QE2: Fed to spend $900B more to spur econ. This on top of $2T already spent. WTF?!

[potluv]

No need to worry, the Amero and NAU will save us.

 

[halik]

Ah, so the government is pretty much buying its own debt, just in a de facto sort of way. Gotcha

Lacking in the reading comprehension department, it's the banks that are de facto buying the gov't debt. The funding for QE doesn't come from the gov't, but rather the member banks.

There money supply expansion doesn't come from any sort of "creation" of money, just expansion of credit/loanable funds.

 

[halik]

He doesn't want to say so but that is what's happening. It truly is a symbiotic relationship between the Federal government, Federal Reserve, and banks. The FR "lends" money to the banks who in turn lend it to the Federal government.

What are you talking about? The money that fed uses for QE comes from the member banks.

If anything, the proper way to think about it is that FED issues debt to member banks, and the capital raised with the debt comes from the banks deposits. Also that's partially why fed started paying debt on the reserves (ie the debt is issued to member banks).

I think most people's confusion about the mechanics comes from the term "printing money" - this implies that fed is literally changing the amount of cash it has ($1... let's change it to $2 woohoo) and then giving it to the banks. That is patently wrong.

 

[CycloWizard]

See "mission impossible" in sig.

Yes, that pretty much sums up my point. How can a process control engineer control a process in which the mass/energy varies based on factors which are not understood? It's a fool's errand.

 

[bamacre]

It's became a fiat for people that think the world is ending and that price move will reverse in the future. Relative to a basket of industrials it is bound to under perform.

Yeah, paper gold/silver has been suppressing those prices. I cannot help but believe that eventually the market will win that game. How long that may be, no one knows. But eventually they're gonna have to dig up Nixon so he can tell the world, "the gig is up."

That's why I'm saying IF you are buying some gold/silver for the long haul, might as well buy the real thing, even though there's a (small) premium for doing so.

 

[nick1985]

He doesn't want to say so but that is what's happening. It truly is a symbiotic relationship between the Federal government, Federal Reserve, and banks. The FR "lends" money to the banks who in turn lend it to the Federal government.

Yeah, its pretty easy to see through the smoke on this one. But we are arguing with halik, who will defend the big government, big spending, big borrowing agenda to the grave. I think he drank too much of the krugman koolaid

 

[halik]

Yeah, paper gold/silver has been suppressing those prices. I cannot help but believe that eventually the market will win that game. How long that may be, no one knows. But eventually they're gonna have to dig up Nixon so he can tell the world, "the gig is up."

That's why I'm saying IF you are buying some gold/silver for the long haul, might as well buy the real thing, even though there's a (small) premium for doing so.

Paper gold is the same thing as physical gold (again assuming no counterparty risk), if you want to have a position in that asset class you can do it either way.

Both physical and synthetic gold positions are largely a fiat by definition, just because bulk of their value is extrinsic (i.e. have value because other people believe it has purchasing power, same thing like paper currency).

 

[halik]

Yeah, its pretty easy to see through the smoke on this one. But we are arguing with halik, who will defend the big government, big spending, big borrowing agenda to the grave. I think he drank too much of the krugman koolaid

I tend to vote republican and I'm hardly big gov't/big gov't spending guy. I just happen to know a little more about macro/monetary policy/fiance, as that's what i do for living. And I take an issue with rage based on ignorance.

You're the guy here screaming OMGZZZ gov't is printing money and using it to buy gov't debt... going off a whole bunch of misconceptions and the stuff that you read on wiki (the QE article is pretty awful).

The truth is what fed is doing is not much different than cutting rates, just the mechanics are a bit more involved. Expanding monetary supply is the end result in either case.

 

[nick1985]

I tend to vote republican

LOL! I nearly spit out my coffee

and I'm hardly big gov't/big gov't spending guy.

Ok, now I spit out my coffee

I just happen to know a little more about macro/monetary policy/fiance, as that's what i do for living. And I take an issue with rage based on ignorance.

Ah, since someone on the internet claims they do that for a living, that means they cannot be questioned on it! Whatever you say Paul.

You're the guy here screaming OMGZZZ gov't is printing money

This is just a straight up lie

The truth is what fed is doing is not much different than cutting rates, just the mechanics are a bit more involved. Expanding monetary supply is the end result in either case.

So basically its buying its own debt. Gotcha.

 

[bamacre]

Paper gold is the same thing as physical gold

Yeah, try to give your fiance a ring made out of paper.

Seriously, I see what you mean. You're correct, and will be, unless the demand for physical outweighs the demand for paper, i.e., people begin to perceive a difference between the two. I believe that will happen some day, and for some, it already has. But those people do not make up a significant enough portion of the market, and until they do, you will remain correct.

 

[halik]

LOL! I nearly spit out my coffee




Ok, now I spit out my coffee




Ah, since someone on the internet claims they do that for a living, that means they cannot be questioned on it! Whatever you say Paul.



This is just a straight up lie



So basically its buying its own debt. Gotcha.

Wow all these clever retorts, you must have a debate championship plaque hanging on your wall.

The very idea of "government buying own debt" makes no sense, as debt is a zero sum game. Need moar youtube econ education my friend.

 

[halik]

Yeah, try to give your fiance a ring made out of paper.

Seriously, I see what you mean. You're correct, and will be, unless the demand for physical outweighs the demand for paper, i.e., people begin to perceive a difference between the two. I believe that will happen some day, and for some, it already has. But those people do not make up a significant enough portion of the market, and until they do, you will remain correct.

Ha gold and other metals do have some intrinsic value for stuff like that, but the recent run up has nothing to do with that.

Counter party risk is about the only way you'd see the spread between synthetic and real metal blow up - you're essentially talking WW3 or something, otherwise you have the exchange clearing house backing your synthetic trades.

 

[nick1985]

Wow all these clever retorts, you must have a debate championship plaque hanging on your wall.

So do dont deny lying? Didn't think you would, it was pretty obvious

The very idea of "government buying own debt" makes no sense, as debt is a zero sum game. Need moar youtube econ education my friend.

It makes plenty sense. You should know, since you work in finance.

 

[bamacre]

Ha gold and other metals do have some intrinsic value for stuff like that, but the recent run up has nothing to do with that.

Counter party risk is about the only way you'd see the spread between synthetic and real metal blow up - you're essentially talking WW3 or something, otherwise you have the exchange clearing house backing your synthetic trades.

Actually there are many industrial uses for silver...
http://en.wikipedia.org/wiki/Silver

Unlike gold, a significant portion of silver that gets dug from the ground is "consumed."

 

[halik]

So do dont deny lying? Didn't think you would, it was pretty obvious




It makes plenty sense. You should know, since you work in finance.

Huh?

I'm an investment analyst at a large institutional portfolio...

Issuing debt only to buy it back right after makes 0 sense.

 

[halik]

Actually there are many industrial uses for silver...
http://en.wikipedia.org/wiki/Silver

Unlike gold, a significant portion of silver that gets dug from the ground is "consumed."

Oh yeah, I'm talking about gold specifically. Silver and platinum are much better relative value plays in my head, since they have a lot less of the "FUD" premium built in.

 

[bamacre]

Oh yeah, I'm talking about gold specifically. Silver and platinum are much better relative value plays in my head, since they have a lot less of the "FUD" premium built in.

I'm hoping we hit that 16:1 silver/gold ratio again. That would make silver ~90 per troy oz. Bring it!

 

[soccerballtux]

We're paying off all of our debt because of low returns in savings, so guilty as charged. To be fair though, if we didn't, the money would still be sitting in savings or some other investment. It's not like the alternative would be a spending spree.

That's a good point (first half)...
but I thought the alternative WAS a spending spree.

 

[Narmer]

Huh?

I'm an investment analyst at a large institutional portfolio...

Issuing debt only to buy it back right after makes 0 sense.

These are different organs of the government. One is lending money to the other via the banks. You say they're basically lowering the reserve ratio, right? Well, if that money is being untapped mainly for bonds then it's pretty obvious the intentions here. Government sells its bonds, banks make a nice profit, and the federal reserve looks the other way knowing full well that this bullshit is not stimulating the economy one bit but just increasing the national debt.

 

[soccerballtux]

Most of what we export is also available from other countries, so inflation will make us more competitive. Most of what we import is not available from American manufacturers, so what we import will cost more. Since we import far more than we export, a weaker dollar will increase our deficit, meaning more of our GDP will go for debt servicing.

Weakening the dollar may be able to increase our employment by making our wages more competitive. Weakening the dollar will increase our trade deficit and debt, and will lower our standard of living. No one has ever found prosperity through inflation.

I'm just saying we need a weaker dollar to encourage us to decrease our trade deficit (make foreign goods costlier. IE, the "strong dollar" mantra doesn't really fly long term. It sounds good, but it will never fly longer than companies don't take advantage of it to outsource.

 

[nick1985]

These are different organs of the government. One is lending money to the other via the banks. You say they're basically lowering the reserve ratio, right? Well, if that money is being untapped mainly for bonds then it's pretty obvious the intentions here. Government sells its bonds, banks make a nice profit, and the federal reserve looks the other way knowing full well that this bullshit is not stimulating the economy one bit but just increasing the national debt.

This

 

[yllus]

Yes, that pretty much sums up my point. How can a process control engineer control a process in which the mass/energy varies based on factors which are not understood? It's a fool's errand.

Is your position then that the Federal Reserve (and all other central banks) should not play an interventionist role in the market? They will never, ever have a handle on all of the variables.

Government sells its bonds, banks make a nice profit, and the federal reserve looks the other way knowing full well that this bullshit is not stimulating the economy one bit but just increasing the national debt.

That's certainly going to be part of the process. We'll see if that's how the majority of the funds are directed. I was wondering last night whether it'd be better for the government to hand out money directly to businesses, but they're even worse judges of viability/success than the banks have proven to be...

 

[Narmer]

This

Look at how the market responded today. If Halik works on Wall Street, he's celebrating too. Of course, for Main Street, nothing changes. Halik's income is probably slavishly tied to government debt. He needs more, Moor, MOAR!!!

 

[halik]

Look at how the market responded today. If Halik works on Wall Street, he's celebrating too. Of course, for Main Street, nothing changes. Halik's income is probably slavishly tied to government debt. He needs more, Moor, MOAR!!!

I don't work on wall street anymore

We're about as main street as it gets and actually lower rates make our life more difficult. Any my income is actually related to weather more than anything else

My view is that it's a lot easier to stop inflation than to stop deflation and that's probably why Ben is doing what he's doing. The CPI going down in the last couple months was definitely not a good sign, but the outcome/impact of this probably won't be enormous. To some extent pushing on a string.

 

[Zebo]

Explained in clear English

Bernanke's Folly: The End Game
http://market-ticker.org/akcs-www?post=171242

Consider the following number:
9,069,879,047,803.52

That's the "marketable" debt - $9 trillion.

Here's The Fed's numbers in debt held, as of now, in billions:

834 - Treasuries
1,059 - Mortgages (at what embedded loss?)
150 - Agency (Fannie and Freddie) debt

There are some other things in here too, but that's the basics as of October 27th.

The Fed proposes to buy $600 billion of additional Treasuries, and at the same time roll off agency debt and mortgages, rolling that into Treasuries. Call the entire thing $800 billion.

So their balance sheet will look like this:

1,600 - Treasuries
959 - Mortgages
50 - Agency debt

Over time they expect the balance sheet to shift, so that the Treasuries are all that's there. This means they want it to look like:

2,700 - Treasuries

Yeah.

Now remember, as of right now, China holds $860 billion of Treasuries and Japan holds $836 billion. The UK is down at $400 billion and then Oil Exporters, at $226.

So once QE is done The Fed will own more than China and Japan combined, about 18% of the total.

Why is this a problem?

Simple: The purpose of issuing bonds into the market is to provide a putative check and balance on Treasury overspending. That is, at some point the continued issuance causes the bond market to revolt and refuse to buy, driving rates much higher. That in turn causes the interest expense to go to the moon.

This threat is the primary check and balance on an out-of-control Federal Government.

The "Chartalists" (and their useful idiots everywhere) claim that the Federal Government simply spends money into existence, and thus they can do this all they want. Well, technically true - you can print all the money you want. However, you cannot control it's value except through relative scarcity!

The Bond Market, rather than being a monetary tool as these people claim, is in fact a fiscal discipline enforcement device.

This is what The Fed with its QE and now QE2 has destroyed.

When Ben Bernanke said "we will not monetize the debt" what he was saying is that he would not permit that fiscal discipline device to be removed from the scales of financial balance. He lied - he not only removed it with QE1, he has now ratified that this discipline function will remain removed via QE2.

The problem with removal of this device of restraint is that fiscal discipline is in fact the only way one avoids imposing taxes on the public. Taxes come either in the form of a literal tax that must be paid or they are financed by causing an increase in the price of things denominated in a currency as a result of debasement.

Taxes inhibit business profits by diverting income from the business and to government. Therefore, in the general sense, the lower the tax rate the more business prospers. Of course taxes cannot be zero, because the government must have funding to perform its essential functions - we merely argue over what those essential functions are and how to pay for them.

QE is effectively naked emission of currency into the economy by government spending. It thus always results in shifting the price equilibrium on commodities in that currency to the right - that is, higher. At the same time since input costs are effectively a tax on production pressure downward is increased on wages. This in turn means that while cost pressures go upward, wages go downward.

Thus QE cannot spur employment. It in fact does the opposite by imposing an effective tax on business operations and consumers, which tends to drive down after-tax compensation of employees.

Ben Bernanke claims that QE is intended to "spur investment" by increasing the "wealth effect." But any such effect is in fact transitory, as one cannot support higher stock valuations while margins are being pressured. You need margin expansion to be able to support higher valuations over time, and that means you need either lower input costs, higher employee after-tax earnings or both.

Bernanke's policies are in fact pushing both of these factors the wrong direction.

But worse, consider the certain "death spiral" scenario on the path we are now traveling:

1. QE is an implicit tax on the population. Input costs go up. This is an effective tax increase on everyone in the country. A dollar increase in the price of gasoline is an effective $140 billion dollars a year in additional tax, as just part of the impact. Basic staples are already up about 10% annualized, despite Bernanke's claim of "no inflation." Note that the "tax on the rich" everyone is talking about is a mere $70 billion a year by comparison.

2. This in turn means lower disposable income for consumers. That in turn hits discretionary spending. And that, in turn, means companies don't need to hire people to provide discretionary goods and services. This is what Bernanke did with QE1. He in fact destroyed job creation, which is a big part of why we still have 10% unemployment! Bernanke CAUSED that unemployment by creating a price ramp in the commodity space!

3. This, in turn, means more demand for social programs. More unemployment. More Medicaid. More food stamps. More government spending of all sorts. But there is no tax revenue increase coming in to pay for these increased demands (it's all going to the commodity producers) so the government once again turns to the bond market and issues debt to fund this increased spending demand.

4. Left alone, the bond market will react to this "never-ending" deficit spending cycle by increasing rates in an attempt to cut it off. This in turn provokes The Fed into even more QE to "spur employment and increase asset prices."

See the problem? The more QE you do, the more jobs you destroy because you continue to trash margins through the imposition of an effective tax on the entire economic system.

Eventually The Fed ends up being, for all intents and purposes, the entire government bond market.

At that point the issuance of credit money is no longer backed by anything at all - it is simply emitted raw, and for every dollar emitted in this fashion you have both a 100% transmission into prices and a premium applied on your threat to do more of it.

That's Weimar Germany folks - it is exactly what happened there, and exactly what will happen here unless Bernanke stops this crap. Since he won't stop on his own volition it is up to Congress and the people to stop him.

Metals will not save you if this spiral occurs. Nothing will save you, other than not being in the nation that this happens to. Government will, in its last gasps of trying to prevent itself from being unable to pay the military, Congress, and of course Ben, find ways to literally confiscate everything in a futile attempt to increase the asset base upon which it issues its increasingly-worthless currency.

There is no exit that can come from a "growing" economy when you are continually increasing the implicit tax rates in the general economic system as your response to each previous tax increase. That is, when your tax increase results in more unemployment and you respond by further increasing taxes, you are simply tightening the noose around your own neck.

The implied tax that has been imposed on the economy thus far since QE1 was put in place is a stunning $250 billion annually due to oil's price increase alone, or nearly four times the so-called "Bush Tax Cuts" for the rich. QE2 will add another $1/gallon (roughly) to gasoline which is another $140 billion, for a total of almost $400 billion each and every year.

And that's just in oil prices - then you have to add in all the other input cost-push problems, from corn to wheat to oats to cotton to wood pulp. The total effective tax increase from QE2 is in fact the entire $600 billion QE package, plus whatever the market anticipates Ben will do as a follow-on!

What is being done here, if it is not stopped by Congress and/or the people, will destroy the economy. There is no ability to withdraw the QE-anything without causing all of the previously-hidden costs to immediately assert themselves in the economy. This is not speculative - it is factual. We cannot get wage inflation due to the lack of pricing power by labor in a market with 17% of the people either out of work or underemployed and another 7 million who are not counted as they are not part of the labor participation rate, which has declined by 5% in the last two years. The true unemployment rate is thus closer to 25%.

Without the ability to pressure wages higher there is no means available to set in motion Bernanke's "virtuous cycle" he is looking for as there is no pricing power for labor today.

We won't get a "high inflation" spiral. We will instead get a downward-spiraling economic disaster where employment and productive investment is successively destroyed by these artificially-imposed tax increases that amount to hundreds of billions of dollars over the next six months - north of a trillion in just one year, or some seventeen times the amount Congress is "debating" with the "tax cuts for the rich."

This is the true tax issue that will destroy our economic future - and nobody's talking about it.