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Will The Fed Have To Save Emerging Markets With QE4?
Submitted by Chartles Hugh-Smith of OfTwoMinds blog,
The risk-off tide is rising, and sand castles of QE will only hold the tide back for a brief period of apparent calm.
A funny thing happened on the way to permanently expanding global markets: unintended consequences. Borrowing cheap, abundant U.S. dollars seemed like a good idea when the dollar was declining, and few voiced any concern when $9 trillion was borrowed in USD-denominated debt around the world in the years since 2009.
Few saw the possibility of the USD rising, or that if it did appreciate against other currencies, that the blowback would destabilize the global economy.
It turns out a strengthening USD has triggered capital flight as other currencies devalue. Anyone propping up their currency to stem the flood tide faces another unintended consequence--a faltering export sector: China: Doomed If You Do, Doomed If You Don't (September 1, 2015).
Meanwhile, the Imperial economy is suffering its own spate of unintended consequences, notably rising yields, a.k.a. quantitative tightening. As emerging markets and nations attempting to defend their currency pegs to the USD sell U.S. Treasury bonds (which have been held as foreign exchange reserves), the yields on the Treasuries rise as a matter of supply and demand.
As supply increases, sellers must offer higher yields to entice buyers to soak up the inventory.
This increase in yields reverses the primary effect of quantitative easing, i.e. declining yields/interest rates in the U.S.
This dynamic undermines both the emerging markets and the U.S. Emerging markets are not really restored to growth by selling Treasuries; the strong dollar continues to crush their currencies and dampen growth, as assets must be sold to pay back debt borrowed in USD.
Rising rates threaten the feeble U.S. "recovery" as well.
So what's the solution to this inconvenient dynamic? QE4, of course. Why would the Federal Reserve launch QE4, if not to push rates down in the U.S.?
The primary reason is not yield suppression in the U.S. but to provide sufficient USD liquidity to everyone in the world who borrowed USD-denominated debt. If dollars are scarce, emerging market assets will have to be sold, and the demand for USD will push the USD higher vs. other currencies.
This creates an unvirtuous cycle in which the strengthening dollar makes it increasingly onerous to pay back dollar-denominated debt, which further pressures emerging market currences and asset valuations.
In the long view, this is the cost of issuing the reserve currency: the U.S. central bank doesn't just have to bail out American debtors and speculators--it also has to bail out international debtors and speculators who gambled with borrowed USD.
The only way to break this unvirtuous cycle is to flood the world with U.S. dollars so borrowers can refinance without having to liquidate assets denominated in other currencies.
One way to issue more dollars is quantitative easing, in one form or another.
This will suppress the rise of the U.S. dollar and give a reprieve to borrowers of USD-denominated debt. But the reprieve will be temporary, as the "growth story" based on borrowing cheap USD to invest in emerging markets and China is broken.
The risk-off tide is rising, and sand castles of QE will only hold the tide back for a brief period of apparent calm. QE4 will fix nothing on a fundamental level.
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How many emerging market nations are also planned economies?
Planned economies fail and fail big.
It's just that simple.
The Fed would not be doing this if they had to earn the money to do so-unlike you or I.
Oh knock it off with the QE 4 hopium bullshit already!
It's not going to happen because it CAN"T!
Duh
Next time don't peg your MF currency to the dollar.
QE4 can only happen if China and other foriegn governments are dumping USTs, and then in that case, it kinda has to happen.
Such are the burdens of having the world's reserve currency. When the rest of the world goes pear-shaped you have to print money to save them so they can in-turn save you. Or something like that.
I think my head is going to explode.
SHUT.IT.DOWN
Hey Old Yeller, where is that helicopter drop Ben promised everyone?
Its not China. It is someone in Belgium. They are the ones selling.
China took the day off, remember?
Exactly. The Fed isn't going to do QE4 so third world countries can hang on to their precious assets. If they want to keep their assets, they'll have to trash their currencies. The Fed (the US banking cartel) will not hike rates PRECISELY to put strain on all EM assets so the US banks can scoop up all these assets on the cheap with the almighty strong dollar.
All your assets belong to US.
LOL! A better question to ask is "will people in emerging markets accept FRNs"? If so, for how much longer?
If you put all of your resources towards betting that people will quit accepting FRNs, it had better be in a way that allows you to live in a world dominated by FRNs. Something about markets being irrational longer than you can remain solvent.
no shit, 100+ years and counting, but remember, things like this usually happen very slow then "all of a sudden"...
interesting times either way.
When all you have is a QE prick, everything looks like a balloon
Its not fucked up enough yet, time to throw more money at it........
QE4 will fix nothing on a fundamental level.
Ah but it will be done anyway. When all you have is a hammer, every problem looks like a nail.
You used the "F" word. Silly rabbit - the only 'F' word that applies here is Fucked.
The next round of QE will actually make things worse for the 99.9......
No The Fed will have to QE to make up for no bond buying by EM
Who is it that really needs to be 'saved', Charles...?
+10000 A FED by and for the mega banks. Can't have the crooks of Wall STreet missing a bonus season
Yes. God forbid these fuckers would have to actually work for a living...
tick tock...
Since they never stopped printing money for themselves, QE4 would just be an increase in the amount of QE3 that they are currently giving away to rich asshole banks.
QE has been an ongoing upwardly curved amount of Federal Reserve scrip given to welfare queen banks ever since it started. Appending a number to QE is a propaganda lie designed to trick people into thinking that QE is not an ongoing process of theft from the American people.
"Help, I'm drowning!"
"Here's an anvil! Grab on! I'll save you!"
The anvil in this little conversation plays the part of QE.
You are unexpectantly still sinking...the first anvil was obviously not heavy enough; have another...trust us, we're experts!
US Federal debt is $210 trillion. The Fed has to save the land of the free to save its own ass.
Feigning altruism while saving your own ass is a neat trick by Old Yeller
That's excluding the over $200 Trillion in unfunded Liabilities. Correct?
Kotlikoff explains:
Kotlikoff says, “I told them the real (2014) deficit was $5 trillion, not the $500 billion or $300 billion or whatever it was announced to be this year. Almost all the liabilities of the government are being kept off the books by bogus accounting. . . . The government is 58% underfinanced . . . . Social Security is 33% underfinanced . . . . So, the entire government enterprise is in worse fiscal shape than Social Security is, but they are both in terrible shape.” So, how much is America on the hook for in the future? Kotlikoff contends, “If you take all the expenditures that the government is expected to make, as projected by the Congressional Budget Office (CBO), all the spending on defense, repairing the roads, paying for the Supreme Court Justices’ salaries, Social Security, Medicare, Medicaid, welfare, everything and take all those expenditures into the future . . . and compare that to all the taxes that are projected to come in, and the difference is $210 trillion. That’s the fiscal gap. That’s our true debt.”
http://usawatchdog.com/financial-system-will-collapse-just-a-matter-of-w...
There you go again introducing intelligence and real facts into the conversation.
Come on man...
Mark to market is dead, stop being intelligent/rational.
It is interesting though, in that case why isn't deflation a good thing, all those liabilites would get less expensive right?
That which cannot be sustained won't be.
you have to take on more debt to save yourself when you have too much debt?
The Fed doesn't save anything. They operate under a search and destroy procedure.
http://www.gold-eagle.com/article/hidden-trillion-qe-monthly-volume
Hey - maybe the MOOK!! above is right after all, just for the wrong reasons...
As long as they pay for my PhD, and you can call me Dr. Q99X2, I don't care.
0.25% rate raise in September, October market melt down, QE4 as a Christmas/Hanukkah present. Bonuses all around on Wall Street of course, that is who the FED works for!
QE4 will fix nothing on a fundamental level.
True. QE will evantually cause more deflation. To unwind the QE, the antidote is helicoptere money in the same amount. Just write a one time $15000 check to 300m Americans. USD may lose reserve currency status due to a drop of about 30% of value and good inflation. However with an increase of rate to 2,4,6,8,10% until next Septamber the damage could be controlled. And than just repo the money. The solutions exist, but they will not make money to the people who have gotten rich in the last 6 years.
And so castles made of sand, fall into the sea, eventually. - Hendrix
https://vimeo.com/104218572
begs the question: How effective have they been at saving the US market?
If I were some EM, I'd tell 'em we don't want their "help".
Stock market is at a record, banker bonuses are huge and the rich are even richer....they saved crooked bankers that is who they saved
Must....save.....banksters....
Do y'all bitchez think Trump will end the FED? LOL.
Well it all depends on the point of view I guess.
Once we squeeze all we can out of the United States, it can dry up and blow away.” Benjamin Netanyahu, 2002
Trump will do nothing to stop the FED, the Wall St and Wash DC fraud and corruption, and he fully supports the NSA, CIA, and the MIC. Other than that, he's a really swell fuckan guy who will deport Mexicans and talk tough to the Chinks.
Sad times at the Hedge reading this bullshit about how great Trump is and seeing his fluffers go on and on about him.
The Fed will not do QE, because now the game is protecting the dollar from excessive failed QE and external forces (QT, anti dollar currency swaps etc.).
The US economy is not about competing and expanding, but more destroying everything that is a threat, such as emerging markets. Dollar strength is about taking a wrecking ball to anything anti dollar.
This is what I believe the Fed will do.
Talk interest rate liftoff as long as possible, maybe into 2016. Begin .25 rate hikes at some point to pain threshold, maybe up to 1.5%. Collapse all markets while QT goes full on, hearding money from stocks into US Treasuries to compensate without more money printing.
Capital controls and gates put in place making it impossible for money to exit bonds.
401 K'S, IRA' s natioalized and also forced into bonds.
Recovery...Rates dropped from 1.5% to negative NIRP, 1.5%.
Game over, dollar saved and a graveyard of negative yielding Treasuries you can never exit.
Just my thoughts
NIRP=lower USD. There is much USD strength from a possible rate increase already included in price that it would be farely sudden drop even if FED hints that there will not be a rate increase, let alone NIRP. QE damage is here already. If they do strengthen we get S&P closer to 1000 than 2000 very soon. Collapsing other markets as well will cause stress in USD. It's a tight corner. Capital controls=loss of international investors. It will save the bonds short term, but who will buy them in the next few years? As stated here a few times, Damned if you do, damned if you don't.
Yes, unfortunately, as has happened over and over before, the supply lines will break in earnest. then the real killing starts.
the fed is already buying chinese owned us treasury paper, when that information finally sinks it, then the party is over, the dollar will collapse
This is happening all over the planet. So what? What part of all fiat and other bullshit paper claims/promises will die don't people understand?
Yes Thunderchief you just nailed it.
Well I don't think that has once been the objective, at any point with any action the Fed or US Treasury took, so all good-to-go from that angle.
They only work to save petrodollar hegemony; and thus of those who are part of that great scheme of things.
No other reason. Titanic passengers all.
When in doubt, take the whole planet hostage.
it's not in the fed's charter to bail out emerging markets, however, they'd probably get away with it because the politicians in washington are either too stupid to understand what the fed is doing or too lazy to confront them about it.
According to MarketWatch.com:
http://www.marketwatch.com/story/panel-of-ex-fed-officials-say-no-rate-h...
Panel of ex-Fed officials say no rate hike will come at September meeting
Published: Sept 3, 2015 1:46 p.m. ET
By Greg Robb
Senior economics reporter
The global economic outlook has worsened since the Federal Reserve’s last meeting in July, which will lead the U.S. central bank to hold off on lifting interest rates in September, a panel of former Fed officials agreed Thursday.
The global economic situation has deteriorated and “not by a trivial amount,” said Joseph Gagnon, a former Fed staffer and now senior fellow at the Peterson Institute for International Economics.
Global stock markets are down 5% to 10% since the Fed last met, and the dollar is up 2% on a broad trade-weighted basis, he noted.
“The Fed has cultivated this recovery so carefully, with such enormous effort, for over the last seven years — are you really going to take the risk in this environment with unstable global financial markets and real macroeconomic questions about the global outlook that are not just about volatility?” asked Julia Coronado, chief economist at Graham Capital Management .
The former Fed officials spoke at a panel discussion sponsored by the Brookings Institution.
Jon Faust, a professor of economist at Johns Hopkins University and a former adviser to Chairwoman Janet Yellen, said Fed officials will delay, awaiting the “macrosignal” behind the recent market turmoil.
Donald Kohn, who served at the Fed for 40 years and ended up as its vice chairman, said two things would make him hesitate to hike rates if he were voting at the September meeting: very low inflation and low market expectations of a September move due to recent market volatility.
Kohn said he would want the Fed statement after its September meeting to stress that rates will rise before the end of the year. “That will help build in the expectation of higher rates later this year and put that in the markets, so when I finally did move it wouldn’t be such a surprise,” he said.
Fed officials have argued that the timing of the first rate hike doesn’t matter as much of the path of interest rates. They have stressed that the rate path is likely to be a gradual one.
Coronado took issue with this, saying it was “not entirely true for the markets that translate Fed policy.” A September move would be a “big surprise” and viewed as a “policy mistake,” she said.
Coronado said there were less than 20% chance of a rate hike in September. Gangnon, Kohn and Faust said the odds were higher but still less than 50%.
why wouldn't all em's sell ustry's, fire up thier printing presses buy gold, negociate your debts with brics, aiib, or eruo-asian group, or china using your gold as colatteral, and make sure your partners have a seat at the sdr's table.
or just put your country on the BIS auction calender,"ie greece".
Isn't QE like a bartender watering down his whiskey?