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The End Of The Fed's "Interest Rate Magic Show" Looms
Submitted by Aswath Damodoran via Musings On Markets,
The Fed, Interest Rates and Stock Prices: Fighting the Fear Factor
If it feels like you are reading last year’s business stories in today's paper, there is a simple reason. The Federal Reserve's Open Markets Committee (FOMC) meeting date is approaching, and in a replay of what we have seen ahead of previous meetings, we are being told that this is the one where the Fed will lower the boom on stock markets, by raising interest rates. While this navel gazing may keep market oracles, Fed watchers and CNBC pundits occupied, I think that the Fed’s role in setting interest rates is vastly overstated, and that this fiction is maintained because it is convenient both for the Fed and for the rest of us. I think that there are multiple myths about the Fed’s powers that have taken hold of our collective consciousness, and led us into an investing netherworld. So at the risk of provoking the wrath of Fed watchers everywhere, and repeating what I have said in earlier posts, here are my top four myths about central banks.
1. The Fed sets interest rates
Myth: The Federal Reserve (or the Central Bank of whichever country you are in) sets interest rates, short term as well as long term. In my last post on this topic, I mentioned my tour of the Federal Reserve Building, with my wife and children, and how sorely tempted I was to ask the tour guide whether I could see the interest rate room, the one where Janet Yellen sits, with levers that she can move up or down to change our mortgage rates, the rate at which companies borrow from banks and the market and the rates on US treasuries.
Reality: There is only one rate that the Federal Reserve sets, and it is the Fed Funds rate. It is the rate at which banks trade funds, that they hold at the Federal Reserve, with each other. Needless to say, not only is this an overnight rate, but it is of little relevance to most of us who don't have access to the Fed windows. While there is a tenuous link of Fed Funds rate to short term market interest rates, that link becomes much weaker when we look at long term rates and their derivatives.
Why preserve the myth: Giving the Fed the power to set interest rates gives us all a false sense of control over our economic destinies. Thus, if rates are high, we assume that the Fed can lower them by edict and if rates are too low, it can raise it by dictate. If only..
2. Low interest rates are the Fed’s doing
Myth: Interest rates are at historic lows not just in the United States but in much of the developed world, and it is central banking policy that has kept them there, through a policy of quantitative easing The myth acquires additional sheen when accompanied by acronyms such as QE1 and QE2, which bring ocean liners to my mind and a nagging fear that the next Fed move will be titled the Titanic!
Reality: The Fed has had a bond-buying program that is unprecedented and large, but only relative to the Fed's own history. Relative to the size of the US treasury bond market (about $500 billion a day in 2014), the Fed bond-buying (about $60-$85 billion a month) is modest and unlikely to have the influence on interest rates that is attributed to it. So, what has kept rates low? At the risk of rehashing a graph that I have used multiple times, it is far simpler and more fundamental, and it lies in the Fisher equation, which decomposes the nominal interest rate into its expected inflation and real interest rate components:
Nominal Interest Rate = Expected Inflation + Expected Real Interest Rate
If you make the assumption that in the long term, the real interest rate in an economy converges on real growth rate, you have an equation for what I call an intrinsic risk free rate. In the graph below, I graph out the actual US 10-year treasury bond rate against this intrinsic risk free rate and you can make your own judgment on why rates have been low for the last five years.'
To me, the answer seems self evident. Interest rates in the US (and Europe) have been low because inflation has been non-existent and real growth has been anemic, and it is my guess that rates would have been low, with or without the Fed’s exertions. In fact, the cumulative effect of the Fed's exertions can be measured as the difference between the intrinsic risk free rate and the US treasury bond rate, and during the entire quantitative easing period of 2008-2014, it amounted to about 0.13%. It is true that the jump in US GDP in the most recent quarter has widened the difference between the treasury bond rate and the intrinsic interest rate, but it remains to be seen whether this increase is a precursor to more healthy growth in the future, or just an one-quarter aberration.
Why preserve the myth: I think it is much more comforting for developed market investors to think of low interest rates as an unmitigated good, pushing up stock and bond prices, rather than as a depressing signal of future growth and low inflation (perhaps even deflation) in much of the developed world. That problem will not be fixed by Fed meetings and is symptomatic of shifts in global economic power and a re-apportioning of the world economic pie.
3. The reason stock prices are so high is because rates are low
Myth: Stock prices are high today because interest rates are at historic lows. If interest rates revert back to normal levels, stock prices will collapse.
Reality: Low interest rates have been a mixed blessing for stocks. The low rates, by themselves, make stocks more attractive relative to the alternative of investing in bonds. But if the low rates are symptomatic of low inflation and low real growth, they do have effects on the cash flows that can partially or completely offset the effect of low rates. One way to decompose the effects is to compute forward-looking expected returns on stocks, given stock prices today and expected cash flows from dividends and buybacks in the future to see how much of the stock price effect is fueled by interest rates and how much by cash flow changes. If this bull market has been entirely or mostly driven by the drop in interest rates, the expected return on stocks should have declined in line with the drop in interest rates. In my most recent update on this number at close of trading on August 31, 2015, I estimated an expected return of 8.50%, almost unchanged from the level in 2009 and higher than the expected return in 2007.
At least based on my estimates, the primary driver of stock prices has been the extraordinary fountain of cash that companies have been able to return in the last few years, combined with a capacity to grow earnings over the same period. By the same token, if you are concerned about cash flows, it should be with the sustainability of these cash flows, for two reasons. The first is that earnings will be under pressure, given the strength of the dollar and the weakness in China, and this is starting to show up already, with 2015 earnings about 5-10% below 2014 levels. The second is that companies will not be able to keep returning as much as they are in cash flows; in 2015, the cash returned to stockholders stood at 91% of earnings, a number well above historic norms. In the table below, I check to see how much the index, which was at 1951.13 at the close of trading on September 3, would be affected by an increase in interest rates (increasing the US 10-year T.Bond rate from the 2.27% on September 3, to 5%) as contrasted with a drop in cash flows (with a maximum drop of 25%, coming from a combination of earnings decline and reduced cash payout): If you hold cash flows constant, an increase in interest rates has a relatively small effect on stock prices, with stock prices dropping 8.76%, even if the US T.Bond rate rises to 5%. In contrast, if cash flows drop, the index drops proportionately, even if interest rates remain unchanged. You are welcome to make your own "bad news" assumptions and check out the effect on value in this spreadsheet.
Why preserve the myth: For perpetual bears, wrong time and again in the last five years about stocks, the Fed (and low interest rates) have become a convenient bogeyman for why their market bets have gone wrong. If only the Fed had behaved sensibly and if only interest rates were at normal levels (though normal is theirs to define), they bemoan, their market timing forecasts would have been vindicated.
4. The biggest danger to the Fed is that the market will react violently to a change in its interest rate policy
Myth: The biggest danger to the Fed is that, if it reverses its policy of zero interest rates and stops its bond buying, stock and bond markets will drop dramatically.
Reality: While no central bank wants to be blamed for a market meltdown, the bigger danger, in my view, is that the Fed does what it has been promising to for so long, and nothing happens. That is a good thing, you might say, and while I agree with you in the short term, the long-term consequences for Fed credibility are damaging and here is why. The best analogy that I can offer for the Fed and its role on interest rates is the story of Chanticleer, a rooster that is the strutting master of the barnyard that he lives in, revered by the other farm animals because he is the one who causes the sun to rise every morning with his crowing (or so they think). In the story, Chanticleer’s hubris leads him to abandon his post one morning, and when the sun comes up anyway, the rooster loses his exalted standing. Given the build up we have had over the last few years to the momentous decision to change interest rate policy, think of how much our perceptions of Fed power will change, if stock and bond markets respond with yawns to an interest rate policy shift.
Why we hold on to the myth: If you buy into the first three myths, this one follows. After all, if you believe that the Fed sets interest rates, that it has deliberately kept interest rates low for the last five years and that stock prices are high because interest rates are low, you should fear a change in that policy. Coupled with China, you have the excuses for your underperformance this year, thus absolving yourself of all responsibility for your choices. How convenient?
What next?
Over the last five years, we have developed an unhealthy obsession with the Federal Reserve, in particular, and central banks, in general, and I think that there is plenty of blame to go around. Investors have abdicated their responsibilities for assessing growth, cash flows and value, and taken to watching the Fed and wondering what it is going to do next, as if that were the primary driver of stock prices. The Fed has happily accepted the role of market puppet master, with Federal Bank governors seeking celebrity status, and piping up about inflation, the level of stock prices and interest rate policy. Market watchers, journalists and economists have found stories about the Fed to be great fillers that they can use to fill financial TV shows, newspaper and opinion columns.
I don't know what will happen at the FOMC meeting, but I hope that it announces an end to it's "interest rate magic show". I think that there is enough pent up fear in markets that the initial reaction will be negative, but I am hoping that investors move on to healthier, and more real, concerns about economic growth and earnings sustainability. If the Fed does make its move, the best news will be that we will not have to go through more rounds of obsessive Fed watching, second-guessing and punditry.
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The Fed is so fucked.
:)
Why do I feel like I just sat through an Amway presentation?
What? You don't believe the economy will take off any second now? Well tsk......
Seriously, does anyone know why the FOMC meeting next week is on Wed/Thurs instead of the usual Tues/Wed? I just checked the Fed's website to verify this.
So they can raise rates on Thursday, see what happens to markets on Friday, push TARP II through Congress by market open Monday?
it's Almost Like a REALITY Show... (Just Weirder)
I don't know what will happen at the FOMC meeting, but I hope that it announces an end to it's "interest rate magic show"
So, you're saying, you hope the Fed will make a decision that may be advantageous to mainstreet "savers" and disadvantageous to WallStreet Big Money Borrowers?
.....ain't gonna happen. Wall Street Parasites will win every time.
I do not believe the Fed will raise rates, but this isn't because of anyone pressuring them or because of jobs or economic data; not directly, anyway. The Fed funds rate follows the 3m t-bill. Currently the 3m/90d is not signalling a rate increase, and therefore they will not increase the Fed funds rate. Simple as that. Once 3m treasuries start to spike in a meaningful way, they will raise rates.
+1 for the FED follows rates not sets them----- (0) for the call on the 3m/90d ---
http://www.barchart.com/economy/treasuries.php
all t bills are signaling rates on the rise--3m, 6m, 1yr etc ---
IMHO, the yield curve is widening, but the 3m is still sitting within the range it has been for years. Looking at my charts out of Eikon and Stockcharts, the 3m is still flatlined more or less. Even on those small charts you just pointed to, the 3m just had a small tick that came right back down again. So I'm still sticking with my no rate increase.
With all the turmoil around the world, short-term US debt is still the go-to for preserving wealth. As our stock market begins to deteriorate, I suspect this will only increase demand for it. After all this is said and done, I believe the US will more or less be finally seen as insolvent and rates will begin to reach for the moon.
Notes and Bonds seem to be tracking in the opposite direction to the Bills--so I'm not sure I'd agree with your long term call.
I think we both would agree that we can all thank the Fed for living in times without precedent. :) The Fed with all of it's QE has been an enabler to all the risk taking and public/private debt explosion.
With all the turmoil around the world, short-term US debt is still the go-to for preserving wealth. As our stock market begins to deteriorate, I suspect this will only increase demand for it. After all this is said and done, I believe the US will more or less be finally seen as insolvent and rates will begin to reach for the moon.
Yep, that comes after they've siphoned up all the 'scared' money and are forced to resume printing again, how ever long that takes.
WE will NEVER STOP.........WE want MOAR and MOAR and MOAR.......we are GAWD!!!!
good lord, i hardly ever comment here, but who the hell in this douchebag writing this? obviously has no clue how things unfold......he is the one who would jump off the bridge because everyone is doing it.
if it was a free market for interest rates, the base rate would be minimum 10-15% to prevent people/government/companies from borrowing more money, and live within their means.....we already have the biggest debt load in the history of the world.....fixing debt by making more debt is a total illusion...lets get rid of these douchebags.
Agreed with getting rid of the douchbags. What you described about where interest rates should be is not how the market works. The fed rate is determined by the 3 month treasury rate. You say it isn't a free market in rates, but it is. There is enough demand in 3 month U.S. debt that the fed will not raise rates. There is a long established relationship between the 3 month and the fed funds rate. I can easily produce charts showing this historical correlation. Once there is less demand for short term government debt and yields spike, the fed will raise rates.
HEY YELLEN!!
GO NEGATIVE!!
YEAH BABY!!
"I don't know what will happen at the FOMC meeting, but I hope that"
swat teams move in arrest them all for treason and a branch of the military takes over operations until such time that they convert the system into an open source publicly owned financial system and arrest warrants are issued for Blankfein and Dimon.
No there are other factors why share prices are so high,poor accounting standards that allow Enron like practices such as one division selling to another showing up as 'sales',.
Others include companies buying their own stock,in the case of Tesla and many others irrational exuberence,in the case of Amazon which hasn't ever turned a profit flawed analysis and valuations,in the case of Apple whose manufacturing is largely subcontracted an over emphasis on goodwill the list goes on; but the true value is what is it worth if they turn the lights off and send the bankruptcy auditors in,in the case of twitter,facebook and many others thats a scary thought.
What happens when they run out of money (crappy earnings) to buy their own shares? FED gives 'em cash to keep up the ruse?
No the Fed doesn''t give non-banking institutions cash but there are off balance sheet items,and if your prepared to pay for it GE and others can act as a treasury
I think the source of our unhealthy attention on The Fed is because starting 40 years ago the entire global economy became a fiction. And by that I don't mean a "fiat fiction because gold" but an actual fiction made up of stories we were telling ourselves about how globalism was going to offset the decline of the Western middle class as meaningful jobs were sent over-seas. That was obviously a fairy tale of the first order. But we believed because we had no other choice -- because we were pawns and powerless -- and the prime author of the fairy tale of globalism was American industrial giants, and their beloved pied piper playing his lute leading the rest of us over a cliff was the impish Alan Greenspan followed by Good Old Uncle Ben Bernanke.
We were all fools easily led by the nose and we are now going to suffer for it.
Stopped reading half way through #2. Paul Volcker raised rates big time to drive down inflation and succeeded, so please don't tell me that the FED doesn't control interest rates.
The Shit storm is about to happen, Sept 17th the majic date.
Sensible explanation of how interest rates work and why they are low (not QE) and then a hypothesis that assumes the 10yr goes from 2.25% to 5% - which makes no sense unless you are a banker, a red official or an academic (the later two work for the first one anyway).
Fact: The Fed prints money and hands it to fascist cronies who then drive the entire economy into the fucking dirt.
The rest doesn't matter.
The fed has flown into a box canyon from which not even a helicopter escape can be executed. When the narrow, surrounding cliffs soon come into clearer view, the terminal descent will begin, and can be viewed here, starting perhaps now, or soon:
http://www.investing.com/indices/us-30-futures-advanced-chart
this guy is a NUT JOB!
HE FAILS TO MENTION THE TRUTH OF THE FEDS POWER - "FRAUD, STEALING, AND MONEY PRINTING"! ALL THOSE THAT FOLLOW WILL GET "PAID" THROUGH FRAUD, STEALING AND MONEY PRINTING.
1) 1.5 QUADRILLION PLUS OF DERIVATIVES THE FED USES AS A CONTROL GRID ACROSS ALL "MARKETS" = FRAUD.
2) STEALTH BUYING OF THE ILLIQUID US TREASURIES THROUGH BACKDOOR PROXIES = FRAUD AND STEALING.
3) QE EASING THAT REQUIRES EMISSION OF CREDIT THAT IS "UNBACKED" BY PRODUCTION = FRAUD AND STEALING....
I CAN GO ON - IF YOU WANT ME TO GO ON. I CAN TALK ABOUT THE FRAUD BEHIND THE FED RESERVE NOTE.....OH, AND THEN THERE IS "BIRTH CERTIFICATES" TO CHAT ABOUT AND.............ALL FRAUD! CAN I HEAR AN "AMEN"....
At least he didn't resort to all-caps.
Might be using an old Teletype ASR-33 - caps only
Wat?!
Where do you start with a guy like this, a finance prof at NYU who, in attempting to set up a team of strawmen, proceeds to trip all over them?
ZH Admins, please look into this: I was able to post with someone else's credentials for some reason, the "Brown Brother" comment above is actually mine. I just loaded the main page, and was logged in as him. WTF
That means the NSA is tracking you.
Yea, I tried replying to another post(pro FED) and my 'puter froze up. The FED is not amused!
It's fine but if you end up logged in as me some time be sure you adhere to the following while posting:
-- Global warming is real and mostly caused by humans;
-- 9/11 was a tragic and lethal collision of cultures rather than a hoax;
-- The fracking industry is a financial ponzi and therefore doomed;
-- Obama is a tool indeed but no more than any other office holder;
-- The NWO is a fable born of our preoccupation with our own lost empire;
-- Snarky Tyler is a treasure to mankind; and
-- All human activity is an illusion and we but await the dawn.
Otherwise have fun being me and enjoy being a cat, cats totally rock.
Wrong on so many levels.
"While no central bank wants to be blamed for a market meltdown, the bigger danger, in my view, is that the Fed does what it has been promising to for so long, and nothing happens."
I think the bigger danger for the FED is that they DO NOTHING i.e. keep interest rates at zero and the markets break anyway. At that point they are screwed because it will be clear that the downturn is real and it is a global affair plus the Fed is out of bullets given zero interest rates. Can't go below zero, so now what. Once the collapse starts, panic will follow.
Wrong. The Fed controls everything, you'd know that if you had actually asked to see the interest rate room.
This guy: paid schill ... Goldman-Sach's disinformation agent ... total academic douche.
doesnt matter how we get there, number 4 is correct. if the fed keeps going on the same trajectory things will not end well. we wring our hands over rogue asteroids and black swans, but in fact staying locked into a bad policy is the real culprit. the fed should have never gone ZIRP in 2008, they should have raised rates in order to price risk and let the markets sort it out. myth 5, the fed is independent. the fed is carefully controlled, although obama chose to remain with bernanke, for six years, whjile he was privately unhappy, (he's not happy with michelle either) he replaced him with his clone. of course we know obama is carefully controlledl. dont you feel enlightened that america finally has a member of the former slave class as president.
while he was privately unhappy
Oh, really? Wouldn't Bernanke tell him where the other seven states were located?
dont you feel enlightened that america finally has a member of the former slave class as president
Thank you. Debt slavery, where the white Goy go to work to feed the black Goy. How appropriate.
interest rates are now, so corrupt hedgefunds and mega banks can gamble....has little to do with normal people and business borrowing. Death to the Mega Banks! Having Zero interest rates so some fucktard 25 year old bond trader can make $5 Million a year....is beyond insane!
QE is a liquidity swap. Cash is more liquid that debt instruments. If one thinks of the money supply as consisting of both debt instruments and money, then there is a ratio of debts to money.
Another money supply is banker reserve loops. Banker reserve channels have a weak transmission path if any to real transaction money supp. ( I say weak, because banksters can be sneaky and unless one is an insider it is hard to have perfect information.)
Scenario 1 – Bank sells $100 in t-bonds to Fed. This would be TBILLs being sold out of Banker Reserves.
This means that FED buys Tbills out of banks reserve account. Private banks actually have their reserve accounts at the FED.
Federal Reserve balance sheet:
Change in Assets = +$100
Change in Liabilities = +$100
Change in Net Worth = $0
Banks balance sheet:
Change in Assets = $0 (t-bond is swapped for reserves)
Change in Liabilities = $0
Change in Net Worth = $0
A non banks is something like GE Capital – a shadow bank. Shadow banks like to loan short term to small and medium sized business.
Scenario 2 – Non-bank sells $100 in t-bonds to Fed where private bank acts as intermediary
Federal Reserve balance sheet:
Change in Assets = +$100
Change in Liabilities = +$100
Change in Net Worth = $0
Banks balance sheet:
Change in Assets = +$100 (reserve assets increase)
Change in Liabilities = +$100 (deposit liabilities increase)
Change in Net Worth = $0
Non-bank public balance sheet:
Change in Assets = $0 (non-bank sells t-bond and obtains deposit)
Change in Liabilities = $0
Change in Net Worth = $0
The buying of TBills from a non bank entity effectively UN-PRINTS the Tbill.
In the case of QE money aimed at reserve loops, it is a liquidity swap and reserves have weak transmission path if any. Buying bonds (like a TBill) does lower interest rates, so this action is FED policy tool to lower rates, and hence more people may show up to take out more “new loans.” New loans means more bank credit being emitted into real economy.
Think of lowering interest rates as a valve to induce people to take out new loans. But if people are already in DEBTS too much for their wages, are they going to rush out and take out new loans?
No. Well some sheeple with no ability to restrain themselves willingly become debt slaves.
The buying of TBills from Shadow Banks effectively unprints them, so there is more money and less debt instruments in real economy.
However, the net asset position of money supply did not change.
What did change is that banks former crap paper, like MBS were paid fully at face value with QE money. QE money also by buying bonds holds bond price high, and interest rates low.
Interest rates held low and aimed primarily at bankers - then allows them to make loans to themselves and others who have access to cheap credit. This class of people do not use the credit to improve industry or productivity. The gamble with it instead.
All equivocating gooble-dee-gook until this:
"Why preserve the myth: For perpetual bears, wrong time and again in the last five years about stocks, the Fed (and low interest rates) have become a convenient bogeyman for why their market bets have gone wrong. If only the Fed had behaved sensibly and if only interest rates were at normal levels (though normal is theirs to define), they bemoan, their market timing forecasts would have been vindicated."
Even mealy-mouthed, equivocating professors can't help but show their hand...
Did the FED buy back trillions in bad loans from banks by miraculously print money out of nothing? Did they not purchase Government debt pushing yields lower? Did mark to market vanish back in 2009? Has bullshit accounting practices led to miraculous profits for corporations? Hasn't corporate debt also hit all-time high with all these buybacks? When NON GAAP is the new norm, when broke nations borrow money for nothing than yes the magic FED is behind everything.
In the end when a new currency is created and the people that own the FED own everything once more, land, corporations, the printing press and the government maybe Aswath will get it. Until then just more prattle from a very intelligent moron.
in the first depression they took the family farm, in the next depression they will take the family home
They, actually, already have. It happened several decades ago(70's). Only about 1 in 5 homeowners are mortgage free. Don't even get me started on property taxes. Most people rent their home from the bank.
Old debt that is re-mortgaged for new debt just brings the future foward to today.
That is effectively what happened with QE.
QE then allowed another debt cycle with people taking out new loans.
However, against this backdrop was the off shoring of jobs and financial shenanigans like carry trades.
The financial class is then DRAINING productivity and transaction money away from laboring producers. Speculation instruments like derivitives and swaps ultimately will demand to be paid from real producers. For example, interest rate swaps are typically held low, so municipalities have to tax their citizens, and hence it is a rent scheme for fianance.
Or brokers in wall street churn stocks, to then take fees.
Or bankers engage in carry trades, inflating other economies, and then distorting exchange rates.
Or finance does HFT to "look ahead' at prices, and then siphons a little for themselves by front running.
But, the main problem with QE is that producers are not able to transact equally with other producers. The "debt" means that there is always something being siphoned away.
This then means that Say's law is broken. It is not a circular flow of producers buying from producers.
Siphoning off of productivity toward finance is the action of a parasite.
The parasite gets this power because we gave it to him when we allowed banks legal power to coin money. Actually bankers maneuvered and bribed their way into gaining this power for themselves.
Private banks should not have money creation power - this power belongs to the people, not a select group of self appointed oligarchs.
Nothng good can come of this extreme power held in unlawful hands.
sovereignmoney.eu
Watch the long end.
That is all.
http://www.zerohedge.com/news/2015-09-04/what-does-it-mean-if-fed-hikes-...
The FED helicopter dropped cash onto finance by spending into banker reserve channels, and buy buying bonds from non bank entities.
By buying bonds from shadow banks, that actually limited their "credit" creation power. This is why companies like GE capital are exiting the business.
Banker's asset positions were held high by the spending into reserve loops. MBS paper especially had collapsed in 2008 as it was tranched with ninja loans and other deadbeat creditors.
Also, Sheriffs were hot on the heals of banksters due to robosigning scandal. The chain of law for mortgages had been broken, so they were forging documents.
But, by buying up MBS helped to vaporize evidence of fraud.
Bond price high, interest rates low. Savers then are attracted to equities instead of bonds. Bond price is held high by QE purchases.
Money then funnels into stock market in pursuit of yield. Of course this yeild is not real, it is just unnatural flows of money chasing after stocks in supply /demand error.
As stocks go up, some even take out new loans at cheap rates, to then gamble in stock run ups. This means that stock market is not doing price discovery.
In meantime, wall street continues in China Gambit to offshore jobs - looking for profits by way of wage arbitrage.
Notice that credit creation by banks aims at finance, insurance and real estate. FIRE.
Double entry ledger likes fungible assetts for its mechanics to work.
So, swapping of unlike papers - for example MBS for Cash is not an equal trade. It benefited the holders of MBS by allowing purchase at face value. MBS were not marked to market in their true lower fradulent price.
FIRE mostly makes people go into debt for mortgages, hence run up in housing bubble.
By overpricing land and housing, it is yet another whack against the head of labor. Labor's output is then stolen in high prices. These high prices must be recovered in wages, but that then makes a financialized economy too inefficient to compete on the world stage.
China's banking system is 80% state banks, and this means their debt instruments and credit are not aimed at FIRE, but instead are aimed at industry.
Therefore, WAGE ABRITRAGE IS PERMANENT. Off shoring from the more inefficient economy will contine toward the more efficient one.
Finance predators then have created a cancer system for laboring American producers, and hence parasites are now vultures consuming ever increasing dead economy.
+1 for the comments
http://english.pravda.ru/opinion/columnists/07-09-2015/131840-US_governm...
Definitively need another reset a la fall of Iron courtain to extort money from new colonies. 1990's were great
Lets look at this in a purely logical way. If deflation is occurring because less money is being taken in than the chance of default should be increasing. If the CB's dont force yeilds lower, than one would expect to receive a higher rate of interest by loaning money to those that have less of a chance of repaying those loans. By artificially buying sovereign debt through printing of fiat the CB's have influenced interest rates on everything, since investors chase yeilds.
Money like everything else is about supply and demand. The fact that through money printing money has become cheaper. The more that's out there the less value it has.
I read an article the Krugman penned a month or so ago mocking the hyperinflation crowd where he stated they were wrong, because banks had basically built up 2 trillion dollars at the FED. He stated that this was a good thing to build capital. What I thought was nonsensical about this point was no mention of how they got it or what they're going to do with it.
Of course this was from the same guy that said deficits mattered from 2001-2008 and didn't matter after the oval office was occupied by his party.
In the end printing money cheapen it. Cheapening it for a small percentage of people makes it all worth less for the majority. What use to be a decent amount of income or savings is now less and less because there is more out there.
Corporations firing people or using profits or debt to buyback shares doesn't grow the business it shrinks it.
"I read an article the Krugman penned a month or so ago mocking the hyperinflation crowd where he stated they were wrong, because banks had basically built up 2 trillion dollars at the FED. He stated that this was a good thing to build capital. What I thought was nonsensical about this point was no mention of how they got it or what they're going to do with it."
That's counterfeiting. Those debts weren't worth much. Now, the banks get interest paid(.25%) on the cash they were given($2.5 Trillion), with more to come in interest. http://www.federalreserve.gov/releases/h3/current/ http://www.federalreserve.gov/monetarypolicy/20150618a.htm http://www.federalreserve.gov/monetarypolicy/files/bcreg20150618a1.pdf They will raise rates and pay banks more on excess reserves. They've said so since April, but I haven't seen it reported. So, as long as the banks can remain afloat on higher interest (including that on excess reserves) offsetting any defaults, rates will rise. And when things crater? Taxpayer bailouts, of course. Heads we win, tails you lose.The end, or the next act?
Is this guy related to Krugman? Was this posted to ZH ironically??
I'll concede that there is a half-truth to the article in that the Fed does not have omnipotent control over all interest rates, but that doesn't mean it doesn't have a profound influence. The fact remains that ZIRP/QE has greatly distorted the world economy.
They need more debt issued because they've already soaked up most on the market. W/o new debt issuance, rates will go negative as people seek 'safety'. I'm sure their puppets in CONgress will add another $2 Trillion of US debt by Oct. 1st. That adds another 11% to debt outstanding to keep the fiat train rolling.
Complication seems to directly correlate with corruption, just like the US tax code. For years people have tried to explain this nightmare.... "this becomes collateral for that and that and this will be sold to them and will be swapped for that" etc,.
You see brilliant people debating what the hell is going to happen with the Fed, the entire banking system and derivatives but the result of of all of this debate never seems to end in any true consensus. Watching this completely convoluted and overcomplicated issue and the attempts to dissect it just screams of an intentionally convoluted corruption that is not possible to fully understand. I'll I can figure any more is that they will pull the plug on us when they are ready.
Please ZH, no more articles by Asswipe Damnedmoron.
The real reason interest rates are hanging low and long.
Zirpgasms are about a billion times more fun than a three-way with Tom Brady and his wife Gisele Bündchen.
Even the straightest guys at ZH, who don't usually swing both ways (I won't mention names), would love to let Tom hand off their under-inflated balls.
From SWASS
His below comment is not true. Open market operations by FED are there specifically to control interest rates. The FED does repos and reverse repos to control interest rates within a window. The FED does buy TBills out of reserve loops. The FED does pay for MONEY now in reserves to prevent a collapse to zero on overnight market.
The FED even has a plunge protection team for CRYING out loud.
With regards to overall interest rates, they are a lagging indicator. The credit driven economy declines, and then the FED responds by lowering rates. Conversely, it runs away with a credit driven spiral, and it raises rates.
The market does not and never has been a "perfect" place to find prices, as if it was God.
If the FED targets the short end of the yield curve, (which they do) they do it on purpose, it is not the markets.
NOT TRUE. Please don't confuse ZH readers. Monetary Mechanics are exactly as I described.
The output of these mechanics makes for entirely predictable results.
Rates will stay low as long as the rest of world Central Banks continue to QE. Both Japan and ECB are doing QE operations, while the U.S. has dropped back some.
The real question is what kind of QE are foreign CB's doing?
The SWISS CB has recently showed in its annual report that they are holding large chunks of Mutual Funds and APPLE STOCK.
This would be something new, supporting equities directly, and further indicates that markets are RIGGED.
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Agreed with getting rid of the douchbags. What you described about where interest rates should be is not how the market works. The fed rate is determined by the 3 month treasury rate. You say it isn't a free market in rates, but it is. There is enough demand in 3 month U.S. debt that the fed will not raise rates. There is a long established relationship between the 3 month and the fed funds rate. I can easily produce charts showing this historical correlation. Once there is less demand for short term government debt and yields spike, the fed will raise rates.
Thanks, I needed a laugh.
From DavO
"I read an article the Krugman penned a month or so ago mocking the hyperinflation crowd where he stated they were wrong, because banks had basically built up 2 trillion dollars at the FED. He stated that this was a good thing to build capital
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Krugman is a Neo-Classical economist, who completely does not understand that banks CREATE NEW CREDIT when they make loans.
This is beyond debate, and to have a Nobel prize winner not understand this is beyond laughable - it is sad.
Steven Keen has totally dismantled Krugman. Krugman thinks that banks intermediate savings, hence his postion on Capital.
BANKS DO NOT INTERMEDIATE SOMEBODY ELSES SAVINGS.
Banks create new credit upon hypothecation by marking up accounts. A liability and an asset are created simultaneously.
Actually, people like Krugman are pathetic.
One reason I'm so hard on Jews specifically, is that I have gone through almost the entirety of monetary history, and so very often, they spew nonsense. It is almost the exception when you find honest commentary, and this is often toward the end of life when they are feeling guilty. For example, Marx showed a lot of remorse, as if he was being coerced.
This nonsense is actually propaganda... a smoke screen to cover rents taken in the monetary sphere. A good parasite will emit toxins and chemicals in order to control its hosts brain. It is imperative then that privately controlled money system, which generates usury out of banking, then is used to control brain function of sheeple.
All hyperinflations, with the exception of Zimbabwe, are through the exchange rate mechanism.
It is on Krugman to explain how hyperinflation can happen to the U.S.
I doubt he has the mental digits to figure it out, and any claims he makes are based on false understandings.
No hyperinflation in near future. The real problem is that laboring producers of the real economy are not having investment. CREDIT is not being directed into the commons, and households do not have money in supply to pay down private debts.
The FED's helicopter has dropped money over the financial sector, as if that sector has any real bearing on the real economy.
Financial sector is mostly extractive - a rental parasite.