Quantitative Easing

The financial elite - using academe for intellectual cover - want you to believe that markets are efficient, as defined by the Efficient Market Theory (EMT). Neoliberal economic philosophy is based on the belief that neoclassical economic theory is correct. That is, that “markets are efficient”. Wall Street touts markets as trustworthy and infallible, but that faith is misplaced. Gullible US politicians believe that markets are efficient and defer to them. Therefore, US politicians abdicate their responsibility to manage the overall economy, and happily for them, receive Wall Street money. Mistakenly, the primary focus during the 2008 credit crisis is on fixing the financial markets (Wall Street banks) and not the “real economy.” The financial elite are using this “cover-up and pray” policy—hoping that rekindled “animal spirits” will bring the economy back in time to save the status quo. This is impossible because the trust is gone. The same sociopaths control the economy. A Federal Reserve zero interest rate policy (ZIRP), causing malinvestment, and monetizing the national debt with quantitative easing by the Fed, and austerity for the 99% to repay bad bank loans has not worked—and doing more of the same will not work—and defines insanity.

At the high level, our global economic plight is quite simple to understand says noted Australian deflationist Steve Keen.  Banks began lending money at a faster rate than the global economy grew, and we're now at the turning point where we simply have run out of new borrowers for the ever-growing debt the system has become addicted to. Once borrowers start eschewing rather than seeking debt, asset prices begin to fall -- which in turn makes these same people want to liquidate their holdings, which puts further downward pressure on asset prices.

Gold fell $28 or 1.73% yesterday in New York and closed at $1,591.60/oz.  Gold traded sideways prior to another 1% fall in Asia but has recovered somewhat in early European trading and has made gains in euros and Swiss francs particularly. 

Cross Currency Table – (Bloomberg)

All you need to read.

In today’s world, there are many who want government to regulate and control everything. The most bizarre instance, though — more bizarre even than banning the sale of large-sized sugary drinks — is surely central banking. Why? Well, central banking was created to replace something that was already working well. Banking panics and bank runs happen, and they have always happened as long as there has been banking. But the old system that the Fed displaced wasn’t really malfunctioning — unlike what the defenders of central banking today would have us believe. Does central banking retard the economy by providing liquidity insurance and a backstop to bad companies that would not otherwise be saved under a free market “bailout” (like that of 1907)? And is it this effect — that we call zombification — that is the force that has prevented Japan from fully recovering from its housing bubble, and that is keeping the West depressed from 2008? Will we only return to growth once the bad assets and bad companies have been liquidated? That conclusion, we think, is becoming inescapable.

Fed governors regurgitate it time and again to rationalize their policies.

Less than an hour ago Zero Hedge was happy to point out the glaringly obvious.

Bernanke speech will have nothing in it

— zerohedge (@zerohedge) June 7, 2012

Shortly thereafter, Bernanke confirmed it. Now it is Wall Street's turn to join in.

Well, risk is on. Not so much because of the ECB, or BOE, both of which did nothing, but because everyone is hoping and praying that in two weeks the Princeton professor will unleash the 4th round of quantitative easing in the US (yes, Twist was a flow-shifting operation and thus QE3). And the reminder that China is not immune, and did its first rate cut since 2008 only validated the realization "that they have every idea just how bad it is", as Cramer would say. Sure enough, risk is ripping, although considering the world's 2nd largest economy just joined the monetary easing pants party, the 10 point ES response is oddly subdued. Where the reaction is yet to manifest itself is in gold: we expect the PBOC will take a little longer before it announces its meager 1000 tons of gold holdings have at least doubled following 100 ton/month gold imports as recently announced. But announce it will. In the meantime, China's aggressive step likely means that unless we get a global coordinated intervention at 9 am today, as was the case on November 30 after the last notable move by the PBOC, which was the first reserve cut also since 2008, there will be none this time around and Bernanke will be on his own. God save the markets if he does not deliver, either today at the JEC testimony at 10 am or at 2:15 pm on June 20, as the S&P has now priced in at least 75 points of NEW QE intervention.

All you need to read.

The employment numbers that came out Friday were very bad and caught most economists and analysts by surprise. Nothing the Fed has done has worked. Once again the ranks of the unemployed grow, wages flatten out, manufacturing weakens, GDP declines, and savings are spent to maintain lifestyles. The U.S. and much of the rest of the world is heading toward stagnation, if not recession. Yet, despite the failures of central bank policies, they will persist in doing the same wrong thing again. Here we review the data and explain why things are heading south.

It's one thing for liberals to demand one group of Americans pay for another group of Americans, with a third group's money of course (until it runs out), but when a progressive think tank actually has the temerity to tell Bernanke that Europe is not socialist enough, and thus needs liberal US support, that's when things just get plain old silly. Which incidentally, is precisely what the progressive brains of Mark Weisbrot and Dean Baker, co-directors of the liberal Center for Economic and Policy Research, have done. Naturally, we are all for a humanistic effort; we also believe in leading by example. If Messrs. Weisbrot and Baker would first be kind enough to divest themselves of all their earthly possessions and bank account contents, which should be Fedexed and wired in the direction of Spain post haste, it would make their transparently theatrical pursuit of pseudo-noble causes just that more palatable to the masses who already are on the verge of poverty, and are now being asked to bail out other countries. 

• Spain Seeks Joint Bank Effort as Pressure Rises on Merkel (Bloomberg)
• Banks Cut Cross-Border Lending Most Since Lehman: BIS (Bloomberg)
• Shirakawa Bows to Yen Bulls as Intervention Fails (Bloomberg)
• Merrill Losses Were Withheld Before Bank of America Deal (NYT)
• Investors Brace for Slowdown (WSJ)
• China's lenders ordered to check bad loans (China Daily)
• Obama Seeks Way Out of Jobs Gloom (WSJ)
• Noda Reshuffles Japan Cabinet in Bid for Support on Sales Tax (Bloomberg)
• China to open the market further (China Daily)
• Australian Industry Must Adapt to High Currency, Hockey Says (Bloomberg)
• Tax-funded projects to be more transparent (China Daily)

All you need to read.

If the U.S. Federal Reserve were a hedge fund, its phones would be ringing off the hook with prospective investors wanting fresh allocations and Ben Bernanke would be zipping around the French Riviera in a gold-plated helicopter.  The Fed’s multibillion-dollar position in Treasuries is nicely in the money with the recent moves to record lows risk-free yields, after all.  But it’s policy outcomes, not returns, that the Fed is after.  By that measure, the current record low payouts in “Safe Haven” bonds (U.S., Germany, U.K, for example) are troublesome.  There is, of course, the worry that they portend a global recession.  This concern cannot be waved away with the notion that a worldwide flight to quality totally upends the bond market’s historical function as a weather-vane of economic expansion and contraction.  Beyond this concern, however, Nic Colas of ConvergEx sees two further worries.  The first is that the Fed has needlessly compromised its independence by pursuing bond purchases that, in hindsight, were unnecessary in the face of the current economic outlook and investment environment.  The second is that interest rates have been demoted to a supporting role in kick starting any global economic recovery. As with unfriendly aliens unpacking their bags at a landing site, the move to record low rates around the world is a truly menacing development. Historically, low interest rates have generally sparked economic recovery.  In the current environment, this gas-down-the-carb approach seems to have simply flooded the engine of growth.  Other factors are at play, as I have outlined here. The real answer is simply more time.

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