December 14, 2012

QE4EVAH!

Your Federal Reserve, making sure there’s always money to spend:

Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. 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, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.

Bill Wilson, ALG:

[...] what if all this easing was actually prolonging the recession? That’s what Hong Kong Monetary Authority chief Norman Chan thinks might be happening.

Particularly, it is possible the process of deleveraging, necessary for a recovery, is being disrupted by quantitative easing, Chan noted at the 2013 Hong Kong Economic Summit.

Since 2008, financial institutions have shed some $3.3 trillion of debt, and are still deleveraging 4 years after the panic, according to data compiled by the Fed last updated Dec. 6. This is the process of balance sheet repair in the aftermath of the popped housing bubble.

“In order to solve the structural imbalances built up in the past two decades, we must get to the bottom of the problem,” Chan said.

But if all the bailouts are preventing the bottom of credit markets from being felt, then the rebound has been forestalled as the market’s price discovery mechanism remains broken.

Something to consider as Fed head Ben Bernanke promises that central bank support of the economy will continue until the unemployment rate is 6.5 percent. Namely, what if we never get there?

On the balance sheet side of the equation, if the Fed keeps buying U.S. treasuries at the new pace for 10 years, it’ll own an additional $5.4 trillion in U.S. debt — more than half of the $10 trillion of new federal debt that will be issued by 2022.

It already owns $1.6 trillion of treasuries, bringing the Fed’s grand total to $7 trillion, comprising some 27 percent of the $26 trillion national debt projected by that time.

When coupled with its annual $480 billion of mortgage securities purchases, the Fed will be printing more than $1 trillion in 2013 and every year after that to prop up financial markets and the federal government.

In the short-term, the new purchases should push interest rates down even further to historic lows — not unlike Japan has achieved over the past decade.

That is, until inflation ultimately rears its ugly head, at which point the Fed may find it impossible to unwind its position for fear of cutting off the flow of funds to the federal government. That is when the American people will pay — with higher prices for food, energy, and everything else.

This is the problem with a digital currency that can be lent into existence with the click of a mouse by all-powerful central banks.

Now dependent on the central bank, Congress will never balance the budget or significantly cut spending so long as the Fed buys U.S. debt. Bernanke’s policies are poisoning discipline in Congress to ever get our fiscal house in order.

In short, governments that take advantage of funny money see no other way to make ends meet.

Ultimately, printing money to pay the debt perpetuates the current broken financial and political system, in the process passing the hidden inflation tax onto everyone else, who had better hope their wages rise to pay for all this new debt.

The current temporary politicians and Fed reserve folk will have already feathered their own nests, so kicking the can down the road repeatedly — while knowingly setting us up for a hyper-inflationary economy that is inevitable — evinces the contempt our elected officials have for the we the people, a product of their having to debase themselves while pandering for our votes.

The disconnect between the DC trough feeders and the people they pretend to represent couldn’t be more stark.

What we need, politically, is a fresh start.  Nuke DC from orbit, I say.  It’s the only way to be sure.

Posted by Jeff G. @ 9:48am
11 comments | Trackback

Comments (11)

  1. bernanke likes raping the senior citizens whereas food stamp likes the young stuff

  2. I can’t wait till they have to start printing $500 and $1000 bills again. Maybe we can put Obama’s face one one of those.

  3. I don’t want to have to look at his stupid rapey face every time I want a latte

  4. In his little speech last week, Bernanke manifest fear.

    no one wants to mention that the Fed Chairman has changed the rules of the game in the middle of the game but there you are; a backsliding Federal Reserve Bank whose statements are only crafted for the moment and future moments may be brief; we just don’t know. Apparently we have transitioned to a “whatever is convenient” policy at the Fed and we all should bear that in mind when assessing probable actions.

    He all but openly admitted that the game is over. Considering that each successive QE has reduced the high — Yahoo Finance of BigCharts or whomever have the charts; check QE dates against the markets and then go back and look at the housing collapse and before it, for reference, the dotcom collapse — the addict is fast becoming immune to raw cash injections via Wall Street banks and other mega firms, the kind that basically own the markets, having shaken everybody else out. Like the one where they’re holding over ten million foreclosed properties, waiting to sell em back without wrecking the RECOVERY housing market again. And this when the reabsorption rate is still 600,000 units a month.

    The artificial stock market is the only game left and all QE is aimed at pumping it. This is what a nation that’s squandered its manufacturing base in favor of a number of artificial economies — the Welfare State, unionization, the FIRE economy, and of course, Jeff’s mention of many a feathered nest — looks like.

    Add in regular metals raids to jangle the hobbits and keep the panic at bay and it’s all fun and games but mostly it’s all slow motion pain and games. Oh, and basically everything you hear from the State’s mouthpieces about any of this is raw bullshit while the alternative Press on the matter is validated 24/7.

    No really. The veneer is so thin you can almost see light through it. That, at least, is good news.

  5. Now dependent on the central bank, Congress will never balance the budget or significantly cut spending so long as the Fed buys U.S. debt. Bernanke’s policies are poisoning discipline in Congress to ever get our fiscal house in order.

    In short, governments that take advantage of funny money see no other way to make ends meet.

    Our financial system is modeled after the crystal meth trade.

    What could go wrong?

  6. Jhoward, and perhaps you can expand (or dismiss, because I’m way off base) on the idea that the Fed is trying to push inflation because, in the end, it helps the over leveraged large corporations, by allowing companies to pay back debt with money that is worth a lot less than when the money was originally borrowed.

    Conversely, the biggest fear large companies have is a deflationary crash, because then companies have to pay back debts with money that is suddenly worth more than when it was borrowed.

    If I’m not mistaken, most of the large companies in the US would instantly implode if a deflationary crash happened.

    In fact, taking the thought a bit further, what happens to Fannie and Freddie in a deflationary crash?

  7. There were a couple of long pieces in the 12/12 WSJ about how a large number, including the three main players in the Fed, the EU, and the UK, all came out of the economic school of thought of MIT in the late 70s and the 80s.

    The Massachusetts Institute of Technology in the 1970s and 1980s was the center of a generational shift in economic thinking that ascribed substantial influence to central banks for managing economic turbulence.

    MIT, in Cambridge, Mass., became home to many “New Keynesians,” economists immersed in the real-world complexities of markets and sympathetic to government intervention.
    [...]
    Economists at MIT focused on the minds of consumers and business owners—how expectations of the future can affect economic behavior today. Public statements issued by central banks, for example, are carefully crafted to shape expectations.

    The MIT economists adopted some ideas from so-called freshwater economists whose challenge of Keynes gained force in the 1970s. Economists at universities in Chicago, Rochester and Minnesota—nicknamed for their proximity to the Great Lakes—saw markets as efficient, driven by households and businesses holding rational expectations for the future. They rejected a government role, in part, because they believed markets were always a step ahead of government planners.

    The MIT economists embraced the forward-looking focus on expectations but saw a world still prone to market breakdowns. Mr. Fischer wrote a paper showing why monetary policy was sometimes needed to jolt slow-adjusting wages and prices, breaking ranks with freshwater economists.

    Managing, shaping expectations seems oxymoronic to me as all expectations that are based in a world where a few men, in the fiscal and political arenas, can flip-flop from day to day, will be pessimistic and oriented to survival not growth.

    The biggest central banks plan to pump billions more into government bonds, mortgages and business loans.

    Their monetary strategy isn’t found in standard textbooks. The central bankers are, in effect, conducting a high-stakes experiment, drawing in part on academic work by some of the men who studied and taught at the Massachusetts Institute of Technology in the 1970s and 1980s.
    [...]
    If the central bankers are correct, they will help the world economy avoid prolonged stagnation and a repeat of central banking mistakes in the 1930s. If they are wrong, they could kindle inflation or sow the seeds of another financial crisis.
    [...]
    The goal is to lower borrowing costs and stimulate stock markets to encourage spending and investment by households and business. But the method is untested on such a global scale, and central bankers have labored in behind-the-scenes meetings this year to size up the risks.

    A day after their June dinner here, the central bankers were warned by one of their hosts in a speech to the group.

    “Central banks find themselves caught in the middle, forced to be the policy makers of last resort. They are providing monetary stimulus on a massive scale,” said Jaime Caruana, general manager of the Bank for International Settlements, where the dinners are held. “These emergency measures could have undesirable effects if continued for too long.”
    [...]
    “Central banks cannot solve structural problems in the economy,” said Stephen Cecchetti, who runs the BIS monetary department. “We’ve been saying this for years, and it’s getting tiresome.”

    Central banks control the spigot of the world’s money supply. When opened, the flow of new cash heats up economies, driving down interest rates and unemployment but risking inflation. Closing the spigot, on the other hand, raises interest rates and cools economies but tamps down prices.

    The central bankers have promised that once the global economy gets back on its feet, they will shut off the spigots quickly enough to forestall inflation. But pulling back so much money, at exactly the right time, could become a political and logistical challenge.

    “We’re all very conscious that we’re in an environment that’s unusual and we’re using a policy weapon that we don’t have a lot of experience with,” Charles Bean, deputy governor of the Bank of England

    We’re all lab rats now in a maze the experimenters can change but have never, can never control though they believe they can.

  8. Jhoward, and perhaps you can expand (or dismiss, because I’m way off base) on the idea that the Fed is trying to push inflation because, in the end, it helps the over leveraged large corporations, by allowing companies to pay back debt with money that is worth a lot less than when the money was originally borrowed.

    I can’t know what motivates the deeply entrenched, deeply manipulative, and profoundly powerful cartel (for want of a better word) that is the US Federal government, its treasury, its de facto financial monopoly, and that monopoly’s customer banks.

    If I were to guess, I’d say that given that it ascribes positive-direction management to a large chunk of the beast your characterization is probably charitable. Remember that it (or they) have a raft of political power and economic leverage to exercise in the immediate term, and that by now thoughts of bilking the long term have probably escaped them.

    Conversely, the biggest fear large companies have is a deflationary crash, because then companies have to pay back debts with money that is suddenly worth more than when it was borrowed.

    Deflation is largely a myth. History just doesn’t show it happening as any meaningful ratio of inflationary events.

    IMHO, an outright crash is probably the more immediate concern (and in a market inflated by half with stimulus, all but guaranteed). Things are transpiring so fast and with such short term consequence that they tend to swamp long term planning. Meanwhile long term action means leaving the only game left, as I alluded above. Such would take a Board with sterner stuff than any I can imagine.

    If I’m not mistaken, most of the large companies in the US would instantly implode if a deflationary crash happened.

    When you realize that the market is traded far more by investment corporations than by real investments — consider the variety of inverse, perverted relationships between monies, stocks, funds, indices, and the like that fiat currency and bad regulation has wrought — there’s a great deal of action happening for the savvy manipulator’s immediate corporate upside, this being the age of President Goldman Sachs and wall to wall crony capitalism. Any one or five or twenty of them magically unhinging, taking enormous losses today, and ostensibly preparing to be on the uptrends when sanity prevails, is probably a stretch of Randian proportions.

    In fact, taking the thought a bit further, what happens to Fannie and Freddie in a deflationary crash?

    If you’re asking what happens if a crash occurs and housing prices deflate, which they shall if one comes, I suppose the answer lies in whatever power the feds have to craft legislation to refloat those dead whales. With luck they’ll be left dead on the beach in the hot sun of the revival of real markets and real trade.

  9. Whatever the impact is of the QE4 is, at least we know for sure that it will be declared “unexpected!”

  10. If I were to guess, I’d say that given that it ascribes positive-direction management to a large chunk of the beast your characterization is probably charitable. Remember that it (or they) have a raft of political power and economic leverage to exercise in the immediate term, and that by now thoughts of bilking the long term have probably escaped them.(…)

    Any one or five or twenty of them magically unhinging, taking enormous losses today, and ostensibly preparing to be on the uptrends when sanity prevails, is probably a stretch of Randian proportions.

    Jhoward, my thinking is along the lines of:

    1. The people at the top really think they are “the smartest people in the room” and are arrogant enough to think the market will never (whether financial or lamppost) catch them off guard and hit them with a margin call they cannot cover.

    2. The Goldman Sachs cabal does not care what happens to anyone or the USA, as long as they get theirs.

  11. Blake, in either event given all the prior wreckage both internally ignored and externally left entirely unreformed, obviously neither they or our government care at all.

    It’s hard to grasp the perniciousness of the institution that runs the world money system(s). What personally moves them doesn’t concern me as it’s neither subject to correction or much debate. What it physically is, however, is terminal to classical liberalism.

    This is one of two or three of the greatest existential threats to the American way, the others being progressivism — which is the intellectual parallel to bad money practices, thereby dooming the Republican remoras who seek to attach themselves to the State either politically or economically — and progressivism’s multiculturalism.

    Yet even though they’re all part of the same synchronous arrangement of lies and deceits that has replaced reality with the corrupt egos of various imperial persons across a number of domains, bad money and practice gets virtually no airtime on the ostensible right. I think this owes to their false notion that banking is free enterprise and politics are not. This is incorrect and is evident with just a little thought.

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