QE II -- ALL A-B-O-A-R-D !!

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machinehead's picture
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QE II -- ALL A-B-O-A-R-D !!

SuperBear Ambrose Evans-Pritchard says that the pessimistic Federal Reserve minutes punctured the dollar:

Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar.

The euro rocketed to a two-month high of $1.29 and sterling jumped two cents to almost $1.54 after the Fed confessed that the US economy may not recover for five or six years. Far from winding down emergency stimulus, the bank may need a fresh blast of bond purchases or quantitative easing.

The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.

"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016.

"The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months."

The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.

The minutes confirm the Fed is split down the middle over QE. Fed watchers say the Board in Washington wants to be ready to launch another round of bond purchases if necessary, pushing the banks balance sheet from $2.4 trillion towards $5 trillion, but hawks at the regional banks are highly sceptical.

A study by the San Francisco Fed said the interest rates need to be –4.5pc to stabilise the economy under the Fed's "rule of thumb". Since this is impossible, massive QE needs to make up the difference.

http://www.telegraph.co.uk/finance/currency/7893238/Feds-volte-face-sends-the-dollar-tumbling.html

Eighty years after 1930, we've come full circle. In the pre-Keynesian era of the Herbert Hoover presidency, it was accepted by both parties that balancing the budget was a must to end Depression I. As in 1930, so in 2010.

As stimulus recedes and tax cuts sunset at the end of this year, fiscal policy is becoming more restrictive, even as the economy barely treads water.

In Depression I, monetary policy was ineffectual because the Federal Reserve sat on its hands. It made perfunctory discount rate cuts, but did very little to expand its balance sheet to offset the gross contraction in money supply caused by uninsured bank failures. 

Frank Roosevelt, contrary to his 'balanced budget' campaign platform in 1932, ushered in a vast expansion of the federal bureaucracy, which entailed large, chronic deficits all the way through to 1945. Maynard Keynes's General Theory of Employment, Interest and Money, published in 1936, provided contemporary academic endorsement to heroic fiscal stimulus measures. Otherwise, Keynes said, the paradox of thrift (the pathological urge to save at the worst of times) would send the economy into a self-reinforcing deflationary death spiral.

Now overindebted rich-country governments themselves have succumbed to the 'pathological urge to save.' Keynes molders in the grave, and his modern disciple Kurgman [sic] can no more step into his shoes than could Keynes' intelligent cocker spaniel.

And so we enter an inverse replay of the 1930s, in which fiscal policy drags its foot outside the wagon, whilst boiler stoker Ben Bernanke frantically shovels more debt securities into his malfunctioning monetary breeder reactor.

The notion that the Fed's balance sheet could double yet again to $5 trillion is credible enough, should a double-dip recession occur. Fiscal policy is in thrall to the paradox of thrift, so only monetary policy has the latitude to act through Quantitative Easing, to induce the functional equivalent of a minus 4.5 percent Fed Funds rate. A corollary -- whisper it! -- is that the dollar must die. Competitive devaluation is one of the few easing options that remain available, when the policy interest rate has bottomed out at zero.

Far beneath the deck, the mighty diesels of the QE II are thrumming to life. Captain Bernanke sounds the klaxon. "ALL A-B-O-A-R-D !! ... to parts unknown."

Surprised GOT PFDs?* Surprised

* Personal Flotation Device, in gov-speak.

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Re: QE II -- ALL A-B-O-A-R-D !!

I've always loved that term - "Paradox of Thrift"

It has that nice built-in feel that there is something dangerous about saving.

How about Paradox of Low Interest Rates or Paradox of Quantitive Easing?

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Re: QE II -- ALL A-B-O-A-R-D !!

The dollar has taken a hit the last month, but it was expected due to the outrageous sentiment extreme reached in the EUR/USD trade this spring. October '09 FX sentiment had 98% USD bears, and May '10 had 98% USD bulls.  Talk about a bipolar herd!  

All-aboard the market roller coster.

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Re: QE II -- ALL A-B-O-A-R-D !!

John Makin of AEI hammers at the same point in the Financial Times:

Ben Bernanke, the chairman of the Federal Reserve, would be well advised to heed his own advice from 2002. The current environment is more unnerving than the one he described then as a governor of the US central bank. Cutting rates is no longer an option. Inflation is now low and falling in the US and Europe (year-over-year core inflation at 0.9 and 0.8 per cent) and has firmly taken hold in Japan at minus 1.6 per cent year-on-year. [Today it was announced that the 12-month change in CPI fell from +2.0 to +1.1 percent, a large drop.]

At this point in the post-bubble transition to deflation, fiscal rectitude and monetary stringency are a dangerous policy combination, as appealing as they may be to the virtuous instincts of policymakers faced with a surfeit of sovereign debt. The Group of 20’s shift toward rapid global fiscal consolidation, a halving of deficits by 2013, threatens a public-sector Keynesian “paradox of thrift” whereby, because all governments are simultaneously tightening fiscal policy, growth is cut so much that revenues collapse and budget deficits actually rise. The underlying hope or expectation that easier money, a weaker currency and higher exports can somehow compensate for the negative impact on growth from rapid fiscal consolidation cannot be realised everywhere at once – especially when a move towards deflation is increasing the demand for cash.

Policymakers need to recognise more clearly that, while the acute phase of the financial crisis may be over, the chronic trend toward deflation that has followed it is not. Two things should happen in this dangerous environment to prevent a relapse back into crisis. On the fiscal front, deficit reduction measures must be undertaken to reduce expected future outlays. Legislation to raise retirement ages for public pensions and index pension outlays more conservatively can be enacted now to take effect in the future. On the monetary front, central banks – led by the Fed, as the European Central Bank and the Bank of Japan are just not going to do it – will have to announce firm price level targets that imply rapid money creation through more aggressive asset purchases.

http://www.ft.com/cms/s/0/5c8c6aec-9049-11df-ad26-00144feab49a.html

Being associated with the American Enterprise Institute, Makin of course does not advocate cutting the ruinous military spending which has reduced the U.S. from an unchallenged superpower in 1946 to a crumbling, defeated empire in 2010. This gargantuan, multi-decade misallocation of capital is the main, continuing reason for America's headlong decline into a security-obsessed, politically paralyzed banana republic.

Nevertheless, Makin's claim that monetary policy will pick up the slack from fiscal policy undoubtedly parallels Ben Bernanke's thinking. Quantitative easing will almost certainly happen, unless Bernanke should leave his post unexpectedly. The detached-from-reality discussion in the Fed minutes about running off the Fed's $1 trillion bolus of MBS is an anachronistic case of demented old soldiers, still fighting the long-gone last Bubble as they pound shells into their own rear lines, backs turned to the deflationary enemy. 

To the QE II, then -- a remarkable vessel that manufactures its own fuel from 'thin air.' Book passage now on the last boat out!

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Re: QE II -- ALL A-B-O-A-R-D !!

Machinehead

Why don't you tell us what you really think?Smile You have been quite prolific lately with some very good information.  I, for one, appreciate your efforts. 

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Re: QE II -- ALL A-B-O-A-R-D !!

Travlin wrote:

Machinehead

Why don't you tell us what you really think?Smile You have been quite prolific lately with some very good information.  I, for one, appreciate your efforts. 

+1

Thanks Machinehead for your input.

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Re: QE II -- ALL A-B-O-A-R-D !!

Marc Faber's gonna be aboard the QE II with us:

Marc Faber, the Swiss fund manager and Gloom Boom & Doom editor, said the US is so full of debt, stuck in a period of slow growth and high enemployment, that the Federal Reserve will soon have to revert back to crisis era policies.

Speaking to Bloomberg in a live interview Thursday, Faber said: "I am conviced the Fed will soon implement further quantitative easing," adding "and massively so".

"It will probably happen in September, October," Faber said, putting a timeline to his prediction.

Explaining his reasoning, he said: "The US economy is not robust".

Not buying into the good news brigade of commentators who believe the worst is behind us and the US economy is on the mend, he said: "We have mixed signals, but in general the economy is still weak".

http://www.bi-me.com/main.php?id=47181&t=1&c=33&cg=4&mset=

Meanwhile, I'm waiting for my Federal Reserve VISA card with 'no preset spending limit' to arrive in the mail. Wink

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Re: QE II -- ALL A-B-O-A-R-D !!

MH, I'll take the other side of that bet.  The Fed is unique among CBs in that it is a private for profit bank with murky ownership.  The only real "franchise" it has are its FRNs, of which there are roughly 900 billion.  A highly inflationary scenario, as a QE II suggests, ultimately harms the Fed.  Burnanke has already burnt through his list of "depression remedies" from his thesis with zero results - some might even say negative results if you include technically bankrupting the Fed.  I doubt his real bosses are amused and perhaps he should avoid small aircraft and skydiving.

If one were a true believer in QE II, dollar going to zero and hyperinflation, then the only rational action is to buy real estate where the leverage is nearly infinite - you would get a whole lot of something for a whole lot of nothing.  Personally I thnk real estate (residential and CRE) is primed for the next leg down and it should be a doozy as the collapse of buyers coincides with the banks eventually being forced to shove their shadow inventory out the door. 

Ultimately the dollar and all fiats fail.  Typically the failure of "money" coincides with a full loss of confidence in the govt. and regime change.  When it happens, I don't want to be around to witness it as I believe it will entail a full social breakdown that is likely to very messy. 

QE II will happen at some point down the road, but for now I put that out several years at least.  For now those with the money derive greater benefit from deflation than from inflation.  The deflationary sign posts in the real economy are clear as two critical indicators leap out - falling wages and falling real estate prices.

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Re: QE II -- ALL A-B-O-A-R-D !!

yobob1 wrote:

...A highly inflationary scenario, as a QE II suggests, ultimately harms the Fed. 

...

QE II will happen at some point down the road, but for now I put that out several years at least.  For now those with the money derive greater benefit from deflation than from inflation. 

Knowing as I do that the inflation/deflation debate is going to be near-endless until one or the other shows up in definitive form, I'll just say (in response to the above) this:  I believe deflation would be just as bad for the Big Boys/Girls as inflation.  If the economy suffers a deflationary collapse TPTB will have on their hands tens of millions of unemployed with nothing left, nothing to lose, and carrying a heap of anger.  It could end up being dangerous to be perceived as floating unaffected above the suffering.  Would it be worth that danger?

Viva -- Sager

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Re: QE II -- ALL A-B-O-A-R-D !!

If the previous depression is any indicator, the wealthy will become much more private and indeed restrained in their spending.  Currently the mood of the country has shifted towards anger over unrestrained spending by the govt.  I think this will prove to be a much larger part of the discussion in the Fall elections.  The situation is we have a populace angry with govt workers remaining largely unaffected with "rich" pension plans and Cadillac health care plans.  Increasingly the govt workers at state and local levels are angry with the govt as those must cut spending and increasingly are seeing the govt worker unions and pensions as enemies. The productive portion (including at least some of the unemployed) of the population is angry at both.

Again if we look at Depression I, you had unemployment that ranged from 25 to 17 per cent for a decade.  The other side of that coin is you had employment of 75 to 83 per cent.  Which segment of the population do you pander to?

I still must "follow the money" - those that have the most, have the most to lose under inflation.  Money is power.

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Re: QE II -- ALL A-B-O-A-R-D !!

yobob1 wrote:

Burnanke has already burnt through his list of "depression remedies" from his thesis with zero results - some might even say negative results if you include technically bankrupting the Fed.  I doubt his real bosses are amused and perhaps he should avoid small aircraft and skydiving.

Personally I thnk real estate (residential and CRE) is primed for the next leg down and it should be a doozy as the collapse of buyers coincides with the banks eventually being forced to shove their shadow inventory out the door. 

QE II will happen at some point down the road, but for now I put that out several years at least.  For now those with the money derive greater benefit from deflation than from inflation. 

'Avoid small aircraft and skydiving.' Laughing

I guess that includes helicopters, too! I've been waiting hopefully out in the yard with a wicker basket, but no 'helicopter drops' around here yet.

On real estate, I don't disagree. All the real estate crashes I've seen were followed by at least five or six stagnant years, when property prices went nowhere. QE II, if it happens, won't be a magic bullet for the housing market. 

I'm puzzled, though, by how the monied elite would benefit from deflation. Banks, at least, know that deflation will accelerate defaults -- the loan principal remains the same, but borrowers' incomes decline or disappear. Bernanke's obsession with avoiding deflation, I would think, is probably quite acceptable to the banking cartel.

Inflation also hurts lenders, because it devalues the currency they get repaid in. But given a choice between 10% deflation and 10% inflation, my guess is that 99% of bankers would prefer the latter. They can hedge against inflation to some extent. But 10% deflation quickly destroys a loan portfolio with defaults ... not to mention the potential for 'regime change' which you mentioned.

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Re: QE II -- ALL A-B-O-A-R-D !!

Those with the money are not all bankers and even those that are bankers still have private liquid assets far beyond what your wicker basket will hold - more on the order of a wicker open pit mine hole.  A lot of stuff gets discarded (vinyl blight subdivisions, excess commercial/retail space, etc.) but in the process the remaining productive assets also get repriced (baby / bath water) so the opportunity for accumulating large quantities of productive assets at bargain basement prices arises.  The same applies to art, guns, rare whatevers that get coughed up by those who thought they were rich, but must raise cash.

Yes a lot of incomes decline or disappear and debt repayment becomes improbable which will no doubt sink a whole bunch of loan portfolios (see local regional banks - see them vaporize).  But then again what this really is, is credit.  Money is credit, credit is money - or is it? I firmly believe that away from gold the only real money in the US are those 900 billion FRNs - roughly half of which circulate overseas.  Everything else is "leveraged" off that base - if the leverage disappears, I say we lose nothing but the fantasy that we were "rich" beyond any people that have ever existed in the known universe.

Every contract in the US has in its repayment terms the word "dollar".  it doesn't say you owe me a check or a credit card payment.  Naturally by convention we accept checks and plastic as payment, but it is within the rights of the contract holder to demand payment in cold hard FRNs. Not hardly enough of those around to cover the contracts, eh?

Deflation is not the only case where regime change occurs ( see Weimar Germany, innumerable African and South American countries).  So far in this country deflation has never brought a total change in govt. FDR was a s close as we get and in reality even though he campaigned against Hoover's wild spending - once in office he took the ball and ran with it - sort of like Obama has done with the pre-existing Bush policies.

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Re: QE II -- ALL A-B-O-A-R-D !!

yobob1 wrote:

If the leverage disappears, I say we lose nothing but the fantasy that we were "rich" beyond any people that have ever existed in the known universe.

Every contract in the US has in its repayment terms the word "dollar".  it doesn't say you owe me a check or a credit card payment.  Naturally by convention we accept checks and plastic as payment, but it is within the rights of the contract holder to demand payment in cold hard FRNs. Not hardly enough of those around to cover the contracts, eh?

You raise an interesting point about FRNs, checks and credit cards. In one case that I'm familiar with -- the Argentine crisis in 2002 -- cash withdrawal limits were placed on bank accounts. But the ability to make transfers (which is mostly done by wire transfers there, rather than checks) was unaffected.

From the standpoint of avoiding deleveraging, this policy made sense. Transfers between banks tend to balance out -- the total amount of deposits in the system remains unchanged. But pulling out cash deleverages the system. So does sending money overseas, outside the system. 

In the sort of crisis you describe, cash withdrawal limits and exchange controls would be the most likely policy response. By contrast, bankers would be nuts to restrict the domestic use of checks, credit and debit cards. Then everyone would seek to liquidate their deposits into cash, and banks would be deleveraged out of business.

Like rats and mosquitoes, bankers plan on being survivors. Smile

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Re: QE II -- ALL A-B-O-A-R-D !!

In a deflationary period in which defaults, unemployment and hunger occur, who owns everything in the end?  The banks.  That includes all properties, at a cost to them of.......nothing.  In an inflationary period, who owns everything in the end?  Not so much the banks.  So as a banker/elite, when you see the end of your charade coming to an end do you want to create an opportunity for others to still own something?(inflation/hyperinflation) Or do you want everyone to default and get all the "real wealth" back at no cost? (Deflation)

I could be wrong, but this is the main reason I feel deflation is the course we're upon.  I firmly believe (actually know) that this is an event that has been orchestrated and designed by the bankers/elite.  What scenario gives them the most financial control?  As well, what scenario gives them the best opportunity to take physical control of the population?

Remember, these people don't give a rats arse if the population starves, are broke, can't work, etc.....  In fact, all of these things help to institute the control that they want and need to continue their fleecing of the world.  

And once again I'll say.....How can we truly and honestly get our hands around the 3E's, if we don't include the moves, motivations, and outright manipulations of this group of people?  You can't.  As we've found through the stock market manipulation, Goldman Sachs manipulation, too big to fail, etc........what should be happening, isn't.  Why?  Because we expect the rules as they're written to be the guidelines.  But they continue to play by their rules and their guidelines.....which in no way benefit us....and in no way would normal people find their guidelines moral.  

Just some thoughts. 

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Re: QE II -- ALL A-B-O-A-R-D !!

LogansRun wrote:

In a deflationary period in which defaults, unemployment and hunger occur, who owns everything in the end? The banks. That includes all properties, at a cost to them of.......nothing...

...Remember, these people don't give a rats arse if the population starves, are broke, can't work, etc..... In fact, all of these things help to institute the control that they want and need to continue their fleecing of the world.

Yup, I agree that's the plan...to seize all private property so that the international banking cartel can send us back in history to feudalism and the tyrannical rule of a moneyed "aristocracy."  The plan is for those of us who survive to be ruled as debt slave serfs.  The plan was written as the communist manifesto and the 10 point plan (communism; like socialism, fascism and monopoly capitalism, is a form of feudalism).

1. Abolition of property in land and application of all rents of land to public purposes.

2. A heavy progressive or graduated income tax.

3. Abolition of all right of inheritance.

4. Confiscation of the property of all emigrants and rebels.

5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.

6. Centralisation of the means of communication and transport in the hands of the State.

9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equitable distribution of the population over the country.

The deceptive part of the communist manifesto is the implication that the "state" is a government while in reality; it is a group of people who hold a monopoly on money, commerce and trade.  There is no state as the monopoly is privately owned by unelected internationalists.

Notice how the private non-federal Fed makes all of our financial decisions without any government input.  The euphemism for this obvious fascism is "the Fed acting independently." 

The zombies that make up the majority of the populations of the western nations don't notice or seem to care that we are being enslaved by a monetary system that was designed as a tool of financial ruin.  There is absolutely no reason why we as a nation need to borrow from banks that don't have any money, they simply create it on the spot - for free.

Larry

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Re: QE II -- ALL A-B-O-A-R-D !!

How can we truly and honestly get our hands around the 3E's, if we don't include the moves, motivations, and outright manipulations of this group of people?  You can't.

I think the first thing we should address is stopping the unsustainable exponential growth of debt, and retire this debt money system into the pages of the history books and replace it with a sustainable monetary policy that ensures the producers get the benifit of the creation of money.

We could then use this new money to fuel new technologies to enhance and improve mankinds standard of living in a sustainable positive manner.

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