With The US Economy Sliding Back To Recession, Here Is What The Fed Will Do Next

Back in May when we presented our humble and succinct analysis on what the preliminary 1.8% GDP looked like, we said "Ex the now traditional inventory build [of 1.2%], Q1 GDP growth was sub 1%" basically being the only party who said that aside for the "old faithful plug" better known as the traditional BEA fudge to get GDP to whereever the administration wants it, growth was where it ultimately ended up being: 0.4%. And the kicker? The primary cause of the downward revision was, you guessed it, Inventories, which imploded from 1.31% to 0.32% (see chart). In other words, the next time we are skeptical about government data in any format, believe us, and not "them." Which also goes for our skepticism when it comes to the predictive ability of one Goldman Sachs, most notably our take on Goldman's December 1 2010 "watershed" report in which Hatzius said: "This outlook represents a fundamental shift in the thinking that has governed our forecast for at least the last five years... Five years ago, we became very pessimistic about the US economic outlook...So why do we now expect growth to pick up?  In a nutshell, it is because underlying demand has strengthened significantly... After a deep downturn from 2007 to mid-2009 and near-stagnation from mid-2009 to mid-2010, underlying demand is now accelerating sharply.  Currently, it is on track for a 5% (annualized) growth rate in the fourth quarter." Total and utter fail. Our summary then was also rather spot on: "Much more hopium inside. This is unfortunate. Jan Hatzius used to have credibility." Indeed, after waiting for so long, the firm once again capitulated per its most recent report released last night: "Our forecasts for 3%-3.5% growth in Q4 and 2012 are under review for probable downgrade." So with apologies for the self-backpatting, this brings us to the topic of this post. As we have said for over a year, the catalyst for QE3 will be none other than Goldman. Which is convenient because the title of Goldman's report is "The Fed's Easing Options." Pretty much as subtle as it gets: a month ahead of Jackson Hole, Goldman, aka the Federal Reserve's superior, has not only also admitted the other theme was have been pounding the table on, namely that 2011 is a carbon copy of 2011, but has also listed out the entire menu of options for former Goldmanite Bill Dudley to present to his inferior, Ben Bernanke. Let's dig in.

The Fed’s Easing Options

In a remarkable parallel to last year, Fed officials head into their August meeting amidst weak growth and questions about the possibility of further monetary easing. There are of course major differences between then and now, which Chairman Bernanke has been quick to point out in public statements. Most importantly, inflation is much higher—the core CPI increased at an annualized rate of 2.5% over the last six months—and inflation expectations are at levels consistent with the Fed’s mandate.

Nevertheless, growth is running well below trend— GDP grew by just 0.8% annualized in the first half of the year—and recession risks have increased. Some measures of underlying inflation have also started to cool. If downside risks materialize, further easing might well become appropriate.

Consistent with these risks, comments from Fed officials have shifted slightly in an easing direction over the last month. For example, minutes of the June FOMC meeting reported that some participants thought “it would be appropriate to provide additional monetary policy accommodation” if growth remained slow.

Chairman Bernanke also listed easing options in  his semi-annual monetary policy testimony to Congress (formerly known as “Humphrey-Hawkins”) and Chicago Fed President Evans recently said he could support further easing if growth disappoints.

With many arrows already launched, what remains in the central bank’s quiver? Here we walk through the main easing options and our sense of the Fed’s willingness to use them. They fall into three main groups: 1) communication, 2) asset purchases, and 3) interest rate policy.

Communication: Even More Extended?

Because asset values imbed investors’ expectations about the future, monetary policy can influence current financial conditions by changing expectations. In part this is achieved by following predictable (perhaps loosely rule-based) policy over time. Today, when US activity weakens, funds rate expectations and longer-term interest rates reflexively fall, because investors have observed consistent behavior from the Fed and understand its reaction function. This in turn eases financial conditions and supports growth—monetary policy on autopilot.

Central bankers also shape market expectations through public communication (“Fed speak”). In earlier research, then-governor Bernanke argued that managing investor expectations through communication can be a valuable tool when policy rates have reached their lower bound:

“Even with the overnight rate at zero, the central bank may be able to impart additional stimulus to the economy by persuading the public that the policy rate will remain low for a longer period than was previously expected. One means of doing so would be to shade interest-rate expectations downward by making a commitment to the public to follow a policy of extended monetary ease.”

The Fed has implemented this type of “forward guidance” a number of times (Exhibit 1), most recently through its “extended period” pledge: “The Committee continues to anticipate that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” Our research has found that this language has roughly the same effect on financial conditions as a 30bp funds rate cut.

Changes in official communication would likely be the first step in any renewed easing. In particular, we believe an attractive option would be the use of some kind of forward guidance for the size of the Fed’s balance sheet (“extended period” currently only refers to the level of the funds rate). Bernanke fielded a question on this issue at the June FOMC meeting press conference and responded: “It’s something we have on the table, something we’ve thought about.”

The idea came up again in his Humphrey-Hawkins testimony and in a speech by Brian Sack—head of the New York Fed’s Markets Group—last week. The purpose of this type of language would be to push back investor expectations for when the Fed will allow its balance sheet to shrink. A recent survey showed that 72% of economic forecasters expect the balance sheet to start shrinking later this year or in the first half of 20124. Therefore, announcing that the balance sheet will remain the same size “for an extended period” would likely change market expectations.

Based on New York Fed estimates, pushing back expectations for the start of the decline in the balance sheet by one year would be the equivalent of removing expectations for one 25bp rate hike (assuming all assets were allowed to run off, which amounts to a rate of about $250bn per year).

Other changes in official communication are also possible. In his Jackson Hole speech last year, Bernanke mentioned two ideas: committing to keep policy rates unchanged for a specific time (like the Bank of Canada did in 2009-2010) or tying rate changes to specific developments in the economy (like the Bank of Japan did during its quantitative easing experiment in 2001-2006). President Evans discussed similar ideas in his recent remarks.

We believe these options are on the table but that they are unlikely to be enacted. First, funds rate expectations are already extremely low, and further language changes would therefore need to be quite significant to lower market rates much further (Exhibit 2). Second, some Fed research finds that the Bank of Canada’s commitment language had a similar effect as “extended period”, implying that the Fed would gain little by moving in that direction. Third, Bernanke noted at Jackson Hole that “it may be difficult to convey the Committee’s policy intentions with sufficient precision and conditionality.”

A final set of options relate to communication about the Fed’s mandate. In particular, Fed officials have frequently raised the prospect of more clearly quantifying their inflation objective. Most committee members seem in favor of this idea, but a number of issues appear to have held back implementation, including questions about the dual mandate and uncertain benefits relative to the current system. We do not think an inflation target is around the corner but also cannot rule it out. A few officials have also raised the idea of price level targeting. We think this is a realistic prospect in a deflationary scenario, but not before that point.

Asset Purchases: Composition is Key

Asset purchases have played a major role in the Fed’s response to the recession and financial crisis and would likely be a component of any future easing. One obvious option would be a large-scale Treasury purchase program like the one just concluded. Although there is still significant debate about the impact of quantitative easing (QE) on the economy, earlier purchase programs did appear to ease financial conditions and raise inflation expectations.

If the Fed were to restart QE, our research suggests that each $1 trillion of asset purchases would be roughly equivalent to a 75bp cut in the funds rate. Fed officials appear to see a larger effect, with each $1 trillion in Treasuries purchased substituting for a 67-200bp cut in the funds rate.

One potential drawback of additional QE is that the Fed’s balance sheet is already quite large. Bernanke has expressed concern that further expansions of the
balance sheet could lead to “an undesired increase in inflation expectations”. Perhaps because of a desire to avoid further growth in the absolute size of the balance sheet, recent public comments suggest the Fed might prefer to change the composition of its assets.

In the Fed’s view as well as ours, QE works through a portfolio rebalancing channel: by buying securities and issuing reserves, the Fed reduces the overall supply of risky assets available for the private sector and thereby raises the equilibrium price of those assets. In the specific case of Treasury purchases, the Fed removes duration (interest rate) risk from the aggregate private sector portfolio and takes it on its balance sheet.

If the portfolio rebalancing framework is correct, then what matters is not the face value of the Fed’s balance sheet but the amount of duration risk it holds. Exhibit 3 demonstrates the difference for the Fed’s holdings of Treasury notes and bonds (the Fed’s total portfolio also includes Treasury bills, agency debt and agency MBS). The chart shows the face value of the Fed’s holdings and our estimate of its holdings in 10-year equivalent terms—that is, the amount of 10-year
Treasuries that would equate to the same duration risk.

At present the Fed owns $1.6 trillion in Treasury notes and bonds and around $1 trillion in 10-year equivalent duration. The estimate for 10-year equivalents is significantly lower because the weighted-average duration of the Fed’s Treasury portfolio (roughly 5 years) is lower than the current duration of a 10-year Treasury note (about 8.5 years).

One idea—mentioned in Brian Sack’s recent remarks—would be to keep the overall size of the Fed’s portfolio unchanged, but to increase its duration risk by buying longer-term securities. The Fed is already buying Treasuries regularly in order to reinvest paydowns from its MBS holdings (a policy in place since August 2010). A simple way to lean policy in a slightly easier direction would be to weight those purchases toward longer maturities. Currently the Fed allocates 6% of its purchases to nominal Treasuries with 10-30 years remaining maturity. By increasing this share, it could raise the amount of duration risk it is taking on its balance sheet with the flow of purchases. Even if the total face value of the Fed’s portfolio remains unchanged, an increase in its aggregate duration risk should be considered an easing of monetary policy.

Currently the flow of purchases for MBS reinvestment is relatively low—just $14bn per month according to the latest schedule—and the incremental duration risk the Fed could add to its portfolio through these purchases is relatively small. Therefore, as a more aggressive step, the committee could consider changing its reinvestment policy for the Treasury portfolio. For example, we believe the Fed has the authority to rebalance its reinvestment of maturing securities at Treasury auctions toward longer-duration securities (e.g. 10-year notes instead of 3-year notes).

Beyond additional purchases of Treasuries or changing the composition of its holdings, the Fed’s choices are limited. Agency MBS is one option, but the Fed appears inclined to move toward a Treasuries-only portfolio over time. We doubt the committee would move back to MBS purchases without signs of significant distress in the mortgage market. Purchases of private sector assets could be more effective from a portfolio rebalancing perspective, but the scope for these types of purchases is limited by the Federal Reserve Act (Exhibit 4).

Interest Rate Policy: A Dry Well

A final easing option often listed by Fed officials is a cut in the interest on excess reserves (IOER) rate—the rate that banks earn on deposits held at the Fed above  levels mandated by regulation. The IOER rate is to zero (or perhaps even a negative value).

We see little merit in this option, and continue to believe that the Fed is unlikely to use it. First, the benefits are likely to be very small. While the IOER rate is 0.25%, the effective federal funds rate is only 0.08% (Exhibit 5). Thus, the maximum impact from cutting the IOER rate to zero is just 8bp.

Second, cutting the IOER rate down to zero could be harmful to market institutions. Chairman Bernanke made this argument himself in Q&A at the July 2010 Humphrey-Hawkins testimony:

“The rationale for not going all the way to zero has been that we want the short-term money markets like the Federal funds market to continue to function in a reasonable way, because if rates go to zero, there will be no incentive for buying and selling Federal funds overnight money in the banking system. And if that market shuts down, people don’t operate in that market, it will be more difficult to manage short-term interest rates when the Federal Reserve begins to tighten policy at some point in the future.”

We expect that Fed officials would hold the same view about cutting the IOER rate today. Finally, as we argued in a recent article, calls for cutting the IOER rate are partly motivated by the premise that banks are holding excess reserves because of an unwillingness to lend. In fact, the level of reserves is controlled entirely by the size and composition of the Fed’s balance sheet, and says nothing about banks’ incentives or their willingness to lend. Cutting the IOER could theoretically stimulate activity by easing financial conditions and boosting loan demand, but it would not affect the quantity of reserves in the banking system.

Where We Stand

In recent remarks Fed officials have not appeared ready to ease policy. As Bernanke said on the second day of his Humphrey-Hawkins testimony: “we’re not prepared at this point to take further action”. He listed three reasons: 1) inflation is higher than last year, 2) inflation expectations are close to the Fed’s target, and 3) the Fed is forecasting a rebound in growth, whereas last year “the recovery looked like it was stalling.” For the Fed to ease it would likely need to see: 1) significant risks of recession or 2) continued soft growth, lower core inflation and perhaps falling inflation expectations. President Evans said that Q3 growth will be critical to his thinking:

“It’s obvious that the third quarter has to show improvement and it ought to show a high likelihood of sustained improvement … If we continue to have weakness in the third quarter, it’s going to be harder to plausibly sustain this idea, ‘The next six months is going to get better.’ We’ve been saying that for quite some time now.”

If the Fed were to shift its policy stance, we believe the process would start with a change in communication—most likely related to the timeline over which the balance sheet would shrink—and be followed by changes in the composition of its assets. In our view these options already have reasonably high odds. An expansion of the balance sheet (QE3) looks less likely unless the outlook deteriorates significantly further.

Changing communication or the composition of the balance sheet would largely be symbolic. Our quantitative estimates suggest the benefits to growth would likely be small.

---

And as for the strawman that the US economy will be weak, Goldman conveniently provides the following report in the second part of its analysis explaining the horrible Q2 numbers. Also, for the record, we are confident, Goldman's Q3 GDP target of 2.5% will absolutely not be met.

Forecast Highlights

1. We forecast that real GDP will pick up modestly from its anemic pace in the first half of the year to 2.5% (annualized) in Q3. Our forecasts for 3%-3.5% growth in Q4 and 2012 are under review for probable downgrade. Although oil prices have stabilized somewhat after their surge earlier this year, they are likely to remain a meaningful drag on consumer spending and business investment. And fiscal tightening—already more substantial in H1 than we expected—is apt to increase in 2012. The inability of policymakers to agree on a measure to lift the federal debt ceiling has damaged consumer confidence, not to mention our own confidence in a broader-based normalization in the economy.

2. Continued high unemployment, with only a marginal drop in the jobless rate to 8.8% by year-end 2012. Our forecast is for second-half growth roughly at trend, so we expect the unemployment rate to end the year at its current level of 9.2%. Growth of 3¼% in 2012 would bring it down, but only slightly.

3. Core inflation peaks around the end of the year. We expect the core PCE price index to accelerate further to 1.9% yoy by the fourth quarter, from 1.2% now. Two factors contributing to the recent acceleration—a surge in vehicle prices and pass-through from higher commodity inflation—should begin to ease later in the year. Rising rent inflation—caused in part by a decline in homeownership and surge in demand for apartments—is likely to remain a source of inflation pressure in the major price indexes. Overall, however, we see headline and core inflation decelerating throughout 2012.

4. No Fed rate hikes before 2013. Data disappointments have clinched our longstanding call for 2011 and made it even more likely for 2012 than we previously thought. With the jobless rate far above the Federal Open Market Committee’s “mandate-consistent” 5%-6% range and drifting higher, and core inflation still below the comparable “2% or a bit less” standard, the near-term question is how seriously the Fed will consider the easing options discussed on the previous pages.

5. Yields on 10-year Treasury notes reach 3¾% by year-end 2011 and 4¼% by year-end 2012. This forecast presumes recent weakness in US activity proves temporary; in that case, we believe that many participants in the financial markets will turn their attention back to higher inflation.

---

And for those who really want to know the specifics, including the dirty secrets, of the Fed's next steps, we once again present the June 24-25, 2003 Vince Reinhart FOMC Minutes Appendix 1 which has all you need to know and more.

FOMC20030625material

Comments

[Seasmoke]

= Stagflation

[quasimodo]

How about stangnantNATION--to infinity and beyond

[Thomas]

As Mauldin recently stated, "Momentum has broken". (He used all caps.)

[66Sexy]

Could the fed be enabling the US to sell off its gold or "transfer" it to the IMF, so they can sell at the high? TPTB covering shorts to get the price up, its all the same to the fed, w/e price the gold is at, its all freely acquired assets purchased with created debt money.

[wanklord]

Americans are a bunch of stupid animals easy to manipulate and subdue.The sooner the US economy collapses the better, so these brutes will finally learn NOT to live beyond their means.

Time for Barry to govern by decree: suspend the Constitution and declare Martial Law.

[Raymond_K_Hessel]

For those of you who wish to be able to download this to PDF without having to pay for it via Scribd:

http://federalreserve.gov/monetarypolicy/files/FOMC20030625meeting.pdf

Pick up from page 163.

[Raymond_K_Hessel]

Oops, wrong link.  This is it:

FOMC Meeting Presentation Materials June 24-25, 2003 (Appendix 1)

http://federalreserve.gov/monetarypolicy/files/FOMC20030625material.pdf

[snowball777]

So repititive; you need a new line.

[Stares straight...]

Cant you just abbreviate this and save us a lot of time? : AaabosaetmasTstUectbstbwflNtlbtm"

Thanks

[wanklord]

duplicate

[Use of Weapons]

Re-evaluating the book value of IMF gold holdings is quite complicated, is opposed by many governments, and has red tape all over it. The IMF also (officially) only has 3k tonnes or so.

Thinking back to June's wedding, beautification and assassination, there's two possibilities - serious crash, or the Big O wins through, holds hands with the IMF and launches a world-wide (UN / BRIC / EU backed) economic re-evaluation and 'G20' club reworking. (Operation 'Romance'). The Big O loves the bite at the end of a joke - Trump knows that well enough.

It is a gloomy world when even the bad guys losing ends up in ruin... but I suppose that's how the game is rigged.

[trav7777]

yep...inflationary recession

[Mr Lennon Hendrix]

Inflationary depression.

[Oh regional Indian]

India just tightened by 50 basis points. market swooned 700-800 points. Lowest open interest in all future markets since end 2005 (India had a humungous crash in 2006).

I think you guys must have mostly missed it, but a lot of hot money sloshign around in India right now, in Fixed Income and the market through FII routes.

It's all happenign together now, tightening, one more notch, breathe in, one more, ufffffffff.........

I guess we can take it like sheep or break it like men.

ORI

http://www.youtube.com/watch?v=XLco5ISptdA&feature=related

[A Man without Q...]

Coffin Corner

Doesn't matter whether you increase money supply or reduce it, there is nothing the Fed can do to generate real growth.  They'll still reach for the printers, because it is what preserves the banking system.  The Tea Party will find that taxes have gone up, via inflation, but let's face it, "the business of America is business" - however sensible most of the ideas of the Tea Party may be, they're about 10 years too late.

[HungrySeagull]

There is no Coffin Corner left on the edge of space above the Earth.

What you would want now is heat shielding.

[Michael]

No more construction jobs because of the Federal Reserve and Wall Street. Millions of jobs lost in the construction industry in the past few years.

Tens of millions of jobs lost to overseas outsourcing because of US government trade agreements including NAFTA, CAFTA, GATT, etc.

I couldn't have planned the destruction of the US economy better myself, although I cheerlead it's destruction. It's a good way to starve the beast by having the money cut off from it. The best part is, I didn't have to lift a finger to cause its destruction. I just let the Fed and the Federal government lay the groundwork for their own demise. Good work guys.

[RockyRacoon]

Your point is well illustrated by a link that JW posted about GATT.   It is apocryphal to say the least:

http://video.google.com/videoplay?docid=5064665078176641728
Ok to skip the Laura Tyson section in the middle.
Real revelations and accurate predictions of what would occur, all the way to the end of the interview.

Charlie Rose November 15 1994

Sir James Goldsmith, Member-European Parliament/ Laura D'Andrea Tyson, Chair-President's (Clinton) Council of Economic Advisers

[Michael]

Great Video. Thanks.

[PaperBugsBurn]

Nope, not any of the above.

What afflicts America and its economy is fascism, plain and simple. Call it globalization, neoliberalism, Keynesianism, etc

FASCISM

[Ahmeexnal]

don't forget socialism and neo-marxism

[ThirdCoastSurfer]

Which publicly traded companies have failed to meet or beat revenue expectations to independently verify these figures? Autos? Retail? Tech? Are RIMM & Goldman the sole cause of stagnant growth or is government reporting negatively biased to trap and punish the Negative Nancy, Anti-Americans who cling to lies of false data in the face of reality?!?!   

[Use of Weapons]

UPS (ok, ok, cheap shot), but Cisco shedding 10k was fairly large.

Also - GS is cutting 1k traders but re-hiring in Singapore. Never believe the devil when he pretends things are tough for him as well... they're merely moving over (like HSBC) to Singapore Dark Pools.

[SilverIsKing]

= wearefuckedflation

[Jack Burton]

The Fed, what a pack of wankers! They still believe that financial engineering can save a fundamentally f**ked economy!

Look at fundamentals, all of them, and then come along and tell me Bernanke can create jobs and economic growth. Sure, just like the old Soviet Union could engineer economic growth. The Fed as a collection of A-holes whose only job is to preserve the banks, the bankers and wall-street equity prices. All else is just dust in the wind to them.

[trav7777]

yep.  The oil peak isn't a matter that can be resolved by printing.  The FUNDAMENTAL methodology of economics is flawed in that it assumes demand creates supply by some means.

The issue here is that GD1 was a huge political shitstorm.  So was the 07/08 market and economic crash.  Look at the turnover in Congress on account.  NOBODY wants that to happen again because it means significant consequences to those trying to get rich in office.

There is no outcome here other than inflation simply because the money-as-debt cannot be repaid with future growth given the macroeconomic fundamentals.  Despite the appearance of deflation in credit, the value of the debt is eroding at the same time.  While the broader SP500 may not do particularly well, and hasn't, in a price appreciation sense, there are still dividend payers and solid companies, e.g., Coca Cola, that will continue to produce real returns even in a downturn.  It is not as if all things are crashing to zero tomorrow.  Sure there will be lots of corpses but the world is not ending and the zombies are not about to apocalypse on us.

[cosmictrainwreck]

expose my ignorance (no pride): "GD1"? @ para 2

[Bolweevil]

GDP Q1?

[emsolý]

Grande Dépression I

[snowball777]

Venti!

[Mr Lennon Hendrix]

KO?  Yeah because they own all the 3rd world's aquifirs.  You want clean water in a 3rd world country, you better buy coke.  We call that a monopoly by the way, which is illigal.  And they use slave labor, like all large cap corporations (Apple, Nike, etc).

[Use of Weapons]

Coke is known to hire local thugs, crack unions and hog the water supply, for sure.

But you're missing out on a much larger, craftier and low visibility bunch of predators. The French.

http://www.alternet.org/water/151367/the_un_is_aiding_a_corporate_takeov...

[Fish Gone Bad]

Before any nation collapses, its treasury is looted.  The constant borrowing, TARP, and QE++ have all been steps toward the US's ultimate failure. 

[Conrad Murray]

At least someone gets it. The Federal Reserve is nothing more than the TBTF banks's cartel. They are looting the nation by exchanging cotton/linen(and in ever-increasing quantity, merely numbers on a screen) for the assets of the country. They're stealing homes and land through their engineered foreclosure crisis, and they're stealing wealth in general with their cartel created debt as money scheme fueled by the exponential equation.

It's okay though; the Chinese will save the USA, Inc. through their "special economic zones".

Fuck Hamilton, Fuck Lincoln, Fuck Wilson, and Fuck everyone in D.C. Traitors, all.

[Husk-Erzulie]

Fuckin A!

I do so hope that just one sheeple stumbles on this comment and says to themself "Hey, what does he mean? Lincoln? WTF?  Intertubez awakenings are started in just such ways.

BTW check out the tenor of the comments here: http://thehill.com/blogs/blog-briefing-room/news/174487-obama-house-repu...

It really does seem as if more and more people are in serious cog dis vis a vis the lamestream/military industrial talking points.  For example the talking head parade seem to be having a hard time selling the idea that higher interest rates are a tax (phhht...wow).  <--- Which is, by the way, a prime example of just how deep O' vapids' economic thinking goes.

[mess nonster]

Big Q Who has the paper supply contract for currency printing?  Perhaps a solid investment, no?

[HungrySeagull]

Actually it's Cotton shipped to Harrisburg PA and mixed with Fiber, Paper, Inks etc.

[Grifter]

http://www.crane.com/about-us/currency-paper?RPL

Crane AB supplies the stock for FRN's.

[RockyRacoon]

Which is why there will be no dollar coin, which is more economical.   Printers unions!

[Franken Stein]

But remeber. It's all for the good of the nation...

[Mr Lennon Hendrix]

While giving the wealth directly from the people of the Unted States of America to the Major Corporations.

[Chuck Walla]

Ayn beat you to this:

Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked: 'Account overdrawn'.

~ Ayn Rand: Atlas Shrugged (1957)

[CrashisOptimistic]

I would like to point out something getting zero attention.

Yes, the first look, 2nd look and 3rd look of 2.0%, 1.8% and 1.9% were ABSURDLY different from the final 0.4% for Q1 GDP and gives rise to questions about the civil servants in that office and willingness to lie, presumably on assurance that the final number will be cleaned up.

And yes, 1.3% for Q2 suggests no improvement.  And yes, Japan's earthquake was not until Q1 was almost over.

But just what caused 0.4%?  QE2 was in full force!  

Answer: And do not EVER lose sight of this . . . Brent $135.  Oil.  Oil decides everything.  The rest of these financial tweaking abouts is like bailing a lifeboat with a teaspoon.  Oil decides your future and mine.  Not the Fed.  Not Congress.  Not anything else.

And that future is very dark.

[TaxSlave]

We are on the road most travelled -- the FED has painted itself into a corner.  Print and spray, leading to a collapse, or let it collapse now.

Guess which action it will take, having only one tool in the toolbox?

[CrashisOptimistic]

Heavens no.

QE2 was in full roar during this 0.4% collapse!

It has no growth value, and Bernanke now knows it.

There is no point in a QE3, and he knows that, too.  There's no lack of liquidity.

There's a lack of oil.

[B9K9]

I think both of you guys are ignoring what history tells us comes next. Like many who become overly focused on particular data points, it's easy to lose sight of larger macro trends.

To wit, it doesn't matter a whit that oil went to $135, or that traditional monetary/fiscal policies are now experiencing a negative multiplier effect. While you are correct that Ben knows QE didn't work, what's important to understand is that he was given a chance. After all, the next steps would be called into question if it hadn't been proven that "drastic measures" need now be taken.

Now is the time for the pointy-headed nerds to step aside. It is also, unfortunately, time to take off the velvet gloves to reveal what lies inside: the iron fist. We are in various ME theatres not to 'spread democracy', but to hold the territory. Our only real potential challenger is China. In the coming conflict, it's going to be our technological prowess vs the sheer size of their human waves.

The price of oil will not be determined by markets; rather, its net cost will be the "free" oil divided by the total economic costs of supporting and deploying our military to deliver it to these & our ally's shores.

When various commentators issue dark warnings, they are not referring to simple things like guns & gold. Rather, they are looking at historical precedent when supposedly civilized nations discover they are really only hairless apes.

[TSA Thug]

You are another suspect who should be closely watched. Every last inch of your luggage should be examined microscopically!

.

--You WILL Obey!
http://www.youtube.com/watch?v=dTOcAt44_QA

[CrashisOptimistic]

You didn't understand.  The price of oil is the suggestive parameter.  Not the definitive one.  

The definitive one is barrels per day out and in.  Price is just an offshoot of that.  $135 Brent is not about $135.  It's about scarcity.  The engine can't run when it is choked for fuel.

In general, in this new world that has never existed before, history has nothing to teach you.  "Those who forget history are doomed to repeat it"?

Friend, in about 10 years you will be willing to KILL to repeat history.  

And if you have kids, you WILL kill to try to get a piece of it.  Because food will be a quaint, historical substance that could feed 1 or 2 billion historical humans, but not 7.

[A Lunatic]

A cursory glance through history will show that we ignored the lessons of the past to our own peril. An in depth review of history will reveal the great multitude of nations, peoples, and resources we were willing to burn through in order to get to this sorry state of affairs. The only thing sustainable at this point is the inconsolably harsh fucking we are giving ourselves and future generations, and as you have pointed out, it will manifest itself at the most basic levels necessary to human existence.

[Mike2756]

What about the dollar?

http://www.marketwatch.com/story/cambodia-edges-away-from-us-dollar-2011-07-29

[Use of Weapons]

On Friday, both the Iran / Turkey and Syrian pipelines were bombed, fyi. I'm looking at South Ossetia closely as well.

http://www.youtube.com/watch?v=LrQ2pKMwQC4&feature=related

[Rikki-Tikki-Tavi]

Like it or not somebody will still need to buy US treasuries for the ponzi to continue. Does the world have the patience for another round of financial hocus pocus after all a sub 3% yield hardly compensate for the resulting dollar devaluation and inflation? Perhaps domestic buyers will step up as they at least only have to latter problem? I think not but I'll observe with great interest from a safe distance.

[trav7777]

I have ICE brent at 116ish.  Still a $21 spread to WTI, counter to the narrowing everyone has expected.

Let's look at it this way...tons of QE caused positive GDP.  People get fired from Congress for negative GDP.  So which way do you think they'll go?  They will watch California slide into the ocean saying all is well and reporting postiive numbers.

The collective delusion is really that strong.  It's not just that the .gov doesn't want to really REPORT the bad news, the people DO NOT WANT to hear it!  Every single person here who can see on any topic has experienced this.

Just keep stockpiling assets with expected real value and make your own bed.

And don't worry about that oil thing.  The cornucopian PO-deniers convinced me that nukeyaler was going to save us all (no problem, mon) until Fukushima when they were among the most strident in calling for the end of nukeyaler.  So now it's "ionic liquids" and other technobullshit.

Fukushima was a black swan which in retrospect will come to be seen as far more significant than any other.  The authorities know about peak and have for some time.  Their plan was to build nuke plants and keep the lights on.  Fukushima has now created immense political momentum to go in the diametrically opposite direction.  Not only will we not build new plants but we will close existing ones!  The amount of capital waste that will go into this effort will end up having to be reversed as we either turn existing plants back on or else the lights go out.  There's a brick wall waiting called the NG production curve.

Yet, in the face of this, are even the Germans having the adult conversation about generation capacity?  Nope.  Total kowtowing to the political winds and an order to decommission capacity.  Same in Japan.  Insanity.

Now what, Peak deniers?  Now the fuck what?

[TSA Thug]

I'm really worried about this peak oil thing. Will it ground planes at the airport if it comes? Will I still have my job if there is no oil? When is it going to hit us?

"Just keep stockpiling assets with expected real value and make your own bed."

Yes, I need more assets.

.

--You WILL Obey!
http://www.youtube.com/watch?v=dTOcAt44_QA

[CrashisOptimistic]

There is no expected real value.  Gold will be a paperweight in the post Peak world, assuming you can find some writing paper to hold down.

To say nothing of toilet paper.  Charmin, like food, won't make it to the shelves if the trucks and planes don't deliver it.

And yeah, not a lot of need for Xray guys at the airport when daily passenger count for all flights total at JFK is 53.

The usual way this is presented is to tell you to go to Orbitz and price a coach ticket to Hawaii from your home airport.  Then look at the First Class price.  That First Class price will be the coach price.

Yeah.  53.  All airlines total.  Per day.

[GeorgeHayduke]

Gold was money long before oil and coal powered the world. It will be money again when they are gone. There may be a settling out period where everyone has to do their Mad Max thing and play survival bad ass, but once things settle back into a likely feudal system, gold will become money once again.

[Gully Foyle]

Hey Spanky why not run down to Sears and toss a chunk of Gold on the counter, see how much tv it buys you.

There are a couple of sites with posts written by actual survivors of collapses. Uniformly they all point out thet even used books were more useful as trade than Gold.

In the end farmer Bob will be trading me Corn for a bushel of Apples before he trades for your Gold. Unless you find a rapping farmer who needs some new bling.

[TSA Thug]

Gold is a store of wealth which does not spoil.

Lately at LaGuardia we've started to notice more and more people with small amounts of gold sewn into their clothes. They are traveling with like 3 or 4 ounces of soon to be contraband. That's what my supervisor said.

We try to sneak a little gold from the unsuspecting. LoL. I've got about $7400 so far doing this.

.

--You WILL Obey!
http://www.youtube.com/watch?v=dTOcAt44_QA

[KowPie]

So if I'm reading your post correctly..... you regularly STEAL from people as they come to your captive station. You proudly proclaim $7400 in "profit” via theft from people you don't know and most likely will continue to do so in the future. Hmmm.... can't for the life of me understand why airport security personnel have such a shitty reputation? After all, they're all honest, hard working individuals just trying to make an honest living like everyone else. Right... right? (cricket chirps indefinitely)

Please correct me if I'm misinterpreting your post, seems pretty clear.

[Milton Waddams]

Gold, diamonds, and other varying shiny shit is appealing because, well, for whatever reason ... chicks in already comfortable stations in life have determined it has value.  I can trade my cow in exchange for all of the commoner's daughters.  It will take gold to shag the princess.

[Mr Lennon Hendrix]

You can live in a barter/trade society, but not on an island economy.  What if farmer Bob wants avacadoes?  He will need a medium of exchange that is accepted world wide.  Gold/silver/platinum are:

1)  Units of account

2)  Fungible

3)  Means of an exchange

4)  A store of wealth

It takes this metric to define monie, and if you want to tell me that monie is a human creation, then why does gold fit the rhetoric?  We didn't discover monie, monie discovered us.

[Temporalist]

Hey douchebag:

Sears and Kmart to Offer Consumer Gold Buyback Program

http://www.prnewswire.com/news-releases/sears-and-kmart-to-offer-consume...

And that was from 2010

[Use of Weapons]

Your junks are undeserved -

In the short term, you are correct, gold is useless.

In the medium term, when your local dictator / community collective / vampire 1 (delete as appropriate to your luck / ability to organise) gets settled in, then someone needs something non-wearing that is easy to smelt down and stamp faces on.

Gold (and silver) is traditionally useful, because those faces can easily be wiped from history and replaced with the new ones. That is the worth of gold - inertness and ability to switch political sides with immense ease.

• 1. Tribute to Richard Burton Matheson

[DCFusor]

Lots of people evidently don't like that message, but it's mostly true.  I'm a farmer, live in farm country.  We already have gold ourselves, why would we want to trade food for it if food is scarce?  Maybe big factory farms would, if you wanted large quantities, but us little guys?  No way, we're not interested, and we're tired of you city boys taking our resources and exporting your trash and pollution, frankly.  If used books are good, I'm rich now!  I suspect standard caliber ammo might be good for trade too, but if you want me to take you in, feed you -- a shovel and a strong back might be best, sucka.

[papaswamp]

"Hey Spanky why not run down to Sears and toss a chunk of Gold on the counter, see how much tv it buys you."

Go to a farmers market or flea market. They do take gold and silver. A TV is useless. Food and non-electrical items..awesome. Pawnshops take gold and silver for firearms (and TVs). Just have to know where to shop.

Go to Asia...you can buy what ever you want with gold and silver. Huge number of stores take it.

When you are trying to cashout your netflix stock cert after the crash...I don't think the local lady that decided stock up and is now selling bread will take that certificate....but I bet she will take physical gold and silver.

[GeorgeHayduke]

Last I checked, Sears doesn't take guns, ammo or freeze dried food in exchange for its products either, Sparky. What makes you think Sears will still be there if things get as bad as you perceive?

Yes, I've read Dmitry Orlov, Jared Diamond and many, many others on the topic. In fact I'd venture that I've been studying societal collapse and survival since before you had a clue about it.

I've also taken many backpacking trips, with others and solo. So, while I may not have first-hand experience with a major societal collapse, I'm guessing my chances are better than folks who sit around and read blogs and post as though they are experts.

So, does gold still have value today in Argetina and Russia? I'm guessing yes it does. You might not be able to use it in stores, but it survived whereas the paper money of the time may be gone.

You and farmer Bob can have all the fantasies you want about your favored exchanges, but my guess is the people with the remaining real power and the thugs to come take your apples and nuts will still have gold and silver. If it gets to the point you are imagning, then wits and an ability to see reality and react accordingly will be the best investment of all. Being a know-it-all know-nothing who really can't see or understand the bigger picture won't be of much use.

[CrashisOptimistic]

>>

Gold was money long before oil and coal powered the world. It will be money again when they are gone.

>>

"They" being people.  The pre oil / pre coal world had a population of 2 billion people.  

There are 7 billion now.

There will be 2 billion again, soon, and gold will not determine if you're one of them.  Water and food will, and anyone with reliable supplies of both will not trade them for chunks of non flammable rock.

[DCFusor]

Wonder if we're going to be excommunicated from the gold religion, because that's all it is.  Yes, way back in history, when the world had a working system, and a lot of fudge, instead of our about to be utterly broken JIT system where one week of failed supply to stores via trucks from farms dependent on supplies that are also JIT and a working system to finance it all...well, gold worked then because there was excess this and that to trade for it and buy with it.

It no way solves the problem of no food (or just too little).  It can't do squat for no oil to move things from where we decided to make them to where they're needed.  In history, that was all local, and that was possble because we hadn't already used all the high grade ore, the easy resources, and weren't so dependent on a knife edge balance of huge numbers and flows for basics - but now we are.

Hell, I'll even blaspheme all the way, nothing to lose:

It's different this time.

Funny how people here who are great at pointing out denial in others can't see it in themselves. Gold means nothing to my cats, the deer in the field, my crops, or me.  Sure, I've got some myself -- which is why I won't want yours if you expect to exchange it for my food and protection.

[trav7777]

um...gold was not a paperweight in the pre-oil world, bud.

Why would you expect people in a peak crash to not revert to more primitive ways?  Gold's allure is very primitive.  I mean look, we have an abundance of primitives right here in the US who seem to like to get they teefs covered in it.

[Gully Foyle]

No. Golds allure was only exciting to the business/trading class. Sheep, Goats, Oxen, Cows all had much more appeal to the average working farming class. Gold allows for a single trade, a Cow you can milk and breed for a very long time, same with a Goat. Oxen can work the fields allowing for much more productivity.

Gold is just another pretty stone.

Even the shit from the beasts has more real post collapse value than Gold. How much Gold does it take to fertilize crops?

[EHM]

Claiming gold is more barbaric than straight up barter? What the fuck am I going to do if I want johnsons chickens but he doesn't want my blankets? Gold is convertible into anything.

[A Man without Q...]

Indian farmers are big buyers of gold and silver when they sell their harvests.  Of course, to be self sufficient, you need sources of food, but you're talking about a regression of 14,000 years to the earliest days of the pasturalists and even then there were primative forms of money, and even then, there is clear evidence gold was seen as a sign of wealth and power.

[Not For Reuse]

absolutely true. If you aspire to be a member of the cowshit class, it's probably much more useful to stockpile cows than gold. Nothing wrong with that. There are even plenty of fictional narratives about princes and princesses who chose to give up the existential hell of useless nobility in exchange for the morally superior soul-satisfying freedom of slave labor

[Mad Cow]

The PTB have more gold than all the gold bugs on the planet combined. Sorry, you're still part of the "cowshit class."

[Not For Reuse]

you no reading comprehension much?

[Mad Cow]

I guess not.

[Not For Reuse]

any relative valuation of non-monetary things has an implicit lifestyle preference built in. I agree that cow > gold makes sense for someone who prefers to be part of the "average working farming class." But as a general argument it begs the question

[Row Well Number 41]

When the drought/fire/war/pestilence of your choice wipes out his crops or turns him into a refugee the farmer with gold has options.  The only way gold is not useful is if your with ten people on a small island. 

Money is essential to civilization and always exists in some form, gold is just the most widely used through history, and is the natural fall back when fiat collapses.

#41

[Not For Reuse]

sure, but that has nothing to do with whether a cow or gold is more valuable. If you assume that someone's lifestyle preference is to feel maximally nimble in anticipation of a catastrophic event, then of course gold > cow makes sense. But to argue that gold is more valuable in general based on that assumption is in fact the very definition of begging the question. What if your lifestyle preference is to make hay while the sun shines?

[data_monkey]

I cannot fit a cow in my safe, therefore I hold gold.

[Not For Reuse]

thanks so much for sharing, and that's like so totally relevant to the discussion! Hey, did you hear Amy Winehouse died?

[Use of Weapons]

http://en.wikipedia.org/wiki/Bat_poo

Good for the garden, great for explosives. A lot of people made serious amounts of money from bat poo before oil.

p.s.

Stop junking the man, he's right!

[Mr Lennon Hendrix]

Precious metal is monie.  Nothing else is.

[blunderdog]

It's totally arbitrary.  The Austrians nailed this one.  PMs only have value because people like you think so.

[Mr Lennon Hendrix]

Monkeys, in their naivete, do not understand that gold can preserve wealth.  Humans, understanding that gold is a very limited resource, one which lasts forever, understandd that gold is monie.  If you want to argue that you do not need money, try living without it.  And good luck to you!

Price is arbitrary.  Value is arbitrary.  But monie is gold, and nothing else fits the definition.  If you want to trade in a barter system, go for it, but you will likely be trumped by monie, because as far as a means of exchange goes, it is the trump card.

Gold has value because it has value.  It is finite, it is used in technology, ad it is an accepted means of exchange.  It also lasts forever, which means it preserves its wealth perfectly.  It is a unit of account (1 troy oz, 1 tonne, etc) and it is fungible.

Gold is monie, and monie is gold.

[blunderdog]

So you don't buy into the Austrian school, huh?

[Mr Lennon Hendrix]

Austrian economics has a lot of good thought behind it.

[Temporalist]

The Austrian point is that any individual will see value in whatever they choose only if they desire it.  People, humanity, have decided that gold is money and of value and is the lubricant for exchange.  I believe cigarettes aren't money but in a jail they are because people desire them.  They also are consumed so they maintain value through consumption loss.  But they don't last forever and someone that doesn't smoke may not want them at all and would instead prefer porn as his medium of exchange, or toothpaste, or Vaseline.

Many people find gold to be money so it is regardless of it's actual value for use or function or sustenance.

The fiat snake oil salesmen are just that, trying to promote their product as the best because as long as people perceive it to have value it will even if it's just a placebo and ineffective.  But what they don't tell you is that they are going to make their product worth less and worthless eventually.

[Mike2756]

They'll go back to rationing, just enough to get you to work and back.

[HungrySeagull]

We don't really need gasoline. We fill a few times a month if only to drive one or two tanks worth on part time work.

If I do it right, we stay right here at home and trade pocketing the net each month.