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The Fed's Hobson's Choice: End QE/ZIRP Or Destabilize The Dollar & The Treasury Market
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Though the Fed is doing its best to mask its abject failure and lack of choices with public relations, the reality is it has no choice but to taper and eventually end its endless spew of credit and its unprecedented and destabilizing purchases of assets.
Many smart observers assume the Federal Reserve (and other central banks) can print money and buy assets like bonds, mortgages and stocks unconstrained by any limit. Indeed, at first glance, it seems like a closed circle: print the money and use it to buy bonds, mortgages and equities, which are booked as assets.
The more the Fed buys (or enables proxies and financiers to buy), the greater the assets value, as buying pushes prices higher.
After all, look what quantitative easing (i.e. buying assets like Treasury bonds and home mortgages) and zero-interest rates have done for the stock market: to the moon, baby!
And to housing: thanks to the printing press and buying mortgages, the Fed inflated an echo-bubble to soften the inevitable crash of the previous bubble:
On the surface, there are no intrinsic limits to QE and central bank money-printing:in other words, there appears to be nothing stopping the Fed from printing essentially limitless money and buying up the majority of Treasury bonds, mortgages and stocks.
But we must be mindful that the economy is not linear. Pushing asset prices higher via unlimited credit at zero-interest rates has not trickled down to wages or consumer spending. That is, the wealth effect is missing in action despite a $20 trillion increase in household net worth. (Most of this increase flowed to the top 10%, and within that, most flowed to the top 1/10 of 1%.)
Meanwhile, risky credit bets are soaring: subprime auto loans are now common, margin debt has skyrocketed and purchases of junk bonds have gone through the roof.
The Fed's printing and asset purchases do not occur in a vacuum. Fed printing and asset purchases affect the reserve currency, the U.S. dollar, and the Treasury market, which the Fed now dominates via its purchases.
Keeping interest rates near zero has removed any financial incentive to buying Treasury bonds other than flight to safety. As Stephanie Pomboy observed in her excellent Wine Country Conference 2014 presentation, (and I paraphrase here): "every day they continued QE, they chased away more and more of our foreign creditors."
The Treasury must sell bonds to fund the Federal deficit, which is running about $500 billion a year. The Treasury must also sell new bonds to replace the immense amounts of T-Bills that are maturing.
The more T-bills the Fed buys to keep interest rates at zero, the more it drives foreign and domestic buyers out of the Treasury market.
This is also true of the U.S. dollar. This sets up the Fed's Hobson's Choice, which is the term for an illusory choice, i.e. a choice in which only one option is offered.
If the Fed continues QE, it destabilizes the Treasury market that funds U.S. government deficits, and the hegemony of the U.S. dollar. If it ceases QE, interest rates will rise as non-central bank buyers will demand an actual return on their capital.
Rising rates will crush the echo bubbles in housing and the stock market, which has been propped up by dividend-paying stocks and speculative issues purchased with Fed-supplied "free money."
For the Deep State, there is no choice: dollar hegemony is paramount. Rising interest rates and the fate of financiers who have over-leveraged the Fed's free money are not even secondary.
Who Gets Thrown Under the Bus in the Next Financial Crisis? (March 3, 2014)
The Dollar and the Deep State (February 24, 2014)
Is the Deep State Fracturing into Disunity? (March 14, 2014)
The Fed believed that five years of free money and incentivizing risk would heal the economy. They were wrong. The real economy is more fragile and dysfunctional than ever due to the distortions created by Fed policies, while the top 1/10th of 1% have feasted on the asset bubbles inflated by these same policies.
Meanwhile, beneath the crony-capitalist celebration of new asset bubbles, the foundations of the nation's fiscal security--the Treasury market and the U.S. dollar--have been undermined and destabilized by these same Fed policies.
Those who focus solely on the Fed assume the ruling Elite is monolithic: unified in worldview, strategy and goals. I believe this is overly linear and overly simplistic: there are competing elites, and nations fall when their elites experience profound disunity.
Though the Fed is doing its best to mask its abject failure and lack of choices with public relations ("Pay no attention to what's behind the curtain!"), the reality is it has no choice to tapering and eventually ending its gargantuan spew of credit and its unprecedented and destabilizing purchases of assets.
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Aaahhh... Plan B....
In theory, yes, but I ain't so sure anymore.
It is all 1s and 0s that can be moved, deleted, and added with a keystroke, and nobody is the wiser.
On the bright side, I thought they needed a trillion to do that
"They need Belgium's trillion" apparently.
Thanks for the Chimay too!
"The Treasury must also sell new bonds to replace the immense amounts of T-Bills that are maturing." the food in my fridge which is maturing goes into the compost pile
Markets are crashing we need more POMO. Print baby print
As I've been saying here lately, the Fed has NO choice now but to end QE and raise rates cause destabilizing the U.S. dollar also means destabilizing U.S. military power cause it can't be paid for with worthless paper!
That plus inflation would spike like crazy.
Weimar "Republic" anyone?
I thought the only thing keeping the Federal Reserve Note and US Treasuries from destabilizing was QE/ZIRP ? Hence the whole painted into a corner analogy.
The Fed has no viable choices. They MUST taper, else they will destroy the dollar, and with the dollar's passing, so will the Fed. They CANNOT taper because it is that printing that allows them to manipulate the markets, and without that manipulation, the shadow banking system will come unwound, and the dollar will die, albeit probably a bit slower. Rock, meet hardspot.
Taper, crash, QE. Repeat.
The US Fed is just a BIS branch office. They have securitized to completion so the dollar's status is sort of moot at this point -- it's already dead. TPTB will decree that the Sovereign Nation of XYZ is now the main BIS branch office. The Fed's job at this point is to prop up the 1% of the 1% of the 1%'s equity holdings in lieu of imminent default of US debt.
Plus, isn't the name of the game for any banker to "sell high and buy low". They're creating their own market for the high part, just need an event to buy back at the low.
Let's not forget, we have Obammy in office with his magic wand of crapulence. People will be paid in T-Bonds and only allowed to redeem the coupon. Before you dismiss, look at the actual MyRa proposal. Pretty easy to extend to everyday lives.
One way or the other the lives of Americans are about to become harder and more costly. There could be a plan to gradually bring it on but a collapse fits better with my non-conspiatorial view. Not that I don't believe in conspiracy it is just that I don't believe there are folks that well organized and in great harmony at the highest levels.
Usually following a collapse we learn that those in charge really were that stupid...and it is always a surprise even though we knew they were stupid before the collapse. Kinda like with Evil Kinevil. Everyone said:' he's going to crash really bad one day...but we were still surprised when he smashed up Ceasar's Palace.
Stupidity is the most palatable excuse for maleficence.
While it may (or may not) be true that the sock puppets serving as hand warmers are stupid, the agenda they serve is most certainly not the result of stupidity.
The US government budget would have no way to fund an army or a navy with higher interest rates.
STFU Charles.....things are going swimmingly
Nobodys starving and the FSA can still buy stuff
The FED chair steering committee thinks another 20 trillion cash burn could steer the ship around. Wash, rinse, and repeat
They are no longer real once they are emailed...
Book their 6% profit then hit delete.
Everyones a winner.
Now ask yourself why the FED has to print money in the first place? Its to make up for the gigantic trade deficits we have with other countries. No media outlets ever talk about this. The US is bleeding dollars every time you buy a Chinese made product from Wall Mart.
If the FED didn't print money and increase credit, our dollars would be overseas and you would see deflation.
wha...?
Those dollars overseas always get spent and always try to come home where they have value. The government needs to keep them from overheating the local economy so they suck them up from the Chinese (and everyone else) and send the Chinese Treasuries. That way those excess dollars cause no harm and the government gets to spend more without causing inflation.
This is what is ending. Those dollars are not being used to buy treasuries. They are still trying to find value to buy, but what we are wittnessing is an end to the great era of storing wealth in US paper. Now it is not 'as good as gold'.
How can you destabilize the Treasury market when you ARE the Treasury market?
The marginal trader sets the world price. So, by running off foreign investors, they have given more market control to the remaining traders. The FED was worrying about this before Bernanke ran from the burning house.
Nope, still Plan A....make sure everyone is totally beholden in the Fed markets, then pull the rug out and the banks own every bit of everything! It's working we'll, no one suspects a thing.
Plan B is called a false flag operation and war
When...just tell me WHEN!
When you least expect it.
...like a thief in the night.
< the ruling Elite is monolithic
< it is not
kill or be killed is their way... but they all dance to the tune of the same piper...
Plan C, Yellen can jump from a plane without a parachute. Keeping the volicity of ZIRP at negative gravity.
/sarc
Her impact would cause climate change. I guess big oil wins weather it gets warmer or colder?
No more Money Trees? WTF
They can only do what they can do. "Wind down the QE and bitch about job creation."
If the dollar, treasuries, you name it "collapse" the Fed is of going to change course.
"The Kobiashi Maru has set sail for the promise land."
Bully negative savings rates. /Sarc
"SINGAPORE, June 24 (Reuters) - Singapore is set to announce the launch of a gold futures contract on Wednesday, two sources familiar with the matter said, joining a race in Asia to provide a viable alternative to the metal's global benchmark which is under regulatory scrutiny.
The physically settled contract will trade on the Singapore Exchange. This and other planned contracts in Hong Kong and China could cut Asian reliance on gold's spot price benchmark in London and futures bellwether in New York.
"Having a local price for local markets ensures that markets are more efficient and that the price accurately reflects where the metal is locally trading," said Ruth Crowell, chief executive of industry group London Bullion Market Association.
"As more markets develop, local prices for precious metals will become more tailored." The Singapore Exchange did not respond to phone calls or an email seeking comment.
The price benchmark for gold is the so-called London 'fix', determined by a group of four banks over a teleconference. The process has drawn attention recently, after regulators in Europe and the United States started to probe benchmarks in several markets following the Libor manipulation case in 2012."
from other news
Preparing for austerity, Sisi cuts own pay
Read more: http://www.dailystar.com.lb/News/Middle-East/2014/Jun-24/261380-preparing-for-austerity-sisi-cuts-own-pay.ashx#ixzz35ZqFvSpv(The Daily Star :: Lebanon News :: http://www.dailystar.com.lb)
Wow, everytime I look at that stock chart I'm amazed at how lucky I was to live during the greatest era of bullshit the world has ever seen.
The Fed believed that five years of free money and incentivizing risk would heal the economy. They were wrong.
The fed's primary objective is to maintain government growth, healing the real economy is probably pretty far down on its list of priorities.
Primary is banksters, secondary is the protection racket (DC).
So Hobson got picked to create an image of debate and opinion at the Fed. Hmmmmmm
Plane crash or boating accident? Start a Bitcoin pool.......
In the end the choice will be made for them.
"One day when the people starve, the guillotines will eat."
Another deflationary crash is needed to secure debtors to a life of service to the perpetrated bubble valuations. Gold bugs take note, cash is king in such a scenario.
Not so sure anymore. Another crash so soon after the last one is extremely bullish for gold and silver. Cash may not get accepted when faith is completely eroding. Might see a reset of old cash for new cash with a massive haircut for holders of old cash. ECB with NIRP is basically penalizing cash holders.
They won't stop there and I'm 100% sure they won't. Have seen several European currency debasements in action. When the reset happens, you don't want to hold cash.
Silver right back above $21 of course after the London close...
Dow plunging...
something is up...
this has been a Kaiser Sousa info break.
Is it ME or does the DJIA from 1994 through 1999 look as steep/even steeper than the 'QE' period?
I have a feeling that the DJIA and QE might not be as correlated as many assume.
...Or, more likely, that unbacked credit emmisions have similar effects on certian asset classes be those unbacked credit emmissions Central Bank OR Commercial/Private Banking in origin.
Yes, it's mostly the result of ever increasing amounts of debt (of all kinds). In 94 there was the realization that ever increasing amounts of debts was the only thing keeping the scam going so the only logical result was to keep the ever increasing amounts of debt ever increasing. No way back now.
then Y2K came along and served as excuse for the uncertainty (like the weather now) and when that didn't do the trick, BOOM a couple planes hit major US landmarks and voila... best thing ever!!!!
A confused and confusing post.
Yeah, I guess that's clear enough.
Apparently QE has already bought too many bonds, and the remaining bond market was deemed manipulable and was squeezed pretty strongly two weeks ago. So end QE. But if you end QE, the debt becomes unsustainable and the economy may tank. So don't end QE.
Getting off the smack is never easy.
The FED has no choice, they have to keep bond yeilds low, stock high, the dollar high, gold low, employment high, unemployment low, housing high, car sales high, education high... They have to keep Russia out to Iraq, Chinese Yaun out of world reserve status, and keep the parties going in the Hamptons.
Don't care what you want to label it. The Fed has no choice. They need to print until Kingdom come.
The Fed may really think, it possibly had a choice but it doesn't. Not anymore, not after making all the banks whole after 2008 and putting trillions of money from thin air into the banks.
There's a price to be paid. They cannot afford higher interest rates unless they print even more to offset the charges. Revenues are still down and the cost of government is exploding higher. I'm not even talking future liabilities here which are largely unfunded in a volumeless market without real buying interest.
Just who do they think they would be selling to in order to raise cash to cover liabilities?
They need to print, don't care what they are calling it. QE, NIRP, TARD, BSIT, VOMT, FKUC or whatever.
WEIMAR was not an isolated instance in history.
Well you seem to have it right!
So someone tell me. Would it be reasonable to buy a couple 1/16 calls in NUGT, AGQ, TMV? Highest dollar amount.
Cheap insurance, that could pay off the mortgage or expire worthless.
Risk/reward seems reasonable.
that or burning the cash at a craps table.. same difference.
if you got cash to burn, sure
Gun or pills? Banksters should take the pills and then use the gun, just in case.
BIS is starting inquires on several banks regarding the filing of false claims. No, really. Seems the ol' dummy invoicing scam is back. It never really left! Chinese banks fell for it again too...because they wanted to.
Free and market are to never be used in conjunction again. Long white out.
Yes, ignore the millions of Senior Citizens getting ready to retire. Does Chuck realize that they want their SS checks? That's the bulk of those 100Trillion unfunded liabilities that you hear people like Mark Levin talk about. The printing presses will NEVER stop. They can't stop them, and the ONLY reason Yellin is slowing the presses now is the same reason a dog licks its ballz...it can. 500 billion down from 1.3 trillion...soon to rise back to 1+ trillion around 2018ish give or take. Let me help with the math...average of 40 billion this year /month QE is strangely right around the deficit when you multiply by 12.The real 2 options are:
1) Print moar sawbux
2) Raise taxes on the wealth makers
#2 has never worked yet. So guess that leaves us with printing.
yeah, how about #3? reduce expenditures on the fiscal side? hahahahahah
But then what would happen to all those highly skilled, "in demand" healthcare jobs if not for more than a trillion a year and growing government spending?
http://www.usgovernmentspending.com/total
If it ceases QE, interest rates will rise as non-central bank buyers will demand an actual return on their capital.
Rising rates will crush the echo bubbles in housing and the stock market, which has been propped up by dividend-paying stocks and speculative issues purchased with Fed-supplied "free money."
Sounds pretty good to me.
Which is why it will never happen in ernest. They may be flirting with the idea but will never execute anything that will threaten all the debt fuelled bubbles.
All of 'em would pop like a monkey poking around with a needle in a balloon shop.
>>POP<< >>POP<< >>POP<<
The Fed raised interest rates in 1929 under Roy Young, after inflating the bubble known as "the roaring twenties".
What followed was the worst economic depression in US history until present day.
So, while it may seem unfathomable at the moment, don't think for a second they are not capable of such a move.
Deflation is Kryptonite for the Fed, so the Fed needs Inflation to escape liquidity trap.
I can see them ending QE because 1) it's not doing what it's supposed to do and 2) it is doing things it's not supposed to do and 3) if they don't stop the Treasury market ceases to exist.
But wouldn't a cheaper Dollar be good for the Fed? Import inflation pops and Foreign bond liabilities evaporate?
"Deflation is Kryptonite for the Fed, so the Fed needs Inflation to escape liquidity trap."
Liquidity isn't the problem, insolvency is. Creating more debt did not make the U.S. more solvent.
Inflate a bubble, it deflates. The FED has inflated the debt bubble even more than it was. No one can inflate their way out of a bubble. 100% deflate.
Destabilization? I can only infer the type he's referring to is some form(s)of capital flight.
Where?
I sure hope the Fed raises interest rates.
That gives one a SURE sign that the whole thing is about to implode, just as it did back in 1929 with Roy Young (Fed Chairman of the time).
Otherwise we sit and wait for the day that everyone finally loses faith in the dollar and stops accepting it as payment, or until a bag holder of US bonds (e.g. China) dumps it all to hell.
One nit to pick. It is somewhat inaccurate to always speak about the Fed "failing," as if it were possible to succeed at what they were trying to do by some other means. You can be sure that the economists at the Fed know full well that none of this is going to work over the long term. The Fed was backed into taking this course of action because the President and Congress refuse to deal with reality. That's why I have some sympathy for Bernanke and Yellen: they really are the only adults in the room. Realizing that the political class was still quite far from accepting the reality of a deflationary world and was not interested in adjusting its policies accordingly, the central bankers did the next best thing they could and tried to buy us some time. That bought time was purchased at the expense of the future (as all bought time is), but what other choice did they have?
The blame for this can be fixed squarely on the politicians, for they alone had the power to change the course of the nation. The Fed can only strive futily to bail out a sinking ship.
goose has landed and proclaimed god's people run the fed because the pols made them do it, never read ZH much goosey boy? nobody got rich off 08 did they goosey you smuck.
As long as people around the world work for and believe in the worth of a dollar, the Fed can do whatever they want, and it will work.
"The Fed believed that five years of free money and incentivizing risk would heal the economy."
Bernanke wrote in 1988 that QE wouldn't work. All Bernanke did was prove himself right, at great cost to the American people.
"On the surface, there are no intrinsic limits to QE and central bank money-printing:in other words, there appears to be nothing stopping the Fed from printing essentially limitless money and buying up the majority of Treasury bonds, mortgages and stocks."
Appearance is deceiving. Money is created out of debt. The more the FED prints, the larger the debt bubble grows. The global debt bubble grew by 30 trillion, to now 100 trillion, as a result of central banks printing money. How is 100 trillion of debt better than 70 trillion of debt, when all bubbles burst and deflate? All those people who said the Bernanke FED saved us from a Great Dpression, are going to have some explaining to do.
Leaving long term support behind, by 40% or more... it's nice to hug the multi-decade upper bollinger, until it isn't.
https://imgur.com/98oFzoB
Its only a Hobson's choice if they cared about inflation or stabilizing the dollar, the assumption that the Fed cares about either of those issues is a mistake, bet on it.
Annihilating the dollar is their agenda, QE is a firehose of political power, they'll never give it up, bet on their greed, it is as reliable as the Sun.
Gold is not the correct response, you want portable commodities that people consume, not "pretty shiney"
I think it is a mistake to assume they HAVE a plan for fixing this. It is more sensible to figure they are just doing whatever they can to tread water. I'm having a hard time believing ANY of these folks have actually thought their ideas through. It's strictly 'whatever will keep it up for one more day'...and hoping tomorrow brings back the incoming tide of of the business cycle which will lift everyone and cause them to forget about all this unpleasantness.
Oh, I suspect that tide is coming back in alright. You may want to wrap up your shell-collecting and get to higher ground.
You can always tell how much respect a country has for its currency by looking at what its made of. Nearly all begin with PM's, or strongly-backed paper that is exchangeable for PM's. Their currency is 'as good as gold'.
Over time, they reduce the amount of PM, finally resorting to base metals and paper backed by "promises". Those promises are meaningless, and it takes more and more to buy anything you need. It is painfully obvious that the currency is no longer respected, and even held in contempt. It eventually becomes totally worthless, and the thing collapses.
When we started out, we had gold and gold-backed paper. Today, we have FDR's and digits stored in computers. And some of us have bitcoins. Made of nothing. Not even existing in the real world. Just like all our so-called wealth. Why waste precious resources making a currency if its just a piece-of-shit worthless nothing? Like the economy it represents...
EXACTLY BACKWARDS.
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The predators-DBA-government will not stop spending... and will not stop increasing their spending.
The predators-DBA-government therefore need to borrow more and more, and because they already have vastly too much debt, literally cannot afford substantially higher interest rates that would be required to attract private or foreign investors.
The predators-DBA-federalreserve will therefore create endless new fiat, fake, fraud, fiction, fantasy, fractional-reserve vaporfunds, route them invisibly to a variety of foreign co-conspirators (other central banks and governments), and have them buy US government debt at insanely low interest rates required to keep their ponzi going.
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So yes, in the mainstream media, the headlines will say "taper continues".
However, the REALITY is... the federal-reserve will keep creating fiat, sending it to their stooges, and those stooges will buy the US debt.
Which means... NO ACTUAL CHANGE, only propaganda.
AAA Junk. Who wants some?
The assumption is not that the Elite are a monolith.
The assumption is that one faction among the Elite are CLEARLY DOMINANT - the BANKSTERS.
Every policy since Greenspan began blowing bubbles has confirmed it.
Yes there are other factions.
Yes the other factions can inject noise into the graph of the Fed's monetary choices.
But they cannot change the outcome, for they all hitched their wagons to the Banksters long ago, and cannot survive without them.