QE forever and ever and ever and ever............

dazzak's picture

QE forever ever and ever,ever....

 QE has potentially severe implications for inflation, but not directly from the QE itself. Instead the inflation will come as a result of a dramatically increased total money supply resulting from bank lending. QE does enable more bank lending, but the lending must take place for the total money supply to grow....which it still isnt...

 

It is said that if consumers know that something will cost less in the future (even if it’s just 2% less) they will defer their purchases indefinitely, perhaps waiting for the cost of their desired product or service to approach zero. They argue that this can push an economy into a deflationary spiral of falling prices and diminished demand which may be impossible to escape

But this idea ignores the time value of a product or service (people will tend to pay more for something they can enjoy sooner rather than later re;I-phones etc) and the economic law that shows how demand goes up as the price falls. But common sense has absolutely nothing to do with the current practice of economics. Instead, the argument is that inflation is needed to seed the economy with demand.

However, this argument is merely a smoke screen. The only thing that inflation can do is to help governments spend. Economies do just fine with low inflation. In fact during the late 19th century, the United States experienced sustained deflation while creating much faster economic growth than we have seen in the last few generations. As recently as during the early 1960s the U.S. experienced consistently low inflation (barely 2%) and strong economic growth based on government figures. But in their call for more inflation, modern economists tend to forget or downplay those periods. 

 

Stopped...for now....

The Fed has ceased its program of quantitative easing (QE) and may soon begin to raise interest rates. Japan has embarked on an even more aggressive program of QE. The European Central Bank (ECB) has just begun QE. In a related development, the Swiss National Bank (SNB) recently stopped pegging the Swiss franc to the euro. 

 

What does it all mean?

QE’s direct and indirect effects are complex, and the fact that various policies are at different stages of implementation doesn’t make it any easier to understand the dynamics.

In the normal functioning of a reserve banking system ,commercial banks create money when they take deposits and make loans.

Central banks limit the amount of money that commercial banks can create by managing reserve requirements. They provide liquidity to the banking system by lending directly to banks through the discount window. Central banks also influence interest rates and the pace of money creation by buying and selling securities through open market operations.

 The primary objective and typical standard of success for central banks is for stable prices....HA! Well at least thats the plan...

 

Quantitative Easing for dummies..which is probably all of us,including the Fed


QE is not money creation; it’s more accurately a reserve creation. A central bank buys securities and pays for them with bank reserves (liabilities of the central bank and assets of commercial banks), thereby increasing the central bank’s balance sheet and the reserves of its member banks.

 The linkage between QE and the money supply is indirect. Banks will use new reserves to create money, but only when reserves are an active constraint on lending. When banks do not wish to lend and/or borrowers do not wish to borrow, then reserves are an inactive constraint. When banks seek to increase their capital and borrowers strive to pay down their debts, QE does not increase the money supply and therefore does not cause inflation. 

 

Has it worked??? 

During the global financial crisis , the first round of QE was effective in averting a financial collapse. A central bank can act as lender of last resort by making loans directly to individual banks through its discount window. During 2008, however, many distressed financial institutions were not banks and so did not have access to the discount window. Through QE, the Fed and the Bank of England (BOE) provided liquidity to the financial system by buying large quantities of securities from the market rather than waiting for banks to show up at the discount window.

However...

Beyond providing the liquidity necessary to avoid financial panics and bank runs, can QE increase economic output and employment? 

Some believe that, when an economy is operating below its potential growth rate, lowering interest rates to inflate capital asset prices indirectly stimulates the economy through a wealth effect: People who own stocks, bonds, and houses will spend more if they feel wealthier.

However in this case people are becoming ,more and more aware that by intentionally inflating capital asset prices distorts markets, creates bubbles, and leads to a probable repeat of what was seen in 2008. And with the banks unwilling to loan ,the "wealth effect" is barely being felt.

 

Money Printing

Money printing is different from QE. Money printing is inflationary by definition. If the central bank rapidly prints a lot more currency and immediately puts it into circulation, then more money is chasing the same amount of goods and services. 

 A central bank may monetize the national debt—and facilitate increasing the deficit—by purchasing newly issued government bonds with the proceeds transferred into the checking accounts of government agencies. This, too, amounts to printing money. In other words, QE plus substantial fiscal stimulus is money printing and may cause inflation.

 

What’s Happening Now?

Initially QE was not paired with fiscal stimulus. Banks chose to hold the proceeds of QE as excess reserves rather than increasing their pace of lending and thereby creating money. While QE was in progress, the Fed and the BOE were pushing on a wet noodle. 

 

So far then, QE is not inflationary. It may become inflationary if it achieves its intended purpose of stimulating more economic activity by fueling bank lending and money creation..

 

The ECB have just started their QE game. Because of the concern about already unsustainable levels of government debt, Europe appears unlikely to pair this QE with fiscal stimulus. The ECB will probably be pushing on the same wet noodle, as were the Fed and BOE. 

Japan, however, is flirting with a more aggressive form of debt monetization, combining QE with increasing fiscal deficits. The country seems close to testing what happens to a modern developed economy when it intentionally chooses money printing as its macro-economic policy….so if you want to know what we may have to look forward to,it’s the land of the Rising Sun that will probably give us the best clues,which means that there could very well be years more of the same old.... 

 

Even the mainstream media is waking up to the problems created by central bank manipulation

It is expected for a return to "happy days" that annual growth of about 2.5% is required,however since the peak in 2007 we have a compounded growth rate of just 1%!!!!

It would be nice if market participants could actually agree on what all these years of bond buying has done for the economy. But they can’t. So it’s not surprise that why no one can agree on what the end of QE will actually mean for the markets or the economy.

Take, for instance, the difference between the Federal Reserve’s own predictions for inflation and the future path of interest rates and what the bond markets think will happen. 

The main goal seems to have been the hope that an expensive stock market will give people the confidence to spend. Fed officials would probably argue that higher asset prices are merely a second-order effect of their policy and that Zero rate policy was implemented  in an effort to get businesses to invest. But either way, the policy requires growth in demand to organically materialize within the economy so that there are people and firms willing to invest at these new low interest rates.

And it’s this last part that really hasn’t come to fruition. Job gains continue to accelerate, but wage growth is flat.

Economic growth in 2015 has been lackluster at best,with  YOY GDP forecasts from Goldmans, Barclays, Nomura and JP Morgan between 2% to 2.2%.. this is  still far below what you would normally see in a recovery.

 

We seem more and more reliant on the US to support global growth,but with so many other issues to look forward to this month (NFP,OPEC meeting,currency wars,Bond market stability,Grexit & Chinese stock market volatility) ,by the end of it we may have a better idea if the US will raise rates this year or if we will be on hold for ever and ever and ever and ever.......

 

 

In regards to more detailed options and futures advice ,please contact Darren Krett through www.maunaki.com or dkrett@maunaki.com

 

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Sandmann's picture

QE is Bank Welfarism. Politicians are paid to look after Banks a bit like Norman Feudalism and the serfs get to work for subsistence. The Norman economy wasn't exactly noted for its prosperity, health or individual longevity. The Welfare Capitalism Phase lasted 1946-1975 and was unique in the history of the world.

Bush Baby's picture

Here's the Code

 

Deflation_Baby:

     Do

          MoreAutomation = MoreAutomation+1

          FewerJobs = FewerJobs-1

          ReducedCost = ReducedCost-1

          AviliableIncome = AvailableIncome - 1

          If ReducedCost = 0 then Exit Loop

      Loop

Print "Good-Bye World"

End:

Bemused Observer's picture

They are waiting for demand to "organically materialize"? Just what the fuck does that MEAN?

I keep hearing this...the consumer will start spending again. Well, what I want to know is WHERE WILL THE CONSUMER GET THE MONEY!!??

WHERE!? WHERE IS HE GETTING THE MONEY!? TELL ME! I WANT AN ANSWER RIGHT NOW!

TELL ME WHERE THE CONSUMER IS GETTING THE FUCKING MONEY!!!

These people are SO lucky I'm reading this instead of hearing it face to face from someone. Because I would grab them by the throat and scream in their faces, "WHERE IS THE CONSUMER GETTING THE FUCKING MONEY!? WHERE, IDIOT? WHERE?

God, I want to go Sonny Corleone on these people! Slamming them in the head with a garbage pail lid, screaming "WHERE, MOTHERFUCKER? WHERE?"

Comte d'herblay's picture

"....but the lending must take place for the total money supply to grow....which it still isnt..."

 

It is occurring but only for the very rich and very connected, those who can or cannot afford a mortgage, and in the financial markets that can use margin.

GuusjA's picture

Doordat minister Jeroen Dijsselbloem (Financiën, PvdA) onwetend is gehouden over de volgende fase van de 3e SpinozaGolf kon hij niets anders doen dat een voorjaarsnota te sturen waarin de staatsschuld dit jaar tot 68,6 procent van het bruto binnenlands product is gedaald. 

 

http://nos.nl/artikel/2039094-rutte-wil-niets-zeggen-over-topoverleg-gri...

 

Het topoverleg van gisteravond in Berlijn over de Griekse schuldenkwestie had namelijk geen formele of bijzondere status. Het was een overleg in het kader van de 3e SpinozaGolf, ofwel besprekingen om druk te zetten op netwerk Juncker om het systeem 'Leven en Laten Leven' vrij te geven. Aan het spoedberaad namen de top van de Europese Commissie, van de ECB en van het IMF deel, als ook de Duitse bondskanselier Angela Merkel en de Franse president Franois Hollande. De Griekse regering was niet uitgenodigd en ook de voorzitter van de Eurogroep, minister van Financiën Jeroen Dijsselbloem, was er niet.

 

http://www.nrc.nl/nieuws/2015/06/01/kabinet-voorziet-lagere-staatsschuld...

 

Zodoende had onze @MinPres een goede reden om de Tweede Kamer te verwijzen naar de oude afspraken die de eurolanden op 20 februari 2015 hebben gemaakt over de aanpak van het Griekse schuldenprobleem. In die oude afspraken zou de ECB met 'gratis geld' de schulden van de lidstaten van de eurozone opkopen, om zo de bankensector te spekken. Dat 'dit recept' niet in lijn is met een rechtvaardige paradigma-wisseling tussen het SCHULD=H00P-principe en het GELD=ZUURSTOF-paradigma is in hotel GradjA al een gedeelde mening. De nieuwe Griekse regering heeft heel duidelijk gemaakt dat 'de macro-economische afspraken en begrotingsdoelen die door de vorige Griekse regering waren opgesteld' niet ten goede kwam aan het 'algemeen belang', maar alleen een wanhopige poging was om het systeem 'Liegen om te Leven' te dienen. 

 

http://www.zerohedge.com/news/2015-02-27/10-reasons-washington-has-war-f...

Comte d'herblay's picture

I so much want to agree with you or not, but, "bankensector" is the only word I can remotely translate.

 

Sandmann's picture

Dutch is a language that dreams of becoming Deutsch

ebworthen's picture

They're committed now.  ZIRP, NIRP, and QE forever - capital controls, cashless societies, "stability levies" on deposits (theft), grinding debasement of currencies, mass psychological control campaigns and police states.

Fun Facts's picture

If global QE ends, so does the ponzi scheme.

If global QE continues, even more of the worlds wealth gets usurped and transferred to the bankster cartel.

actionjacksonbrownie's picture

Finally someone gets it, and it isn't the author of this article. QE is nothing more than an extension of a ponzi scheme that was due to collapse in '08. "Dollars" are not money, they are debt. That debt requires ever more "Dollars"(debt) to be created to service the interest on the existing "Dollars" or the whole house of cards crashes into deflation, and eventually into thin air - the same place all these "Dollars" came from in the first place. Since the economy is already saturated with massive debt, someone had to step in and do a whole bunch of borrowing in order to keep this ponzi going, and it wasn't going to be the consumer, and it wasn't going to be corporations either. Enter the Central banks, in collusion with .gov's all over the world, and we continue this charade called "money" to this day.

 

It does not need to enter H.I. - it can be managed to a great extent - but with the fraud simply servicing the existing debts, and very little investment into new infrastructure or manufacturing or wages/employment, there will be little growth anywhere in the developed world.

 

The author contends that there was low inflation and high growth in the 19th century, but fails to acknowledge that the entire world was on a gold standard at that time, whereas the entire world is on a fiat ponzi scheme at the present. Gold does not require any servicing, therefore all new wealth created through labor is returned to the economy. Fiat "money" requires constant, ever expanding servicing, and is therefore a constant drain on the economy - hence the situation we are in today.

 

It only took 100 years for the cartel to completely drain the developed world of it's wealth and productivity, and now we are merely circling the drain in an "extend and pretend" operation. Everything that happens from here until sound money returns is nothing but damage control for the slime that has benefitted from this system of theft.

 

HANG THE FUCKING BANKSTERS

 

 

Bemused Observer's picture

A gold standard would have prevented most of the over-inflating of the whole economy. Only fiat allows enough froth to be whipped up for Big Finance to skim.

But Big Finance calls this "an impediment to growth". Bullshit. It is no such thing. Gold certainly DOES permit growth, just not the kind of cancerous hypergrowth they need. And it's finite nature puts a set of working brakes on that ever happening, so of course banksters hate it.

Human beings are simply not to be trusted with a fiat currency. We do NOT have the discipline necessary to make it work. And it requires a scrupulously honest government to manage it. For those who CAN, it can be a useful tool, but all WE are going to do is hurt ourselves with it.

Gold was MADE for us. Limited in nature, with a commodity value apart from its monetary value, allowing individuals to store wealth away from governments hands. Wealth that can't be compromised by devaluation, since its value is immune to government manipulations.

SmittyinLA's picture

What does it all mean?

Bottom line ......$16 blowjobs

OC Sure's picture

 

 

Three key points are overlooked here. 

1.  The end result of QE necessarily increases the demand for High Quality Collateral and the shadow banking merry go round goes round and round.

2.  The introduction of new currency in to the system is counterfeit and not money. Therefore, analysis can be distorted when it is presumed that one type of currency will act just like another.

3.  To get wrapped up in an 'a' point such as the mesmerizing spell that the witchdoctors have cast is to deflect the critic away from 'the' only point that matters - Is a monopoly on the banking system as maintained by a governing body Necessary and Proper?

 

 

LawsofPhysics's picture

Allow me to simplify with two simple, but important points;

1) All stimulus is fungible, period.

2) Now that money creation no longer requires any sort of real collateral, bankers and financiers are fucking useless overcompensated middlemen between the printer/computer and the producer/consumer in the real economy.  The real market will eliminate them, "full faith and credit" etc.

Four chan's picture

the evil of the fed manifests itself in several ways the most 
insidious is the brutally punishing way it devalues savings 
through money printing at a rate far exceeding any rate of 
return possible. the fed steals silently. 

the system called federal: 
to enslave a free people to dept, and capture all assets through 
boom and bust, with money printed out of thin air. 

100 years, truly mission accomplished.

LawsofPhysics's picture

Yes, remember when banks were actually banks and a safe place to store your real assets?

Let the motherfuckers slit their own throats.

The problem now is in the calories that must be consumed in order to maintain the status quo, all fiat is going to zero and those calories cannot be created out of nothing.

dumdum's picture

 

 

The whole problem is very simple. Until such time, that real wages start rising and high levels of consumer debt falls significantly, the FED is wasting it's time. Consumers are all spent out: that's not a good thing, for an economy that is based on a high level of retail consumption.

The USSA is heading into it's own version of a lost decade or two, and there isn't a damn thing Yellen or whoever can do about it.

Fluxite's picture

when the fed purchases debt, it takes the debt off the market and issues printed cash - hence the hyper-inflation about to be unleashed.

 

Got it - good.

LawsofPhysics's picture

LOL, assuming that printed money actually gets to the real economy, yes.  The ever-increasing wealth inequality would suggest that isn't going to happen anytime soon. ALL fiat will DIE first. 

Stained Class's picture

Yes, until we Sheeples have had enough.

Dragon HAwk's picture

The Fed has ceased its program of quantitative easing  ( Says Who )

lasvegaspersona's picture

I'm not sure the basic premise is correct. Hyperinflation is a cash event. The banks usually quit lending way before the 'hyper' part starts.

There is already enough 'cash' for HI. Oh, it hasn't been printed yet but the Fed has committed to print it. Every bond is a promise to deliver cash so if 9 trillion (the bonds held by non USGovt entities.) isn't enough cash to give us HI then I guess it can't happen.

Wonder if that's why there is a push to get rid of cash. I suppose those bond holders could buy, buy, buy with the bank credits they get when they decide to not roll over the bonds.

blindman's picture

@.."The linkage between QE and the money supply is indirect." ..
i would say the term should be foundational, not "indirect".
.
@.."QE is not money creation; it’s more accurately a reserve creation. A central bank buys securities and pays for them with bank reserves (liabilities of the central bank and assets of commercial banks), thereby increasing the central bank’s balance sheet and the reserves of its member banks." ..
.
that is printing for the host "government/s" upon which
the bankers feed and dominate at will.
.
@..."What’s Happening Now?
Initially QE was not paired with fiscal stimulus. Banks chose to hold the proceeds of QE as excess reserves rather than increasing their pace of lending and thereby creating money. While QE was in progress, the Fed and the BOE were pushing on a wet noodle."..
.
not pushing a wet noodle, stealing collateral and assets for dimes
on the dollar. transferring the wealth and value to the cronies of
the monetary system, raping workers and such by design of the money
system. by law, they own that too.
...
.
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809)

“I believe that banking institutions are more dangerous to our liberties than standing armies.” –Thomas Jefferson

“… The modern theory of the perpetuation of debt has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating.” -Thomas Jefferson

james
James Madison

“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.” -James Madison
http://www.themoneymasters.com/the-money-masters/famous-quotations-on-ba...

PGR88's picture

The computer and cell phone industry has been in deflation for the last 30 years.  Prices per unit of computing power have been dropping drastically.

If consumers are deferring purchases, why are Apple, Google, Facebook, etc.. the most valuable companies in the world?

Kickaha's picture

We are in drastic need of somebody to create a clear definition of "inflation" and "deflation".  

There has been no deflation with cell phone and computers.  Their prices have come down over time.  That is not "deflation" as I have understood the term.  I don't think it makes any sense whatsoever to talk about "inflation" or "deflation" of a particular product or service.  "Inflation" and "deflation" are terms to apply to the overall effect of increases or decreases in the money supply on the pricing in dollars of all goods and services.  I will concede that central bank or federal government policies can cause inflation or deflation in a particular sector.  Those people who are first in line to get newly created money in their wallets might have a tendency to spend it heavily in one particular segment of the economy, e.g. - the rich and the stock market.  But having the price of a product decline should never be described as "deflation" unless prices of all products measured in dollars are declining as the direct result of a contraction in the money supply.

Deflation is usually described as something to be feared and avoided.  In a world awash with debt, it would certainly make it far more difficult for any of that debt to be repaid.  On the other hand, if, due to more efficient resource extraction, more efficient shipping methods, technological advances, and increased overall productivity, the price of something drops continuously due to competition in the market for that product, that is not only a wonderful thing, but the entire purpose of a free market economic system.  

That's why Apple is a valuable company.  I'm not sure why Facebook has any real value.

The Ingenious Gentleman's picture

Re Apple products, they buy an iPhone with the understanding that it will be obsolete for their purposes within a year anyway.

As for Google and Facebook, what do consumers buy from them?

kaiserhoff's picture

Finally, a writer who understands the difference between QE and money printing.

QE will not go on forever.  Governments are coming up against real barriers such as negative interest rates, and no bond liquidity.

TheRideNeverEnds's picture

What's to stop the FED from buying bonds at negative rates?

I could see a world where the fed funds is negative but civilians still pay 20%+ APR on credit cards and 5% on auto loans. More money for the banks and a free ride for .gov which means everyone (who matters) wins.

kaiserhoff's picture

The short answer is disintermediation.  Banks are less relevant every day.  Negative rates would wipe them out, and the Fed's masters would not be amused.

LawsofPhysics's picture

Now that money creation no longer requires any sort of real collateral, bankers and financiers are fucking useless overcompensated middlemen between the printer/computer and the producer/consumer in the real economy.  The real market will eliminate them, "full faith and credit" etc.

Remember when banks were actually banks and a safe place to store your real assets?

Let the motherfuckers slit their own throats.