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

Tyler Durden's picture

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.


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quasimodo's picture

How about stangnantNATION--to infinity and beyond

Thomas's picture

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

66Sexy's picture

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's picture

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's picture

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


Pick up from page 163.

Raymond_K_Hessel's picture

Oops, wrong link.  This is it:

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


snowball777's picture

So repititive; you need a new line.

Stares straight ahead's picture

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


Use of Weapons's picture

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's picture

yep...inflationary recession

Oh regional Indian's picture

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.




A Man without Qualities's picture

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's picture

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


What you would want now is heat shielding.

Michael's picture

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's picture

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

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


PaperBugsBurn's picture

Nope, not any of the above.

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


Ahmeexnal's picture

don't forget socialism and neo-marxism

ThirdCoastSurfer's picture

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's picture

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's picture

= wearefuckedflation

Jack Burton's picture

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's picture

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's picture

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

Mr Lennon Hendrix's picture

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's picture

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.



Fish Gone Bad's picture

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's picture

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's picture

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's picture

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

HungrySeagull's picture

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

RockyRacoon's picture

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

Franken Stein's picture

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

Mr Lennon Hendrix's picture

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

Chuck Walla's picture

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's picture

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's picture

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's picture

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's picture

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's picture

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


--You WILL Obey!

CrashisOptimistic's picture


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's picture

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.