Why The Fed Is Being Forced To End QE

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The Fed is being forced to end its bond-buying, cutting off the "free money for financiers" that has sustained a frothy stock market.

While the Federal Reserve presents itself as free to do whatever it pleases whenever it pleases, the reality is the Fed's own policies are constraining its choices. Take the taper of U.S. Treasury bond purchases--the heart of quantitative easing (a.k.a. QE or more accurately free money for financiers).

You probably know how this works:the U.S. government runs a deficit, as it spends more than it collects in tax revenues. This deficit is funded by the sale of Treasury bonds.
The Fed has been creating money out of thin air, a.k.a. printing money, and using this new money to buy Treasury bonds.
As the Federal deficit shrank, the Fed upped its bond-buying program (QE). As a result, the Fed was buying more bonds than the Treasury was issuing.This graph from from the excellent charting site Market Daily Briefing plots the Fed's bond-buying (printing) and the Federal deficit (issuance ofnew bonds, which is different from rolling over the existing debt as bonds mature and must be replaced with new bonds).
Many seem to believe the Fed was forced into buying bonds because foreign owners have been dumping their Treasury bond holdings. But if we look at a chart of foreign-owned Treasuries, we see a modest dip in mid-2013 that reversed later that year. Foreign ownership has reached a new high of $6 trillion:
Much has been made of China selling some of its Treasury holdings, but if we look at this breakdown of foreign ownership, we see relatively modest fluctuations in the holdings of both China and Japan.
As I noted in Are Capital Inflows Propping Up U.S. Markets?, foreign central banks buy Treasuries not just for reserves but to lower the value of their currency vis-a-vis the U.S. dollar, the idea being to boost exports to the U.S. by weakening their currency.
These dynamics have created a global competition for Treasuries, pushing yields lower. The Fed is in effect competing with foreign and domestic buyers of Treasuries, a competition that has heated up as Federal deficits have declined.
This can be viewed as one consequence of the Triffin paradox, something I have covered in depth:
As the issuance of new Treasury bonds (and thus U.S. dollars) declines, the demand for dollars will push the dollar higher.
A second side-effect is the Fed is forced to end its bond-buying, cutting off the free money for financiers QE that has sustained a frothy stock market. With the free money for financiers ending, the stock market will actually have to support its lofty valuations on its own merits.

If the market will continue rising without the Fed's injections of free money for financiers, then why is Wall Street so terrified of "hawkish" murmurings, never mind actually hawkish actions by the Fed?

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Manthong's picture

"With the free money for financiers ending, the stock market will actually have to support its lofty valuations on its own merits"

Geronimo !!!!

ZerOhead's picture

Blast from the past...


The Chiasso financial smuggling case began on June 3, 2009 near Chiasso, Switzerland (near the Swiss/Italian border), when Sezione Operativa Territoriale di Chiasso in collaboration with officers of Italian customs/financial military police (Guardia di Finanza) detained two suspects (who appeared to be Japanese nationals in their 50s)[1] who had attempted to enter Switzerland with a suitcase in their possession with a false bottom containing what at first appeared to be U.S. Treasury Bonds worth $134.5 billion.[2][3][4]

Mckayla Braden, senior adviser for public affairs at the Bureau of Public Debt at the U.S. Treasury Department also said that this type of counterfeit bond scam "has been going on for years." Although these bonds, if fake, appear to have been of very high quality. Col. Rodolfo Mecarelli, the provincial commander of the financial police in Como, said that the bonds "are made of filigree paper of excellent quality."[1]

The Financial Times also reported that the two suspects "had been released" by Italian authorities. No additional comment or elaboration from the Guardia di Finanza headquarters in Rome was available.

Beam Me Up Scotty's picture


Yes, audit the fuckers.  They say they are tapering, how do we know?  They could still be pumping billions or even trillions and who would really even know?  They could pump the stawk market and keep bonds bid, and keep a boot on gold.  They can print as much as they need to goal seek any number they want.  And all we get to do is take their word for it.  Their balance sheet could be 40 trillion or 400 trillion not 4 trillion.  Thats how Oz works his magic, behind the curtain.

overexposed's picture

Holy cow, look at Belgium in that third graph -- and compare it to the "correction" after the dip in the second.

Are we seriously to believe that Belgium, in an effort to "boost exports to the U.S. by weakening their currency," is single-handedly responsible for propping up the Treasury market?

Engage: credulity strain.

kaiserhoff's picture

I agree with Charles and the Tylers on this one.  The Fed has no choice.  The bond markets are unstable.

But QE has always been a sideshow and freebies for the banks.  Interest rates are the real deal.  We'll see what kind of guts Mr. Yellen has, soon.

ArkansasAngie's picture

For me the qurstion is can they avoid it blowing up in their faces before the election ?

MalteseFalcon's picture

The FED will simply buy bonds from foreign governments.

The cash give away to float the stock market will continue.

Anca1's picture

I noticed that, too.  "Engage: credulity strain"  I'm thinking that is being mild in your disbelief!

Chupacabra-322's picture

Absolutely! Tapering really means excelerated printing to these Sick, Psycopathic Scum Fucks. Besides, isn't Belgium buying Billions lately.

Bossman1967's picture

They are selling all that gold paper they bought and buying treasries and stocks which also hides the actual state of the economy. The house of cards is wet and sticky here it goes yall. Multiple crises are going on. Are you ready?

hardmedicine's picture

I still fail to comprehend how this has anything to do with the FED or anything else going on.  What gives here?


viahj's picture

the author ignored the blue line

Majestic12's picture

"It's for the children"

...gotta love "the children"...unless your Israeli...Ukranian...or any other pedophile Reptiles who slither through this galaxy.....

U4 eee aaa's picture

It's for the children.

It reminds me of that Twilight Zone episode:

"To serve man"

Bangin7GramRocks's picture

Cutoff QE. That's a good story bro! Tell me another, but make this one believable.

giovanni_f's picture

Right. Reducing QE - the kaboom it would make in the financial system could be heard from Mars. It's frustrating to see how few people seem to be able to grasp the exponential dynamics of debt and the impossibilty to simply cut it back. 


Lewshine's picture

NEWS FLASH!! The Fed IS NOT forced to raise rates, neither will they!! It's lip service to sell the other side of their two sided argument. RECOVERY is one side   - DATA DEPENDENT is the other. They use both arguments to justify THE FACT that rates CANNOT rise without destroying their golden goose (US equities). 2nd NEWS FLASH, they've been doing this for 6 years. In 2011, they said they might pullback QE in 2012 because the recovery was SOOOOOO obvious. Said the same thing in 2012 about 2013...and so on. Wise up. QE until a dollar collapse - No other alternatives. BTFATH!!!!

Son of Captain Nemo's picture


Yes of course. They'll "allow themselves to be audited" right after they get WWIII underway!

ZerOhead's picture

They should audit Belgium as well any anybody else that picks up the slack...

Son of Captain Nemo's picture

The long version...

While the Federal Reserve presents itself as free to do whatever it pleases whenever it pleases, the reality is the Fed's own policies are constraining its choices.


Destroying a few billion dollars worth of real estate in lower Manhattan as a pretext to start an "open ended protracted war on terror" for oil and to preserve U.S. dollar hegemony throughout the Middle East with no rational objectives or goals from the start killing and displacing millions and in the process bankrupting your own Country and Western European allies in order to pay for it.

And then:

7 years into it when you are completely out of money and resources fighting wars of choice and outsourcing your entire IT infrastructure to India and China you tell representatives in Congress that your bank must be bailed out to the tune of $700 billion otherwise the insolvency will be so catastrophic that you will need to declare a "second state of emergency" in addition to the emergency you already have in place on a "tactic", otherwise there will be rioting in the streets when people need to access their accounts.  Instead of bailing out the banks you lie to the government you are loaning the money to and take all of it to increase your own reserves and provide salary increases for yourself and use some of that money to help some of your "corporate" buds.

Followed by:

Starting a world war because no longer are any of your direct and indirect business associates interested in buying the "full faith and credit of the United States" backed by nothing when they know it's worthless and a gun is being pointed at them to keep buying more anyway -or else!

Professorlocknload's picture

No, they can't audit Belgium, that's why it's being used as clearing house/laundry facility.

And they can't raise rates here, so rates will stay low/ go lower, eventually weakening the dollar. Maybe the plan all along?

Of course, incrementalism is their stock in trade, so the jawboning will continue, just to temper the process a bit.

Have faith, the Feds dollar will eventually be exterminated.

JRobby's picture

With a war on, documents are burned, blown up or otherwise destroyed. I think right after the first document request subpoena sounds like good timing........

hardmedicine's picture

Son.,, every time I read through zero hedge I stop cold at your icon.  Is the dog standing on a treadmilll with a muzzle in it's mouth?




wmbz's picture

Congress could order a full external audit tomorrow. Congress could could disolve the fed tomorrow.  However  the un-federal reserve has congress bought and paid for. Owns them all, lock, stock and barrel. Congress has no will to do anything to disrupt it's sugar daddy.

Decades of incest and they love it!

SeattleBruce's picture

"Congress has no will to do anything to disrupt it's sugar daddy."


Banker Buster's picture

Maybe if U.S. can get someone in there like Rand Paul, he would unleash the fury on the Fed and make them have audits (and not audited by goldman sachs, a real audit) while scaling back their power and role in the U.S.  While he's at it, drop bernanke off at a Ferguson ghetto crack house.

One can dream can't he.


LawsofPhysics's picture

Please, show me the real books.  QE, most certainly is not ending.  Show me the real balance sheet motherfucker.  In addition, ZIRP (NIRP in real terms) is far, far more destructive to real capital and savers.

indygo55's picture

Couldn't agree with you more. What are the real numbers? Prove it! No one has seen the proof and no one asks. That would get you an appointment with nailgun manicure for sure. 

Kaiser Sousa's picture

Charles -
please give it up...
the fact that u believe that they are/will taper shows that you believe what the MoneyChangers tell you...
thus u r foolish...

always remember - Bankers are sociopaths...sociopaths r pathological liars....

until u recognize that fact u r not worth reading or listening to....

Kaiser Sousa's picture

" Johannesburg, 19 August 2014. A Krugerrand-denominated bond listed on the JSE last week, which gives investors direct exposure to gold, is the first of its kind to be listed worldwide. Rand Merchant Bank, a division of FirstRand Bank Limited, is the issuer of the FirstRand Gold Bond.

The Gold Bond has a term of five years and the first issue amounts to R2 billion. It requires investors to buy Krugerrands, which they then lend to FirstRand when purchasing the bond. At its expiry the value of the bond is determined by the current gold price, the Dollar/Rand exchange rate and the interest earned. This interest is calculated in terms of ounces of gold as represented by Krugerrands. Investors may take physical delivery of the Krugerrands on maturity or opt to get settled in cash.

"The notes provide direct exposure to the rand gold price and a positive yield in the form of interest ounces payable on maturity. It offers both inflation and rand/dollar exchange rate protection while avoiding the significant storage and administration costs associated with other direct gold investment options available. Current market conditions are particularly attractive for gold investment because of rand/dollar weakness and expectations of higher inflation," says RMB Debt Capital Markets co-head Dale Wood.

"The JSE was founded in 1887 as a result of the first South African gold rush. This issuance provides investors with a way to gain exposure to one of the oldest assets on our exchange in a new and innovative way," says Donna Oosthuyse, Director: Capital Markets at the JSE.

Investors may not hold gold in unwrought form according to South African law; however they still need to pay for the administrative costs associated with holding and storing gold when they invest in products which track the price of gold. These costs are eliminated by the Gold Bond because investors earn a yield on the bond instead of paying fees. Investors can also opt to take physical delivery of the underlying gold because it is in the form of Krugerrands which are legal tender in South Africa. "Investors also benefit as they are able to buy and sell the Gold Bonds on the JSE, with RMB acting as a market facilitator to ensure liquidity and price transparency of the notes," says Wood.

Investors can also get a Gold Bond note with a single Kruger rand, which means that retail investors can use it to gain exposure to the gold price. Investors who already own Krugerrands can use the Gold Bond to achieve the same exposure to the gold price they would have enjoyed when physically holding Krugerrand coins, while also earning interest on the bond."

forwardho's picture

Wait, lets see, You buy Gold and give it to a bank.

They then give you a promissory note.

Trade Gold for paper?

What a novel idea.

RighteousDude's picture

Mathematically impossible to give it up.


World Wide Jubilee !!!!

Taterboy's picture

It is forced to end so the George Soros shorts can work.

symtex411's picture

in the new world about to take place ... bull + bull = bear?

Schizofrantic Squonk's picture

According to the article, the bill bans the state from selling the flag:

"The California Assembly on Monday passed legislation that would ban the state from selling or displaying the Confederate flag..."

I have no issue with that. On the other hand, if the article is sloppily written, and the intent is to ban the sale of the flag in the state, I see a pretty obvious constitutional violation.


Unless, of course, it's considered an assault flag.          /s

LawsofPhysics's picture

Good points, one does have to wonder why the folks in D.C. would want to ban the sale of non-lethal protective gear..


forwardho's picture

Assume your musing is fasciatus.

Seems intent is very, very clear.

itchy166's picture

Meanwhile, the manufacturers of false flags can't keep them on the shelves...

knukles's picture

Nah... no CA political entity would even bother to fly a Confederate flag... so kinda redundant (or retarded waste of time)
BUT.... there are plenty out here would fly ISIS, AlCiaDuh, etc.
lots and lots and lots
See they're the religion of peace... and I shit you not... that's how the CA Progressives view the Muzzies, as a whole

AGuy's picture

What about the Hammer and Sickle Flag?

trembo slice's picture

We'll be adopting it shortly...

knukles's picture

That or simply change the name on the flag from California Republic to People's Republic of California
Already on tee-shirts, etc.

astoriajoe's picture

I think they just opened a factory for those, so...

combatsnoopy's picture

Actually that ban needs to happen.  It's one of the first thing that the nanny state got right. 
Dixies are THE dumbest mofos ever during the history of this planet.   

Where is Gramm from?  The deep south.  Where are the Clintons from?  The deep south.  
Since when did racially harassing, intimidating and physically attacking minorities ever work to benefit the welfare of the racists?  


It's just a group of thugs who get federal funding (social security, welfare, food stamps, disability and unemployment) to do nothing but antagonize and harass minorities, buy meth and a loan for a lifted truck and price inelastic tax for the fuel they can't afford.

You can just go to either Simi Valley, Fresno or Riverside to see the blessings made from the white supremacy has bestowed for the trouble they caused. 

 just trust me on this one, it's better this way.

Professorlocknload's picture

Moonbeam don't like them Southern Democrats?

Prince Eugene of Savoy's picture

Surely now those Assembly laggards will get around to banning that annoying Redskins logo, the racist Mississippi state flag and, of course, any likeness of Richard Nixon.

Then you'll see, everything'll be AOK.