Fed Balance Sheet Hits $4 Trillion

Adam Taggart
By Adam Taggart on Thu, Dec 19, 2013 - 6:03pm

The keen-eyed staff over at Zero Hedge noticed that the Fed's balance sheet has just officially cracked above $4 trillion:

All of America's history to get to $900 billion though 2008. Less than 6 years to increase that by a factor of 4.5x.

What could possibly go wrong??

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20 Comments

BSV's picture
BSV
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For some reason, this reminds

For some reason, this reminds me of the late, great Dr. Albert Bartlett's famous lecture on Mathematics, Population and Energy, which he delivered some 1,900 or so times, in which he stated that the greatest failure of the human race is inability to understand the exponential function. The stars seemed to align exactly as the Fed wished when the "taper" announcement was made.

But as Mike "Mish" Shedlock seemed to say in the most recent Off the Cuff podcast, the Fed has been fudging the numbers on its pre-announced QE targets. Mish said that the Fed has averaged $90 billion a month in Treasury/Agency securities purchases compared to the official number of $85 billion this calendar year. James Howard Kunstler said recently something along the lines that the Fed has back door ways of introducing stimulus that might not be reflected in the official numbers. What a surprise, eh? Uh, no. The Fed's numbers have the same credibility as those of the Bureau of Labor Statistics, and I am much more trusting of John Williams' numbers (www.shadowstats.com), which are probably understated.

A great many people in the investment world have an interest in aligning with the Fed, which is, unlike God, neither omnipotent nor omniscient. One day the wheels are going to come off the Fed's story, and that day will be unpleasant for those who bought into it. This idea of becoming resilient deserves careful consideration, for we are entering "interesting times" in the sense of the ancient Chinese proverb/curse: "May you live in interesting times".

As an example of an interesting time in history, consider that you are a subsistence farmer on the Asian steppes, living a bare existence with your family. And then Genghis Khan arrives with his Mongol hordes.

Summing up, let us remember that timeless sage advice, (a) don't fight the Fed, and (b) never underestimate the ability of the powers that be to continue the status quo longer than we think possible. In the end, we pretty well know the outcome. But that could be a while in coming. When it does, those of us who have prepared will likely find it easier to cope. In the meantime, we occasionally get discouraged and that's understandable.
 

aggrivated's picture
aggrivated
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need to learn from history how to survive

This whole last few years reminds me a slow motion remake of the end of the movie "Thelma and Louise", but in this version the banks/Fed are driving and the politicians are riding shotgun. The kicker is that the rest of us are locked in the trunk. When the road (i.e. the underlying support of the bondholders) runs out the fall will be giddy until the ground rises to meet us. 

Most of the comments made on this site keep referring back to the idea that we will be much better off if we are prepared.  I think it will be very, very hard even with deep preparations made. BSV, your comment about Genghis Khan is interesting. I suspect that those who survived his invasion did so because they stayed out of harms way initially and then were incredibly flexible and resourceful in adapting to the new normal.  In a similar vein many of us are here in the USA because our ancestors had the courage and resources to flee harm and hardship at the right time. I would love for those of this site who know details of that kind of history, which I don't, to have a place to share and apply details for us of how our predecessors survived. My favorite medium is interviews that I can listen to while going about my day.

LesPhelps's picture
LesPhelps
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Treasury Debt held by Fed

The Fed now holds 2.2 Trillion in US Treasury debt.  It was only July when they passed China as the number one holder.  Soon, they will pass China and Japan combined.  Japan is the number two holder.

How can the general public and MSM ignore this?!  The implications seem clear to me.

Jim H's picture
Jim H
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The balance sheet is a perpetual money machine

Remember also that the balance sheet is a perpetual money machine.. throwing off interest and maturity payouts that the FED can use to "reinvest" in other assets... it does not have to return all of this to Treasury.  This is why the taper is really not a taper at all... as the balance sheet grows, AND as interest rates go up, the amount of money thrown off by the FED's balance sheet, aka perpetual money machine (funded by us taxpayers) increases... decreasing the need for QE.  

From the most recent statement;

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

sand_puppy's picture
sand_puppy
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Don't understand this at all

Jim H wrote:

Remember also that the balance sheet is a perpetual money machine.. throwing off interest and maturity payouts that the FED can use to "reinvest" in other assets... it does not have to return all of this to Treasury. 

I don't understand this at all.  Can you explain in a way, using a concrete example, what you see happening here?

Jim H's picture
Jim H
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Balance sheet

Sandpuppy,

I think my initial comment was a little bit misleading... the fact is that the FED does have to return most of the interest they get off the balance sheet, after paying their owners;

2.2.5 Remittances to the Treasury

The Federal Reserve remits any earnings in excess of operating expenses and dividends to the Treasury.22 The use of these funds is stipulated in the Federal Reserve Act, which states:

The net earnings derived by the United States from Federal Reserve banks shall, in the discretion of the Secretary, be used to supplement the gold reserve held against outstanding United States notes, or shall be applied to the reduction of the outstanding bonded indebtedness of the United States under regulations to be prescribed by the Secretary of the Treasury.23

link:  http://www.federalreserve.gov/pubs/feds/2013/201301/

But again, as the referenced portion of the recent FED statement suggests... when a bond or bill or MBS matures.... they get a return of principle... i.e. the instrument pays off... and that is... well.. money!  That money can then be reinvested, as per the rules, and as per the statement.  That money stands side-by-side.. is additive to, any ongoing QE.  So, the bigger the balance sheet, the bigger the roll of instruments that are maturing... and the more (perpetual) money the FED has to play with.  This is a dynamic of the enlarging balance sheet, and the ongoing QE, even in the face of a smallish taper.  This is the dynamic to which I refer.

When and if the FED actually begins to, "taper" it's balance sheet.. then we would have a different story.. but the taper in QE only means that the rate of growth of the balance sheet will slow some, not that the balance sheet will be stable or shrinking.  

 

Jim H's picture
Jim H
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This scenario is so Ponzi-ish, it's hard to fathom

Here is another way of thinking about how the FED's balance sheet works as a perpetual money machine, in terms of reinvesting principle.  It is hard to fathom because a prudent banker would never do this for you or me, were we using a bank like the FED to help enable our personal deficit spending. 

You may think that because the reinvestment of principle from balance sheet instruments is fairly balance sheet neutral (from a FED POV) that, well, nothing is really happening.. and yet there is some real sleight of hand at work here..  because you are not looking in the correct place.  What's actually happening is that the debt of your country is rising, month after month, year after year... and this is being enabled by the FED.  The US is paying back maturing debt instruments with new borrowing.... as is Japan, etc., etc.

You or I would not be allowed to do this.. in fact if you have ever taken out a mortgage, you know they are pretty careful to make sure you don't make your down payment with a credit card.. they want to see those funds in advance.  to make sure you have capital there and are not secretly going to become more leveraged than they already know about.  But the FED is happy to re-loan this money back to the US, at interest yet again, and allow it to ratchet up the debt even farther.  This is not a zero sum game... the results of this action are showing up in our ever increasing national debt.  The owners of the FED own us, and our children.. we are all debt serfs within the dollar system and you need to see how the magician is operating if you have any hope of getting out with any real wealth in the end.      

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Oliveoilguy
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Jim H

As this "perpetual machine" operates, is it not correct that the basis changes? In other words, as the debt continues to increase over the years, the reinvested maturing assets will have less and less impact on sustaining the system. Kind of like a gyroscope spinning but slowing until it crashes.

 

Jim H's picture
Jim H
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Oliveoil

Sure Olive... changes in the basis.. either loss of principle in held instruments due to interest rate increases... or, heaven forbid, reduction of the balance sheet through selling.. would reduce the, "balance sheet effect", just as would the underlying national debt increasing faster than the balance sheet (the dynamic I think you are pointing to).  BUT I would predict the opposite longer term, i.e. an eventual increase in QE (taper reversal) once things start falling apart and interest rates start increasing... meaning that the balance sheet growth will never go negative, but will actually accelerate once again.  

The balance sheet (reinvestment) does in fact give added gyroscopic stability to the markets - I like that term Oliveoilman.  The balance sheet is a money recycling center that gives the FED even more bullets than the explicit QE alone would suggest.  But then again, this (reinvestment) is a small effect compared to the other games the FED has apparently been playing to nullify the mark-to-market losses that the increasing interest rate environment has had on the balance sheet - read Andy Hoffman's interpretation of the fact that QE has been running at a rate of much MORE than $85 B/month lately.  As with almost any rabbit hole we explore.. the truth ends up being much stranger and more worrisome than the propaganda version of reality coming through the mainstream media;

http://blog.milesfranklin.com/proof-of-the-tapering-mirage

Quite obviously, the “Fed balance sheet” chart above completely ignores these losses; and thus, they must be added to the “exactly $85 billion per month” figure submitted for public consumption.  Again, the period involved was 7.53 months; so dividing $329 billion by 7.53 yields an increased monthly QE level of an astounding $44 billion.  In other words, while the Fed purports to have spent $85 billion per month, it actually spent closer to $85 + $44 = $129 billion per month over this period.  Moreover, if rates continue rising, which they most likely will now that the Chinese have stated their intention to stop accumulating foreign currency reserves, the new QE target of $75 billion will likely prove equally, woefully low.  Just look at this morning’s suspicious trading of the 10-year Treasury yield (below); as for the second straight day, a seemingly “magic” force emerged at the NYSE open to push rates down from the very, very key round number of 3.0% – above which, you can bet a veritable avalanche of “stop loss” sell orders are sitting.  In other words, the exact same manipulative, government algorithms utilized to prevent gold and silver from trading above “key technical levels.”             

davefairtex's picture
davefairtex
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fed balance sheet less excess reserves

Here's a chart I just cooked up that shows the amount of printed money actually making it into the real economy.  That is:

Effective Printing = Total Fed Balance Sheet - (Bank Reserve Balances - Required Reserve Level)

     or in FRED-speak

Effective Printing = WALCL - (RESBALNS - RESBALREQ)

At this point, every new dollar printed (WALCL) is landing right in excess reserves (RESBALNS-RESBALREQ).  That's why this chart has been flat for the past 9 months.

Isn't that interesting?  You can do this chart yourself at FRED if you don't believe me.  Try it, its fun!  (But the extra math in there is because RESBALNS has units of "billions of dollars" while the others have units of "millions of dollars" - one reason I write my own code since it does all that conversion for me)

http://research.stlouisfed.org/fred2/graph/?g=qfK

Adam Taggart's picture
Adam Taggart
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More on excess reserves

Great chart, Dave.

Here's one showing the increase in excess reserves, which corroborates your math:

 

Hard not to conclude from this: "It's GREAT to be a bank!!!". QE allows you to amass huge excess reserves on which you get paid interest - a risk-free way to make profits at, ultimately, taxpayer expense.

No need to do any more of that "lending" that banks used to have to trouble themselves with. Just park your excess reserves with Uncle Ben (now Aunt Janet) and watch the checks pile up. Who wouldn't want to be in that business?

From Wikipedia (boldface emphasis mine):

On October 3, 2008, Section 128 of the Emergency Economic Stabilization Act of 2008 allowed the Fed to begin paying interest on excess reserve balances ("IOER") as well as required reserves. They began doing so three days later.[3] Banks had already begun increasing the amount of their money on deposit with the Fed at the beginning of September, up from about $10 billion total at the end of August, 2008, to $880 billion by the end of the second week of January, 2009.[4][5] In comparison, the increase in reserve balances reached only $65 billion after September 11, 2001 before falling back to normal levels within a month. Former U.S. Treasury Secretary Henry Paulson's original bailout proposal under which the government would acquire up to $700 billion worth of mortgage-backed securities contained no provision to begin paying interest on reserve balances.[6]

The Congressional Budget Office estimated that payment of interest on reserve balances would cost the American taxpayers about one tenth of the present 0.25% interest rate on $800 billion in deposits:

Estimated Budgetary Effects[10]
Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Millions of dollars 0 -192 -192 -202 -212 -221 -242 -253 -266 -293 -308
(Negative numbers represent expenditures; losses in revenue not included.)

0.25% simple interest on $800 billion is $2 billion, not $202 million as shown for 2009. But those expenditures pale in comparison to the lost tax revenues worldwide resulting from decreased economic activity from damage to the short-term commercial paper and associated credit markets.

Beginning December 18, the Fed directly established interest rates paid on required reserve balances and excess balances instead of specifying them with a formula based on the target federal funds rate.[11][12][13] On January 13, Ben Bernanke said, "In principle, the interest rate the Fed pays on bank reserves should set a floor on the overnight interest rate, as banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed. In practice, the federal funds rate has fallen somewhat below the interest rate on reserves in recent months, reflecting the very high volume of excess reserves, the inexperience of banks with the new regime, and other factors. However, as excess reserves decline, financial conditions normalize, and banks adapt to the new regime, we expect the interest rate paid on reserves to become an effective instrument for controlling the federal funds rate."[14]

Also on January 13, Financial Week said Mr. Bernanke admitted that a huge increase in banks' excess reserves is stifling the Fed's monetary policy moves and its efforts to revive private sector lending.[15] On January 7, 2009, the Federal Open Market Committee had decided that, "the size of the balance sheet and level of excess reserves would need to be reduced."[16] On January 15, Chicago Fed president and Federal Open Market Committee member Charles Evans said, "once the economy recovers and financial conditions stabilize, the Fed will return to its traditional focus on the federal funds rate. It also will have to scale back the use of emergency lending programs and reduce the size of the balance sheet and level of excess reserves. Some of this scaling back will occur naturally as market conditions improve on account of how these programs have been designed. Still, financial market participants need to be prepared for the eventual dismantling of the facilities that have been put in place during the financial turmoil" [17]

At the end of January, 2009, excess reserve balances at the Fed stood at $793 billion[18] but less than two weeks later on February 11, total reserve balances had fallen to $603 billion. On April 1, reserve balances had again increased to $806 billion. By August 2011, they had reached $1.6 trillion.[19]

On March 20, 2013, excess reserves stood at $1.76 trillion.[19] As the economy began to show signs of recovery in 2013, the Fed began to worry about the public relations problem that paying dozens of billions of dollars in interest on excess reserves (IOER) would cause when interest rates rise. St. Louis Fed president James B. Bullard said, "paying them something of the order of $50 billion [is] more than the entire profits of the largest banks." Bankers quoted in the Financial Times said the Fed could increase IOER rates more slowly than benchmark Fed funds rates, and reserves should be shifted out of the Fed and lent out by banks as the economy improves. Foreign banks have also steeply increased their excess reserves at the Fed which the Financial Times said could aggravate the Fed’s PR problem.[20]

By October 2013 the excess reserves at the Federal Reserve had exceeded $2.3 trillion.[19]

davefairtex's picture
davefairtex
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EXCRESNS

One amusing factoid: FRED has stopped updating EXCRESNS.  Last update: May 2013.  You have to watch those boys at FRED like hawks, they do all sorts of things while you aren't looking.

The current (calculated) value is: 2.39 trillion dollars.

RESBALNS: 2.46 trillion

RESBALREQ: 70.5 billion

Yes.  I am a FRED geek.

Jim H's picture
Jim H
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Leave it to DaveF....

He can show you that all that printing actually amounts to almost nothing!  No problem at all!  Forget that the national debt, which will fall on the shoulders of our children, is now past 100% of GDP and growing at $1T per year.  The debt doesn't matter, because we are the USA... and our credit card limit is huge and we get a teaser rate of like 2% that never will expire!  The above post is PROPAGANDA.   

The printing has certainly not resulted in a spate of fractionally reserved mainstreet lending/money mutiplication.. that is true... but it has enabled our Gov't to be the borrower and spender of last resort, keeping the economy afloat and the banks healthy.  It has become a form of heroin that the economy is completely dependent on... there will be no way to get off of it, unless we get a huge dose of healthy, organic growth.. maybe due to the discovery of free energy!  Otherwise, we can keep playing these games until we can't anymore.  

If you are reading this, please understand that DaveF is here to play a role... his role is as a calming force in a place where many very intelligent thought leaders converse about our predicament.  He plays this role VERY WELL.  He can create a construct, as above, to help convince you that years of QE printing have amounted to almost nothing - see - the chart is right there.. how can you argue?  He can create a construct to show you that a negative GOFO, a rare event that signals Gold loaned will yield more than dollars loaned.. and which most pundits associate with a shortage of London good delivery bars.. or general tightness in the PM markets...is nothing but a vestige of miners hedging.  Note that 1-mo GOFO is negative again right now.  

Others here at PP.com are starting to see this more clearly as well.  Whether I, and they, are right or wrong... I think everyone will agree that we all need to heighten our abilities to discern friend vs. foe, to rally around our communities and help each other by using our expertise, intellect, and yes, intuition (or pattern recognition skills), to expose propaganda.    

     

 

Jim H's picture
Jim H
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Adam

With all due respect.. what are you talking about?  I am starting to think maybe I am just from a different planet than most folks here.. including you.

DaveF made up a chart that took the balance sheet, and subtracted from it the ever growing reserves balance, and called it, "effective printing".  This construct is just that.. a construct.. and it was created as a vehicle to tell a story.  The story is, "see, not much actual printing going on".  That story is total BS.  We have many times hashed over the fact here that the excess reserves are not getting out and multiplying.. fine.. that is true.  It does not though mean you can nullify the effects printing is having;

1)  Enabling our Congress to deficit spend on and on with no ill effects (so far)

2)  Propping up the economy by injecting the deficit amount directly in - that money may have a reflected representation in excess reserves, but it is ACTUALLY being spent as the Gov't borrows it for all the things the Gov't spends on.  It is real money being spent.  Some of it even gets to mainstreet when a Gov't worker from some bloated agency cashes their paycheck and sits down at the Diner for a meal.  If not for the printing, we would not be able to sustain the economy and our level of borrowing - there would be forced, massive cuts.

The growth of the debt, from $10.6T when Obama took office, to $17T today, is a direct result of all this printing... there is no way we could have achieved this level of borrowing and spending had it not been for the QE printing.  Free markets would not have allowed it.  To make a chart that purports to show that QE has had little effect.. has resulted in little, "effective printing" is propaganda in my book.         

       

Adam Taggart's picture
Adam Taggart
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Jim

???

What am I talking about?

1) QE has resulted in a massive buildup of excess reserves.

2) The banks are skimming growing profits, risk-free, at taxpayer expense from these.

Those were my 2 intended points. End of story.

I provided the FRED chart to corroborate #1, and the wikipedia entry (inclusive of the St Louis Fed president's incendiary quote) to support #2.

What are you talking about??? An intentional effort on PP.com's part to:

  • make the case there's not much actual money printing going on
  • try to nullify the effects of printing in enabling deficit spending & massive debt accumulation
  • to show that QE has had little effect
  • to push propaganda

Neither Dave nor I made any of those claims.

Clearly there is a difference between what we are writing and what you are reading into it.

After all of the articles & interviews Chris and I have published on the dangers and evils of QE, I get a considerable chuckle at being accused as a QE apologist. Here is a (tiny) sampling of our frequent railing against the mal-investment and other hazards of the Fed's QE program that we routinely produce:

My humor at this is short-lived, though. Your repeated and shrill 'hidden agenda' accusations are in violation of our site's guidelines and rules for civil, constructive commenting. And IMO, have become more than a little irritating.

We take the sanctity of our comments section as an idea exchange very seriously. It's one of the chief assets of this site, and I suspect is no small reason why you have been a longtime member here.

If you disagree with a point that I (or any other PP.com member) make, we more than encourage you to counter with your own evidence and data -- respectfully. We are all here to learn, and building on/challenging other's ideas is a critical success element for that.

But to repeatedly put words in people's mouths, make unsubstantiated/unprovable accusations about people's motives, label people (moles, shills, etc), and hijack otherwise constructive discussion in the name of your own personal witch hunt? We're simply not going to tolerate that. 

Do you want to debate the significance of negative GOFO rates? Or how much liquidity is making it into the real economy? How much longer the Fed can serve as the borrower of last resort? The sustainability of our national debt/GDP ratio? Any and all of these are fair game, and should be actively debated.

With data. With civility.

Without histrionics. Without a paranoia of hidden subtext.

This site is built upon the premise that the best-supported arguments will prove out. And that each individual reader will make up their own mind after listening to the merits of each side of the debate. We ask you to have the same trust in and respect for our readers' intelligence.

You don't need to agree with DaveFT, or any other poster here. But you do need to be respectful and constructive in your interactions on this site. The same applies to all of us in the PP.com community.

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Jim H
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Adam

We are clearly not communicating here.  DaveF made a chart that represented QE (balance sheet) minus excess reserves... which is a means to make the effects of QE seem minimal.  The chart, and the math behind it, is designed to create the impression that QE has had only a small effect.  In response to Dave's post and his chart, you said;

Great chart, Dave.

I vigorously disagree with you Adam.  It is not a great chart.  It is, as I described and defended  in great detail above, an attempt to use sketchy logic to convince folks that there are no negative consequences to QE.  We can argue whether or not Alasdair's FMQ is meaningful.. because this treats the reserves as inflationary tinder and as long as they are cloistered behind a reasonable interest rate.. they will probably remain there.. but Dave's idea of countering the FMQ with his, "effective printing" construct is just a bridge too far in the other direction.  If you indeed have a record as a website of not acting as apologists for QE.. why the change of position with your statement above?  Let's do this;  Let's ask Chris what he thinks of the value of this construct: balance sheet minus reserves.  I have said my piece - I think Dave's work is purposefully meant to misguide the 99% of people who don't have the depth of understanding to appreciate how silly it is.  Please ask Chris to weigh in here.. because I am not going to be intellectually dishonest with myself.

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davefairtex
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more effective printing

As Adam said, it's indeed great to be a bank.  Who else gets 0.25% on ultra safe ultra short term money?  Not me.  I have to go out one year in a treasury to do that.

As for Jim:

It is, as I described and defended  in great detail above, an attempt to use sketchy logic to convince folks that there are no negative consequences to QE.

I don't recall trying to convince anyone of that.  Oh that's right, that's because I never tried to do that.

This is the usual fare from Jim that always seems to appear when he doesn't really understand how to argue against some fact or figure, but he "intuitively" knows  it disagrees with his orthodoxy and like the Catholic Church of old, he feels he must subject any unorthodox thinkers to suffer figurative Inquisition and eventual Excommunication.

Can't think outside Jim's box, can we?  If we try, its Severe Punishment we must suffer.

I  don't try to make the world fit my thesis, I try and understand the thesis of the world.  I do this through charts and data.  And if new evidence shows up, I try to see where it fits in.  I want the world to speak to me, and it does this through data, and I understand it through charts.

I am trying to understand what QE really does, without saying whether it is good or bad.  If before you analyze, you feel you must try and pick a side, it really gets in the way of analysis.  You will find yourself cherry-picking statistics, believing things because they agree with your worldview, and bashing those who offer something that might possibly conflict with "what you know to be true."

I did this before, and it did not serve me well.  As a result, I try not to do this anymore.

Here's a puzzle:

How can the stock market continue to go up if money printing is going straight to excess reserves and credit growth is extremely mild?  Where is the money coming from?  Clearly, money is flowing into the market from somewhere.  Is it from overseas?  From other instruments?  From bank deposits?  Is the phenomenon all about margin loans?  If I can identify the source of the money, I can track it, and when it stops flowing, at that point we get a correction.

But if before I do this analysis, I am beating the "QE is bad" drum, maybe I might miss some element of the truth that doesn't agree with that orthodoxy.  Or I could spend my energy bashing those who aren't dissing QE.  Or I could be so sure I'm right, I end up making the wrong prediction, and then spend so much time & energy writing snarky articles about why the stupid market isn't following my thesis that I start to assume it must be Mysterious Powers that are causing things to move contrary to my worldview.

QE is a new thing.  Everyone is still - STILL - struggling to understand what it really does, how it really affects the economy.  There is plenty of time for me to diss QE policy once I solve the puzzle.  But prior to that?

Not my style.

gillbilly's picture
gillbilly
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Posts: 423
Debt Cancelation and Safety

I ran across these two articles. The first is about debt cancelation of intergovt. loans, the second is what to do if you believe the FED is a ponzi scheme:

http://www.washingtonsblog.com/2013/10/the-fed-could-simply-cancel-2-tri...

http://www.sovereignman.com/finance/think-the-dollar-is-a-ponzi-scheme-h...

Comments?

If I need to go to Hong Kong to exchange money secretly, I'm pretty sure I know where I can get a fake passport. blush

Doug's picture
Doug
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Posts: 3125
2 reactions

I don't pretend to have a sophisticated understanding of Fed practices, but two issues occur to me.

First, it is illegal for the Fed to directly give or loan money to the gov't.  Therefore, mechanically the way it is done is that the big banks (usual suspects) buy bonds issued by the gov't and sell them to the Fed, taking their skim in the process.  So, what happens if the Fed forgives the debt?  Isn't that dealing directly with the gov't?  It seems to me that that is functionally the same as the gov't creating its own money, as originally Constitutionally mandated, to pay the bills.  That would be debt free money.  Doesn't it still exist if the loans are forgiven?  If we analogize that transaction to a home owner with a mortgage, when the mortgagee pays off the loan, that money is extinguished except for the interest.  However, if the bank forgives the mortgage, that money is still in existence as a windfall to the home owner and there is no debt associated with it.

Wouldn't creation of trillions of dollars of debt free money injected into the economy be wildly inflationary?  And, doesn't it set a precedent for routinely forgiving gov't debt, as it has no effect on the Fed to print massive amounts of money and give it away?  It seems to me that QE is qualitatively different than printing and giving it away.  QE is created as debt and, at least theoretically, that debt acts as a restraint on profligate gov't spending.  Wouldn't printing and spending inevitably end badly?

Of course, the other side of that coin is that the gov't does pay interest on the loans which is also borrowed but returned to it by the Fed as a stream of additional revenue.  That would seem to be essentially a zero sum game, ignoring negligible costs of doing business.  And, simply printing and giving the money to the gov't would be a way to deflate the debt bubble.

Another question occurs.  Why doesn't the Fed simply print money and give it to debtors in the population to pay off their debts?  Of course that would punish those of us who strive to get and remain debt free, but it would deflate the debt bubble perhaps more effectively than the gov't could.

This is all speculative meandering, but I would like to read some reasoning by those more informed than I.

Doug

kenkelley89's picture
kenkelley89
Status: Member (Offline)
Joined: May 3 2011
Posts: 16
Ladies please...

I already don't read the g&s posts because of the juvenile bickering. 

Please don't ruin Ec Wonks for me too.

Dave f was chosen to do a daily wrap which he does well. Deal with it. 

Quit disrespecting Adam by appealing to the teacher. 

Oh look - an ignore user button. Thank the website gods!

Vk

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