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Guest Post: Mental Contortions Of A Printing Machine Operator

Tyler Durden's picture




 

Submitted by Alexander Gloy of Lighthouse Investment Management

Mental Contortions Of A Printing Machine Operator

“We never pre-commit” is the standard answer the ECB (European Central Bank) has for anyone asking about future interest rates (journalists regularly waste one of their two permitted questions at ECB press conferences).

Why should central bankers not indicate future interest rates decisions? Because market participants will price that information accordingly, so the announcement would have no or even a counter-intuitive effect on markets. This could potentially undermine the central bank’s credibility.

If central bankers want to keep their ability to influence asset prices, they need to keep markets guessing about future actions.

What on earth then is the Federal Reserve (“Fed”) doing?

The FOMC (Federal Open Market Committee) published where every member sees interest rates for the next three years and when they expected the first interest rate increase (see below):

What the heck?

This not only takes any element of surprise away; it also puts “outliers” under the spotlight and enhances groupthink (who wants to be the one that leaned out of the window and was  completely wrong?).

Forget all the official statements. Forget anything you read in the “financial press”.

The Fed is printing money (“quantitative easing”) in order to achieve two goals:

1. Finance the government deficit

2. Cheapen the dollar (to help exports).

But how can you justify printing money when inflation is running at 3%, especially when you adopt an inflation target of 2%?

The Fed came up with a great plan: forecasting inflation of 1.6-2.0% for 2014 (at or below its new target) enables it to claim there is “danger of missing the target”. Hence printing more money is “required”.

In order to paint a picture of a weakening economy, the Fed starts out with elevated estimates for GDP growth, only to be able to reduce them at an opportune time.

The Fed now sees 2012 growth at 2.2-2.7%, down from 2.5-2.9% in its November forecast.

How Bernanke & Co. are able to predict inflation in 2014 when they couldn’t see a bursting housing bubble six months ahead is anybody’s guess.

The other benefit of forecasting (close to) zero percent interest rates into 2014 is the following: the Fed “sits” on the yield curve, depressing it as far out as possible by making markets price in available information. Euro Dollar futures have reacted and are now pricing in rates of less than 0.15% until the end of 2014:

This translates further into longer-dated bonds, depressing their yields. The Fed makes it easier for the government to pay its debt. If you pay zero interest on your debt (and assuming you can roll it over indefinitely) it has absolutely no effect on your budget. It is as if the debt didn’t exist (see How Dr. Ben Copperfield makes trillions disappear ).

All the pseudo-scientific yada-yada on economic theory are just hollow bones thrown to journalists and pundits to have something to “chew” on and write about.

The only thing that matters is the monetization of more and more government debt, and how to sell it to the public.

Paul Krugman would argue that despite all the “quantitative easing” inflation has not really picked up. At zero percent interest rates, money has no preference – there is no opportunity cost of just “lying around” without interest. Investing money for 4 years for 0.15% return is not “riskless return” – it’s “return-less risk”. Perversely, the Fed has created a situation where raising interest rates would probably lead to inflation. It is boxed into ZIRP (zero interest rate policy) for infinity.

Things will get serious once the Fed adopts a policy called N-GDP targeting. Instead of inflation, the Fed will try to “target” nominal GDP. If real GDP growth is zero, the nominal GDP growth will be made up entirely of inflation. Debt is a nominal unit, and it is supported by nominal GDP. In order to keep the ratio between GDP and debt halfway bearable, GDP must be inflated. It is a tax on everybody holding dollars, since the value of those will decline.

Meanwhile, the Japanese are resorting to stealth interventions to break the Yen’s strength.    Currency wars have gone from “cold” to “hot”. The Fed’s printing of dollars is forcing other central banks to purchase them and selling their own currency in the hope of stemming their own currency’s rise. This makes them involuntary buyers of Treasury bills and bonds, making it easier for the US government to finance its deficit.

This, of course, will end badly. When the public loses confidence in paper currencies, barter trade and new, gold-backed currencies will be the only solution. “There is not enough gold” will the skeptics say, but it is only a question of price.

 

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Sun, 02/19/2012 - 12:37 | 2174930 Manthong
Manthong's picture

In what parallel dimension can the US government afford ANY increase in the interest rates?

Sun, 02/19/2012 - 12:40 | 2174939 uno
uno's picture

the Humty Dumty dimension

Sun, 02/19/2012 - 12:47 | 2174959 Uncle Remus
Uncle Remus's picture

Wrong question. When can any entity afford debt (leveraged, rehypothicated or blown out Bennys arse) in lieu of real money, real GDP and real jobs? As in a real economy.

Sun, 02/19/2012 - 12:47 | 2174961 Conrad Murray
Conrad Murray's picture

Afford? That's something only people without the ability to print toilet paper have to worry about.

Sun, 02/19/2012 - 22:30 | 2176569 jeff montanye
jeff montanye's picture

apropos of the comment in the summary post to the effect that increased interest rates would probably lead to increased inflation:  yes, it would, barring a huge contraction in the fed's balance sheet: http://www.hussmanfunds.com/wmc/wmc110411.htm

Sun, 02/19/2012 - 12:40 | 2174938 Zola
Zola's picture

"real GDP growth is zero" - try " real GDP growth is negative and has been since 2007" - there , fixed it for you

Sun, 02/19/2012 - 12:41 | 2174943 GeneMarchbanks
GeneMarchbanks's picture

'Things will get serious once the Fed adopts a policy called N-GDP targeting. Instead of inflation, the Fed will try to “target” nominal GDP. If real GDP growth is zero, the nominal GDP growth will be made up entirely of inflation.'

Behind Oz, we're probably already there. Interest rate policy has been outsourced to China along with everything else and it seems the Chinese enjoy this trade-off enough to not want any other course of action. A rise in interest if/when it happens, will only be a result of geo-political tensions and disputes among the market makers. It has nothing to do with 'markets'.

Sun, 02/19/2012 - 12:41 | 2174945 DoChenRollingBearing
DoChenRollingBearing's picture

The "Total" on the Balance Sheet at the Fed is about $2.978 trillion, edging closer each week to the psychologically important number of $3 trillion.  I am sure that ZH will have a zany time when the Fed bites the bullet and crosses the $3 trillion dollar line!  A winner!

Fringe Blogger Bearing discusses this and more in his latest article "Review of Barron's, Dated 20 February" at his blog.  I also review other topics of interest (including tungsten).  If you want a look, drop me a gmail (and promise to behave!), and I'll send you the link.  You can also use our friends at Google to find it.

Sun, 02/19/2012 - 12:49 | 2174968 Conrad Murray
Conrad Murray's picture

Google is evil. Try https://duckduckgo.com/

Cheers!

Sun, 02/19/2012 - 14:06 | 2175233 JohnKozac
JohnKozac's picture

also try Startpage.com:

 

https://startpage.com/

 

and/or:

 

Scroogle.org

 

NYT re: beefing up online security"

http://query.nytimes.com/gst/fullpage.html?res=9806E1DD1138F932A25752C1A...

 

 

Sun, 02/19/2012 - 14:49 | 2175380 DoChenRollingBearing
DoChenRollingBearing's picture

@ Conrad and JohnK,

Since I am already on "Everyone's List", I just don't even care anymore.  Nor am I up to speed enough to trust ANY website, so fcuk 'em all!

+ 1 to each of you.

Sun, 02/19/2012 - 12:42 | 2174947 Cursive
Cursive's picture

Things will get serious once the Fed adopts a policy called N-GDP targeting.

They've been doing this since at least 1971.  You can call it N-GDP targeting or you can call it the Greenspan Put or you can cal it the Bernanke Guarantee or....

Sun, 02/19/2012 - 12:43 | 2174949 FranSix
FranSix's picture

It'll be interesting the watch the Fed Funds price in the futures market for options expiry:

http://quotes.ino.com/chart/?s=CBOT_ZQ.G12.E

Sun, 02/19/2012 - 13:01 | 2174999 ozziindaus
ozziindaus's picture

The market is the ultimate dictator of interest rates and will bear what it can bear. Any manipulation of the interest rate will be dealt with either expansion or contraction at light speed. Since the true definition of inflation is the total money supply both private and public, an artificially low interest rate will cause excess liquidity to be soaked up in exchange for real assets causing bubbles such as the recent housing type. No asset bubbles exist today despite the lower interest rates. 

If interest rates were to "artificially" rise, the markets response will be the same as it ever was. An immediate reaction to adjust for the shrinking liquidity base and a hit to asset values. 

There's no question that QE has added to the money base but there is more "real" evidence that this excess liquidity has done little to cause retail inflation. If the FED decides to inject QE3 into your bank account, then we'll talk about inflation and the interest rates.  

Sun, 02/19/2012 - 13:19 | 2175060 Reese Bobby
Reese Bobby's picture

What?  Food, gasoline, healthcare and most everything are up in price.  Does your Mom do all the shopping Darth Vader? 

 

Sun, 02/19/2012 - 13:25 | 2175083 ozziindaus
ozziindaus's picture

Housing, natural gas, cars, equities all down. Food is also down in many cases.

http://www.indexmundi.com/commodities/

Healthcare is a monopoly and therefor doesn't count. You have a problem with that, bring it up with your senator?

Sun, 02/19/2012 - 14:10 | 2175248 Reese Bobby
Reese Bobby's picture

You're funny.  The "good news" housing crash does continue but rental rates are generally higher.  I power my car with gasoline and prices are way up.  Retail food prices are much higher; forget your little website and see SYY's earnings release, and dozens like it.  And I missed the super-secret stock market decline you are observing.

 

Please endeavor to learn a marketable skill.  The economics text books you find knowledge in are useless.  Worse, the finance money train has left the station unfortunately, leaving young people behind.  You're going to have to get angry.

Sun, 02/19/2012 - 13:31 | 2175100 Hugo Chavez
Hugo Chavez's picture

We may see inflation someday, but I am enjoying the low housing prices and the ridiculously low rent I pay on my office. There are some decent land deals out there, and go price a superduper laptop. Oh my god i just furnished my office with 500 dollar laptops that kick fucking ass. Food is 14 percent of my budget. Gas is 379 for premium for my sportscar. I have seen zero change in my budget due to inflation and I saved 200 dollars a month on my refi.

My secretary can take her work home now with a 500 dollar laptop.

No fucking inflation yet.

Sun, 02/19/2012 - 13:37 | 2175123 Conrad Murray
Sun, 02/19/2012 - 13:51 | 2175169 Hugo Chavez
Hugo Chavez's picture

The things I do for you Americans. I should get more respect for playing my double agent role perfectly. You are welcome for all the data and specs on those intermediate range iranian missiles

Sun, 02/19/2012 - 14:53 | 2175392 DoChenRollingBearing
DoChenRollingBearing's picture

Barack and Hugo sitting in a tree...

Sun, 02/19/2012 - 14:17 | 2175277 Reese Bobby
Reese Bobby's picture

14%?  That's a pretty detailed budget there troll.

 

Sun, 02/19/2012 - 13:09 | 2175027 GeneMarchbanks
GeneMarchbanks's picture

'No asset bubbles exist today despite the lower interest rates.'

LOL.

No private 'organic' credit demand = no change in money velocity = no immidiate inflation = many Taleb Turkeys going about their business in the 'developed' world. It's a brand new economics formula, I'm surprised Krugerman ain't teaching it yet.

 

Sun, 02/19/2012 - 13:32 | 2175108 urbanelf
urbanelf's picture

You get a + for "Taleb Turkeys"

Sun, 02/19/2012 - 13:56 | 2175194 ozziindaus
ozziindaus's picture

We'll I'm glad you understand the process flow of what truely causes inflation. 

Sun, 02/19/2012 - 13:22 | 2175067 Hugo Chavez
Hugo Chavez's picture

You make this zero cost (in real terms) financing of usa debt sound like a bad thing. Eat shit and die, all mercantilists of the world! How does it feel when the host starts sucking blood from the parasite? Rhetorical question. I dont expect Asia, Germany, and the rest of the third world to answer.

Sun, 02/19/2012 - 13:25 | 2175081 SilverDoctors
SilverDoctors's picture

Interest Rate Swaps (derivatives) have more to do with controlling interest rates than FOMC decisions. 
They're basically the whole point of gold and silver suppression.

http://silverdoctors.blogspot.com/2012/02/interest-rate-swaps-real-purpose-of.html

When JP Morgan requires $71 billion in bonds per day just to hedge its IR swap positions, The Fed doesn't need to worry about the market.  JP Morgan= the fed, IS THE MARKET!

-Doc

Sun, 02/19/2012 - 13:31 | 2175098 arrogantchef
arrogantchef's picture

Until investors find a "safer" place to put their money, they will keep buying Treasuries. When their aren't enough "investors" to buy Treasuries, Uncle Ben will buy them. Everyone knows this will not end well, we just don't know how to play it. Nowhere to hide I guess.  

Sun, 02/19/2012 - 13:39 | 2175138 Conrad Murray
Conrad Murray's picture

"As Barclays showed a few days back, under Twist, the Fed has monetized virtually all, and specifically 91% of all gross issuance in the 20-30 year maturity bucket."

http://www.zerohedge.com/news/under-twist-fed-has-purchased-91-all-gross...

Sun, 02/19/2012 - 13:43 | 2175144 Hugo Chavez
Hugo Chavez's picture

Sadly true.
Where to hide is in a business or skill or own the right asset.

You must have something that can generate income (however it be defined) in good times and bad.

A fruit tree in your yard generates the equivalent of income.

If you depend on unskilled service jobs then you work at the whim of the employer class who doesnt have to pay you shit anymore.

Sun, 02/19/2012 - 13:34 | 2175114 tony bonn
tony bonn's picture

someone else who notes the criminal enterprise of the financial terrorists who, as amschel rothscild said, care not who makes a country's laws so long as it controls the money....

Sun, 02/19/2012 - 13:34 | 2175115 Timmay
Timmay's picture

Barter trade huh? Iran is about to try that and we can all sit back and watch how that plays out. And when that is done, who then will doubt that the 30,000 drones flying over the U.S. will be tasked with making sure we don't try something similar at home?? Surveillance and force, it's all that's needed to make sure things continue the way "they" want it to.

Ron Paul was right, we are in a High Tech prison. Might as well start calling him Morpheus....

Sun, 02/19/2012 - 13:53 | 2175179 Conrad Murray
Conrad Murray's picture

And when those 30,000 drones start letting Hellfire missile rain down, they can blame it on Iranian hackers having taken control of them :D

Sun, 02/19/2012 - 14:29 | 2175324 Timmay
Timmay's picture

No, they will blame YOU. The laws will be written and it will be so.

 

COMPLY bitches!

Sun, 02/19/2012 - 15:53 | 2175575 jmc8888
jmc8888's picture

No, the federal reserve is printing 1st and foremost (it's real mandate) to prevent the collapse of monetary aggregates.

It then, must (in their eyes) fund the deficit, because a collapse in gov't spending would also collapse monetary aggregates.

It's all about the monetary aggregates.  Which of course is nothing but bullshit, unproductive, and fraud.

 

Save the real, ditch the fake...and end monetarism.

 

The LaRouche triple curve has been correctly describing the trajectory and overall path we'll take since it was created in 1996, about the 1968-XXXX timeframe as we go along.

 

Bullshit moentary aggregates drive the inflation at the expense of the physical economy.  The monetary aggregates become more numerous than finanical aggregates...the point of no return. Think 2000.  Then you have the period where the bullshit monetary aggregates start getting so big, it accelarates the physical economic destruction and starts siphoning off the money that used to go to financial aggregates (think plant/equipment or capital investment).  This creates the conditions (in whatever form they arrise within the broken, anti american, ideologically fallacy known as the monetary system) for collapse...think 2007-2008 (and thus the 'form they arrise in' takes place with mortgage bailouts, deficit spending, all the different fraud we've seen).  Now since then we've been approaching exponential increases and decreases in these factors.  Increases in bullshit monetary aggregates to keep them afloat, will eventually (and has) cause(d) a collapse of the financial aggregates and physical economic output takes this decrease in what perpetuates the physical economy and goes apeshit down. 

How it is exactly manifested is through all the minutia that doesn't matter, it is predicated by the nature of the numbers within the monetary system.  That and it (the unneeded bullshit fake crap and fraud) get's first dibs on money and bailouts, while everything else is crowded out, and allowed (or some may say forced) to go bankrupt.  Inflation and deflation. 

The scams themselves are just the mechanism that makes the triple curve come to life. 

The thing to realize is very simple.  In our bizarro monetary system (aka monetarism), the 'need' (by TPTB) to save their unproductive bullshit is done so at the expense of everything else.  It crowds out the productive and willfully destroys the real economy to dampen the inflation created to save the unproductive bullshit.  The more real shit they can destroy, the more they can print of the fantasy and be 'equal' in inflation.  So the federal reserve isn't doing anything for the economy (we already know that...but it is actively destroying the economy...something opposite from it's mandate), it's doing it to keep the worthless (past tense) monetary aggregates afloat.

I highly suggest people assimilate what the function of the triple curve means.  Monetary aggregates rules and ruins all.  Printing for the federal deficit, is just a CYA moment for the TPTB.  It's not to fund the 'deficit'.  It's to allow the deficit spending so it doesn't crash the monetary aggregates of TPTB, ruining the books of America (and anyone else they can...see Greece and the Euro) in the process.

The collapse has already occurred.  They are just sacrificing everything else to keep up the illusion that it hasn't collapsed.  It's worthless.  Focus and save the physical economy and more importantly the ideas that drive it (science...real science..not the fake statistical nonsense).

Glass-Steagall

 

Sun, 02/19/2012 - 20:56 | 2176298 q5251355
q5251355's picture

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