. The integrity of the banks is GONE. I know enough bankers who left...purely as the promoted are the worst of the worst with ZERO MORALS. The government guarantees everything they do and they take all the profits and the losses go to the idiot taxpayer. IN THE OLD DAYS....if they screwed up they went out of they will take the country with them!