Is that the QE II emerging on the horizon?

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machinehead's picture
machinehead
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Is that the QE II emerging on the horizon?

Leakers among the Fed doves plant another QE II trial balloon in the New York Times:

WASHINGTON — Momentum within the Federal Reserve this week continued to build toward resuming purchases of huge amounts of government debt to help the flagging economic recovery.

The president of the Federal Reserve Bank of New York, the most powerful of the 12 Fed regional presidents, made a significant argument for the strategy Friday, joining similar expressions of cautious support this week by his counterparts in Boston and Chicago. Their statements helped solidify a belief on Wall Street that the central bank was likely to resume large-scale purchases of Treasury securities after the Nov. 2 elections.

What the officials are saying, in increasing unison, is that inflation is undesirably low, well below the implicit target of about 2 percent, and that unemployment, at 9.6 percent, is far too high“Viewed through the lens of the Federal Reserve’s dual mandate — the pursuit of the highest level of employment consistent with price stability — the current situation is wholly unsatisfactory,” the New York Fed president, William C. Dudley, said in a speech in Midtown Manhattan.

Mr. Dudley spoke favorably about quantitative easing, citing calculations suggesting that “$500 billion worth of purchases would provide about as much stimulus as a reduction in the federal funds rate of between half a point and three-quarters of a point.”

http://www.nytimes.com/2010/10/02/business/economy/02fed.html?ref=business

Clearly, NY Fed president Do-Right Dudley has climbed aboard Banzai Ben's 'unconventional measures' train, with his notion that a trillion dollars in QE is like another one-point rate cut. (He cut the numbers in half so it wouldn't sound so scary.)

Although Dudley's speech is full of the conventional bafflegab chatter about 'expectations,' it never seems to occur to the Fedsters that driving long interest rates lower will actually bring the deflationist doommongers out of the woodwork, thus undercutting the Fed's forlorn attempt to stoke Keynesian animal spirits with rate cuts. Since few of them are business owners, they don't realize that interest rates are not the constraint on most business borrowing today.

I have argued that the Fed should buy international reserve assets -- gold, forex -- which not only will decisively raise inflation expectations, but also will hold its value as the dollar is debased. Bonds appear to be already at Bubble valuations. Official buying will drive them to nosebleed levels, only to precipitate a wholly predictable crash when bond prices overshoot to stratospheric valuations.

Mad Al Greenspan claimed that the Fed shouldn't take pre-emptive action against asset Bubbles. Banzai Ben has added a radical new twist, effectively advocating that the Fed create a Bubble as an unconventional means of economic stimulus. 

Whom the gods would destroy, they first drive insane. The Fedster kooks have hijacked the economic bus, while the deflationists have drained the brake fluid and the politicians have removed the guardrails from the hairpin curve. Me, I'm about to jump out the window.

 

specie's picture
specie
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Re: Is that the QE II emerging on the horizon?

Now that Harrisburg may opt for BK instead of some workout

perhaps Bennie and Feds are gonna buy some toxic munis

the fed is/will soon be largest holders of treasuries

add the toxic mortgages and perhaps some toxic munis

a federal reserve note is gonna be, well, toxic

how much green paper should a Amerikan citizen carry?

 

 

darbikrash's picture
darbikrash
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Re: Is that the QE II emerging on the horizon?

Ben sure does like his Keynesian role models. Although historically, it seems evident that it (domestic stimulus) did once work in the post Depression years lasting through 1947, circumstances have changed fundamentally that lead one to question if this holds true today (obviously).

Is not the first principle of Keynesianism that the stimulus money must remain in the country? Is that not impossible with our supposed global economy?

I think you can argue that political fits and starts of the New Deal had only sporadic success restarting the economy, mostly because of inconsistent political will. It cannot be argued however, that the emergence of WWII was anything but a jubilee with respect to jumpstarting the economy. Said another way, was this (WWII) not the largest “stimulus” program ever seen by a Western economy? I believe it was.

Perhaps a solution to our current predicament lies in the details of the WWII “stimulus” – as to who it actually stimulated and to what end. One word: Manufacturing.

The same word that brought China from a population of rice farmers into the role as one of the largest economies in the world. It was not ideology, it was not monetary policy, it was not Keynesianism vs. the Austrians, it was much more simple than that- he who manufactures- wins.

The reason that WWII had such a profound effect on the US economy was because it spooled up- in rapid fashion- an enormous manufacturing base. This was the indirect beneficiary of a war. It was not giving money to banks. It was not giving money to Wall Street. It was not lowering interest rates or buying foreign currencies. It was ramping up at breakneck speed massive manufacturing capacity with ready customers from the friendly War Dept.

So why could this not be recognized and repeated, this time without the War Dept as a customer?

So who wants to take bets on how fast unemployment drops if the US announces that all goods to be sold in the US must be made in the US. Not tariffs, it has to be made here if it to be sold here- period. Want to argue comparative advantage, flight of capital etc? Fine, if you want to sell it somewhere else that demands a low labor cost model, than go ahead and make it there and resell it to that market. You want to sell it here- you make it here.

Just the policy announcement will send companies into rapid scale up mode spanning capital investment, facility acquistion, and labor force replenishment. That or they give up the US market. Cost to the US taxpayer? Zero. Effect on the economy, well, similar in magnitude to WWII.

I realize this is tantamount to unwinding 40 years of conventional wisdom with respect to globalization- but hey, I'm calling BS, it didn't work except to enrich corporations and lead directly to the ascendancy of the financial sector  to the dominant industry. And look what that got us. I'm not inclined to accept any solution to our predicament coming from the financial sector- in any form.

Too simple, too radical? Why?

Ken C's picture
Ken C
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Re: Is that the QE II emerging on the horizon?
darbikrash wrote:

So who wants to take bets on how fast unemployment drops if the US announces that all goods to be sold in the US must be made in the US. Not tariffs, it has to be made here if it to be sold here- period....

Perhaps there is a simpler solution.

We should all be concerned with the quality and safety of all imported manufactured goods so simply insist that ALL imported manufactured goods be inspected for quality and safety. To insure that the inspection guidelines are followed uniformly there should be a single inspector for all such imported goods. After said inspector has approved the shipment after personnally inspecting each article then it can be realeased for import.

I think this approach may decrease the rate of imports just a little and it has the benefit of no actual tariffs.

Ken

 

dshields's picture
dshields
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Re: Is that the QE II emerging on the horizon?

are you sure qe ii has not already started ?  i am not sure i believe what the fed says about certain things.  announcing qe ii would be disruptive to the markets.  so why announce it ?  they did not announce all the institutions they funded.  just the opposite, they went to court to stop the data from becoming pubic.  i am not sure what they have been doing.  i do see strange things at work some days.

for instance, it is not uncommon, say once every 2 weeks or so, that some negative economic data will be published and the stock market will start to plunge very quickly after the announcement.  generally the dollar will start to drop in the same fashion at the same time.  then, in just a few minutes, all of a sudden big time buying moves into the markets and the plunge stops and then reverses.  who is moving in buying so much that it reverses the trend in multiple markets at the same time in just a few minutes on bad news ?  sometimes really bad news ?  it makes you wonder...

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yobob1
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Re: Is that the QE II emerging on the horizon?

As a charter member of the "deflationist doommongers", I say bring it on! It will do no more good than QE I which now lays at the bottom of the Marianna Trench.

It is inconsistent for them to target "price stability" while hoping to achieve a 2% "inflation" rate. 

While the Fed is supposed to be isolated from political influence, we all know that is not the case at all - they are very much a political animal.  How radical the castration of the Democrats is next month will have an effect on policy.  Of course we've also seen more than a few instances where the incumbent Republicans were ousted in the primaries. IMO Turbo Timmy's head is already on the chopping block.  The ire of the voters has rapidly coalesced around the issue of out of control spending and the lingering anger related to all the bailouts including the cash for clunkers and free govt. money for home buyers.

I don't expect a sudden reversal., but I expect the bow thrusters to kick in and begin to alter course.

We could of course embrace deflation in a radical manner by declaring a 100:1 reverse split on the dollar and all dollar denominated bonds and contracts.  At least we might avoid de-listing.

 

dshields's picture
dshields
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Re: Is that the QE II emerging on the horizon?

another strange aspect of QE2 is a simple analysis of the main stream media - say CNBC, a "business news" channel or Bloomberg.  There are a few people here and there that raise some good questions, but the vast majority if the time they are saying one way or another that it is all bottomed out and now things are getting better.  green shoots and all that.  i hear it every single day.  so, if that is true, then why would the fed be interested in QE2 at all ?  if everything is so great why have QE2 ?  Either the fed is going to do (or is doing) QE2 for the fun of it or the main stream media is basically lying say about 90% of the time.  How is the general population supposed to make good decisions when they are being lied to every day ?

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