WHAT EVER HAPPENED TO THAT DOLLAR CRASH?

Back in October the economic buzzwords had become “money printing” and “debt monetization”.  Of course, at the time, the Fed was initiating their policy of QE2 and you’d have been hard pressed to find someone in this country (and around the world for that matter) who wasn’t entirely convinced that the USA was about to send the dollar into some sort of death spiral.  QE2 was about to set off a round of inflation that would make Zimbabwe look like a cakewalk.  And then something odd happened – the dollar rallied as QE2 set sail and hasn’t looked back since.

Just days before the dollar rally started I said the market was excessively confident in the Fed’s ability to create inflation and misinterpreting the impacts of QE2:

“If my theories prove correct it is likely that the dollar is well oversold and equities have become overextended on false hopes of a Fed driven economic recovery.  This means the market is excessively concerned about inflation and we are likely to move closer towards our economic reality of disinflation with a higher risk of deflation than high inflation.   If this is correct it means there is a fairly sizable air pocket beneath risk assets currently. Warren Buffett once said it is better to be greedy when others are fearful and fearful when others are greedy.  I am currently fearful.”

Since then we’ve seen  a 7%+ move in the trade weighted dollar and the smallest 12 month increase in the history of the CPI report.  In other words, inflation remains non-existent.  For the minority who understood how QE was actually going to impact the economy this was an obvious inefficiency at work (yes Eugene Fama, you are still wrong and this was real-time evidence of it).  QE2 wasn’t inflationary and it never was going to be inflationary because it merely alters the term structure of outstanding government debt and nothing more.  It is not money printing.

This was just one more opportunity for the fear mongering hyperinflationists to latch onto something.  Even as Ben Bernanke himself explained that he was not printing money we continued to see aspiring Presidential candidates, talking heads and even bunny rabbits explain to millions how the Fed was destroying the value of the dollars in our pockets.  This was not only irresponsible, but entirely wrong.  QE2 is not inflationary in the least bit.  It does not help the US government spend in the future.  It will not cause a dollar crash.  It’s just an asset swap. It’s an unusual form of the standard monetary operations that the Federal Reserve always performs.  But monetary policy during a balance sheet recession becomes a blunt instrument.  QE2 is perhaps the most misunderstood and irrelevant policy the Fed has ever embarked upon.  Or as I prefer to call it – the greatest monetary non-event.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:
TwitterLinkedIn

  • FDO15

    TPC, you should have stayed in the equity short position. Your analysis has been so spot on in recent weeks, but I think you got out early. I know you’re playing the anti QE trade through the dollar, but real money will be made in equity shorts in the coming months. I think we could see a complete unwind in stocks and commodities since early September.

  • Dimm

    How about
    WHAT EVER HAPPENED TO the credibility of the people predicting THAT DOLLAR CRASH?
    The sad answer is there is no change …

    It does not matter if you are right or wrong when the public has the attention span of a 2 year old.

  • Mountaineer

    Long Dollar/Short Yen has been enjoyable.

  • http://www.pragcap.com TPC

    The equity short just doesn’t have the same risk/reward. What concerns me is that the economy has certainly improved off the August lows so the QE2 inefficiency trade doesn’t apply quite as well. I’d been short equities for 6 weeks with zero gains. I’m not really that upset to have missed the last 2%. The dollar long has been an incredible trade.

  • http://www.pragcap.com TPC

    If we had to hold people accountable for misinterpreting QE CNBC would have no one left to put on TV. :-)

  • Dimm

    That’s how it should be though, right :) the media should inform the public, not misinform it.

  • Mercator

    I scan it all… CNBC, Bloomberg, Kiplinger, blogs, and so on. So far, the blogs have kept me on the right track. This site in particular has been spot on. Thanks TPC. I hope your high batting average continues.

  • http://www.pragcap.com TPC

    Unfortunately when it comes to finance the majority of what the media tells us is nonsense.

  • roger erickson

    So the enduring mystery that goes inadequately discussed is: Why the heck IS the FED not just pursuing QE2, but still putting so many CPU cycles into its planning & discussion?

    Just to feel better about wetting it’s pants in a dark suit? Or do they really want someone to notice, so they’ll look like they’re doing something important?

  • AWF

    Ok-Ok –You can “crow crow crow” a bit about that Long Dollar trade.

    I’m not going to put a label on the reasons why–It is what it is.

    A bigger concern is the contribution of exports to GDP -

    A Strong USD will reduce that contribution and more than likely cause the DD that David R has predicted.

    Many are overestimating that the US economy is “Improving”

    I believe we will see a new front in the currency war come the New Year.

  • fin

    Has anyone noticed the problem in Hungary? Middle & east eu may give us some surprise rather than china.

  • Roger Ingalls

    Mountaineer:

    Does that shorting the yen with the dollar trade (YCS??) still have a ways to go?

    I think I missed the EUO (shorting the euro vs the dolar) buy in point last month. No guts, no glory, right?

  • boatman

    too scared of everyone else’s money, n thinking QE2 was going to rally the economy…..after all, the markets up so we’re fine….right?…………right?

  • Rower32

    Not yet. You just have to wait. I’ll say “I told you so” when it happens. Write this down. okei??

  • making sense

    QE II itself though is not money printing, it does transfer the cash (well, buying power if you will) from one entity to another (dealers). So it is POTENTIALLY inflationary. EURO weakness helped the dollar, but that does not mean the trend can continue from this point on. Also those people who predicted dollar demise never said it will happen today, or even tomorrow, it is a longer term view.

    Let’s not forget it is the Fed’s INTENTION to weaken the dollar, not to strengthen it, it is another question if they can achieve that goal globally. So to some extent I agree that QE II is an non-event event, but the Fed did INTEND to weaken the dollar (See Ben’s comments on emerging market countries).

  • http://www.pragcap.com TPC

    Wait for what? What is the catalyst?

  • http://www.pragcap.com TPC

    False. Banks trade 1.5% paper for 0.25% reserves. They do not then “get rid” of these reserves and “inject” money into the economy. Remember, banks don’t lend reserves. Loans create deposits. It’s myth to argue that QE gives the banks the “potential” to create inflation. That “potential” is always there.

  • Johnny

    “Just you wait, sonny jim! Just you wait!!!!”

  • http://www.pragcap.com TPC

    I’ve been waiting for the bond vigilantes in the USA to wake up for years :-)

  • roger erickson

    “focusing less on the quantity of money (quantitative easing) and more on its velocity”

    the article misses reality completely; QE2 does not change the quantity of money, so everything after that is completely out of paradigm

    sounds like jumping through hoops in a desperate attempt to make gold-std thinking still seem relevant

    Does it really matter which end of an egghead economist you learn from? Progress requires indirection beyond the scale of currently common thinking.

  • Eric

    http://finance.yahoo.com/echarts?s=SLV+Interactive#chart3:symbol=slv;range=3m;indicator=split+volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

    The chart does not look too bad to me for the dollar bears. Many of the dollar bears such as myself are fiat currency bears (not just dollar), so while the dollar may bounce against the euro and others, the long term view is all fiat is doomed, and the continued buying of the dips in gold and silver are turning to be very profitable trades for those of us in that camp.

  • http://none GLH

    I just heard on CNBC this morning Larry Kudlow talking with two guest about the Irish bailout and they decided that it was enough to hold the Irish until their economic policies worked them out of the situation they are in. Can you imagine that with cutting income for their workers the Irish budget will ever be balanced? And, can you ever think that two fund managers could be so ignorant. If had money with them I would taking out right now.

  • Oroboros

    From a Machiavellian point of view, isn’t this advantageous for those who know? Unfortunate for the poor retail (or even misguided institutional) investor, but someone has to lose. It is the nature of the game, after all.

    It’s too bad people who aren’t in the financial field feel the need to tune into financial media at all. That’s perhaps the real tragedy here. I feel sorry for the types listening to Cramer, et al, but … really … who is so naive as to believe Cramer for G*d’s sake. Probably the least able to afford to.

  • Rower32

    TPC-What a lot of people ignore is standard run on currency models don’t apply a sovereign country like US. I’m not saying there are no risks but i believe it’s time for the bond vigilantes and the hyperinflation crowd to say “we were wrong”. As a person who had been through that experience twice in an emerging country (the one that has the highest growth rate after china) bond vigilantes attack on a coordinated fashion. Of course IMF’s fixed currency peg greatly helps the vigilantes. US is many many years away from that scenario.

  • Johnny

    I still don’t get what makes gold different from paper currency. If I were a dollar bear, I’d just hold a basket necessary consumed commodities.

  • Johnny

    …aside from the fixed amount of gold available

  • UT

    TPC you have made good calls over the three yrs I’ve been following your blog. Long dollar was/is a very good contrarian call. I’m not very good at this financial stuff and don’t have a clue as to the inner workings of the market, but I want to ask you a question in reference to something I read the other day.

    George Soros, supposedly became known as “the Man Who Broke the Bank of England” after he made a reported $1 billion during the 1992 Black Wednesday UK currency crises. Do you think they are cooking up a plan to do the same to Dollar? Maybe you don’t think so, because you’re betting against that. Can this happen in the USA, if so, how? Is that what you mean when you say “bond vigilantes” haven’t woke up in the USA?

    Thanks TPC.

  • Dimm

    A bond vigilante is a bond market investor who protests monetary or fiscal policies they consider inflationary by selling bonds, thus increasing yields

    On September 16, 1992, Black Wednesday, Soros’s fund sold short more than US$10 billion worth of pounds,[24] profiting from the Bank of England’s reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency.

    source: wikipedia

  • UT

    Thanks Dimm.

  • http://www.pragcap.com TPC

    No, there is no chance of a currency attack in the USA. The conditions do not exist. The UK currency crisis was entirely different. They essentially had a pegged currency at the time and so were forced to protect the currency against falling to a certain level. This is a complex event, but it’s important to note that the USD floats freely and so does not need to be protected. In addition, inflation is currently very low in the USA so the likelihood of higher interest rates and collapsing currency are very low.

  • 3421138532110

    Huge SoS day in the SPY today, I’ve jumped on the S&P Puts and will add more if we can take out 1,173, first short in ages and I’m looking for a panic move down to the 1,130 level. probably look to exist at that point. I think TPC is right on the mark with the dollar rising, but IMO it will roll over one more time around when equities bottom.

  • Mountaineer

    Roger,

    The easy money has been made on the Dollar/Yen. Overall I still feel that the Yen is too high, but that’s a longer term outlook, and applying longer term outlooks to trades isn’t usually the most advisable thing to do. I wouldn’t worry that much about missing any opportunity to short the Euro; it’ll be back. The problems within the EMU are structural and this is still overlooked by far too many. Best of luck to you.

  • stpepper

    Well, I guess another difference is that the government can’t control its supply?

    I just think we should all take a step back and take a moment to think. If the gold standard is so good why aren’t we using it right now?

    It seems to me that at the end a gold standard just imposes unnecessary pain to the masses, with no apparently benefit other than making a ‘just’ economic system(ie becomes harder to bail out banks and limits government intervention).

    While I do think fiat currencies will depreciate(that’s what they always do), does anyone here really expect that hyperinflation ever happen in the US? This would require a tremendous amount of irresposibility and ignorance from the Fed and I don’t think they are that stupid or irresponsible. Even if we assume hyperinflation and apocalypse in the US, I’d think that stocking food and guns would be a way better ‘trade’ than holding something you can’t eat.

  • first

    “This would require a tremendous amount of irresposibility and ignorance from the Fed and I don’t think they are that stupid or irresponsible.”

    You don’t think irresponsibility or ignorance cause this mess in the first place ?

    If so, Do you see any different players?

    The Euro scared the hell out of currency investors that does not change or solve any problems in the US but short term it makes for a good trade.

    I hate to think what will happen when the shit hits the fan on Spain.

    Look at this:
    http://www.youtube.com/watch?v=Fyq7WRr_GPg&feature=player_embedded#!

  • UT

    Thanks TPC for the response.

  • mad_dom

    Speaking of no inflation.

    http://www.msnbc.msn.com/id/40418705/ns/business-us_business/

    PITTSBURGH — In the unlikely event that your Christmas list this year includes every item mentioned in “The Twelve Days of Christmas,” be prepared to pay nearly $100,000.

    Trying to buy the 364 items repeated in all the song’s verses — from 12 drummers drumming to a partridge in a pear tree — would cost $96,824, an increase of 10.8 percent over last year, according to the annual Christmas Price Index compiled by PNC Wealth Management.

    So you might want to try for one of everything. That would cost only $23,439, or 9.2 percent more than last year.

    The 27th annual holiday index has historically mirrored the national Consumer Price Index, but not this year. The PNC Christmas Price Index grew 9.2 percent from last year, compared with just a 1.1 percent increase in the much broader Consumer Price Index.

  • http://www.pragcap.com TPC

    When was the last time you used a partridge in a pear tree? I didn’t do much shopping this weekend, but all I saw was sale signs for things I’ve bought in the last few years that are now either larger (and the same price) or larger and a lower price.

  • stpepper

    the qualifier here is ‘tremendous’. Yes, I’ve read the many failings of the Fed throughout the 2000s, but when inflation started to tick up after a while they started raising interest rates(A little to late). While I can see the Fed doing nothing with the interest rates at inflation of 3 or even 5%, I find it hard to believe they’ll stay still if we get official inflation of 8%+(Pulling a random number)

  • mad_dom

    Of course the prices are lower. You’re spending all your money on increases in insurance, energy, education, and food among other things. Which doesn’t leave much for everything else, therefore, prices in everything else goes down. Food takes up a bigger percentage in other countries CPIs, China for instance. No wonder their inflation rates are so much higher. Medical costs take up only 6% of the CPI here even though health care spending is about 16% of the GDP. Last I checked, my health care has been rising around double digits pretty much every year. When your health care insurance rises double digits every year, you have less to spend on other things. Therefore, there’s deflation in… well basically things you don’t need.

  • http://www.pragcap.com TPC

    What about my house? That’s about 40% of CPI and mortgage debt accounts for roughly 75% of all outstanding debt. There’s undeniable deflation in housing. Is that an argument for inflation?

  • http://www.NapaWealth.com Tim Ayles

    I just bought 6 suits at the Men’s Wherehouse for less than I paid 3 years ago for one.

    Buy one get one free in the store. So if gold buys a nice suit in 1929…… does that mean gold falls 50% from here like a nice mens suit?

  • http://www.NapaWealth.com Tim Ayles

    Also just refinanced my house which had 22 years left on the mortgage to a 15 year note,and still had the payments drop $500 a month. Housing just got cheaper for me too.

  • http://www.marketoracle.co.uk/UserInfo-Akhil_Khanna.html Akhil Khanna

    US Dollar will continue to be the world’s reserve currency due to lack of an alternative.
    As US GDP constitutes to more than 20% of the world GDP, world economic recovery is a distinct possibility without the recovery in the US. The emerging economies are the suppliers to the developed countries and cannot replace the consumer demand in the developed countries.

    http://www.marketoracle.co.uk/Article24581.html

  • JH

    To say the dollar is strong because it is the least weakest is a slight stretch. Considering the Euro is toast, and Asia is in danger of war, it is not surprising the dollar looks good by comparison. To say inflation is not happening, is to completely ignore the run up in commodities. Remember QEII has not been injected into the world economies blood stream yet. When the full dose is taken we will see its effects in commodities world wide. Even carry trade is inflationary.

  • Misthos

    Gold just spiked.

    Maybe the Euro and the US Dollar are both garbage. Maybe at times, one is falling faster than the other? And maybe due to soft aggregate demand, we are experiencing price deflation in some things, but in oil and gold, inflation.

    QTM as a theory is dead. The world is much more complex.

  • UT

    Well said sir.

  • gaius marius

    you’ve seen this today i hope tpc –

    http://ftalphaville.ft.com/blog/2010/11/30/420776/its-a-much-bigger-dollar-squeeze-this-time/

    the ZIRP-funded QE-inspired risk frenzy has put USD net foreign liabilities so large that they exceed june 2008 and november 2009.

    this ain’t no correction, i fear.

  • gaius marius

    i’m not courageous (or dumb) enough to disagree with tpc much, but i don’t think the risk is zero here. let me explain (h/t to john hempton).

    japan is a good example of a country that was never in much trouble of a currency run. because it has been a massive net exporter, its banking system has intermediated a significant excess of deposits in relation to its loan book. if foreign depositors ever ran the banks, a real funding crisis was difficult to imagine because there was so much in domestic deposits available — worst that could happen was selling some of the investment portfolio to reduce assets.

    the US — much as britain and germany going into the 1930s, or the asian tigers headed into 1997 — has instead been a large net importer, meaning its banking system has been intermediating a capital account surplus. for a long time. in large numbers. it’s been estimated, for example, that 40% of citi’s deposit base is foreign in origin — big US banks are totally reliant on wholesale funding markets to support their assets.

    if foreign funders of the US financial system started to run — as they began to in september 2008 — the potential for turmoil is, well, as you saw then. or as was seen in south korea in late 1997. or (more dramatically) iceland in 2008.

    we know the fed can support bank balance sheets at will, as they did in 2008. and the dollar isn’t the korean won or the icelandic kroner — there’s a massive amount of dollar-based global funding that, in crisis, gets unwound and creates dollar shortages (which is why 2008 was such a big dollar-positive).

    but i would also say that the potential does exist for a sudden stop in US systemic funding, and it cannot be ruled out for the duration of the balance sheet recession. *if* it comes, granted, it will be the biggest lightning strike out of the blue ever seen in global markets — it’s widely considered to be impossible, i’m sure. but there are some necessary preconditions in place.

  • first

    That is the problem.
    Greenspan looked at inflation instead of credit.

    The difference from past inflations was that this time consumers goods came the Wallmart of this world etc.. you know…from china.
    They have been the US cheap labor force.

    Low inflation was the wrong signal. The signal was the absurd risk ratio from excess credit. There is also the factor that when short term rates do not fluctuate according to risk and are moved down artificially it is tempting to borrow for long term commitment in the low cost short term markets including money markets. That works well as long as the borrower can roll the debt over every 3 months or so. But when liquidity is needed they all got squeezes.

    For a few days in some cases AAA 30 day paper had no market price at some of the largest investment firms. There debt structure was balanced in relation to Greespan and BB cheap money.

    If and when inflation comes back rate would have to climb. If so imagine what each 1% means if they keep this madness. I hope Its not the catch 22 on the horizon

  • first

    Why was your house not included in the inflation statistic when it was going up in prices. If it had was this not a reason to have increase rate at that time and prevent this mess.

    They seem to have it both ways. When price go up it does not count but when they go down its deflation.

  • Christian Glupker

    I’m still not 100% on-board with you regarding QE and it being inflationary/money creation, etc. Maybe it’s I do agree with you but don’t think you see the entire scope of this transaction.

    As an economists and bank executive, I agree QE is a ‘non-monetary’ event. The transaction in itself does not create money. However, it does create the potential for an increase in monetary base via bank loans (thus impact on the dollar). So, in a perfect world, where Bernie lives, QE would ease us bankers into lending out those excess reserves, investment goes up, unemployment goes down, consumption up and then GDP up. Wow, wouldn’t it be great if it were that simple.

    Economists and others who put an ounce of intelligent thought into the process know this is not how its working. You mentioned it in a previous post (I don’t know which)where Bernie is glaring over earnings of companies. Margins are shrinking. I see it in our corporate banking portfolio. Billions of investment dollars to companies who are staring at shrinking margins. These companies wouldn’t borrow a dime even if the interest rate dropped more.

    Here’s something Bernie is really missing: Interest rates should NEVER make an unprofitable investment, profitable. Example, you can’t afford investment at 5% but you can now at 2%. That’s malinvestment. Interest rates should determine WHEN you do an investment. Right now is NOT the time business want to do investments.

    Banks, like mine, will hold these reserves because our credit box is so small, you need to be a very very strong company to get a loan. We don’t need these reserves, we have plenty. Reserves are not the issue. Our loan loss reserve is an issue as well as our credit underwriting standards. So much of our resources are tied up in loan workout or loan policy review that making loans to new companies is not a priority.

    Anyways, I guess this is getting too far off-topic.

  • http://www.pragcap.com TPC

    It’s included in my personal data….Inflation was running very hot in 2007 and at the time I was calling for a more proactive Fed to get out ahead of the problems. See my chart in here: http://pragcap.com/cpi-disinflation

  • roger erickson

    the people who had bigger $US worries in late 2008 & during 2009 were foreign countries, and Bernanke bailed them out with massive currency swaps (basically selling out the USA economy in order to stabilize Libor, not even US rates)

    have to agree with the crowd saying the FED is out of touch with needs of the US electorate

  • Dimm

    You own a bank? Which one?

  • first

    That’s good TPC.

    I should have been more direct I am talking about Louis XIV at the Fed.

  • Scott

    This must be a trick question…you can’t get a nice suit a Men’s Wearhouse.

  • ZZZZZZZZZZ

    “Anyways, I guess this is getting too far off-topic”

    Ya think?!

    “Banks, like mine, will hold these reserves because our credit box is so small, you need to be a very very strong company to get a loan.”

    Yeah, which bank do you own? You need to read you some TPC more often because all your points are redundant and have been discredited here numberous times.QE is not inflationary and it is not ‘money printing’.

    What i’d like to know is when will the dollar dip? 3 months, 6 months and if so what does it mean for mainstreet(the normal guy).

  • Perdido

    Hold on, what a minute! “It’s too bad people who aren’t in the financial field feel the need to tune into financial media at all.”

    So preach to me to invest in my 401K, IRA, 529, annuities, all these INVESTMENT products that I know crap about, other than what I’m told about ‘Rate of return on your investment sir’, but I shouldn’t listen to CNBC or Cramer and/or all these so-called guru’s of finance because they are feeding me BS through the media. Well that’s messed up, for lack of better term!! Then why does the government give me tax deductions for my ‘phony’ investments and why are these guys even on TV if they are misdirecting the public?

    “Probably the least able to afford to.” Your damn right I can’t afford to just give money away!

    I guess at this point, the best thing to do with my investments is sell it all and invest in something tangible like a house or property. Wall street is a great big hustle. I can hear my advisor saying, ” No sir we can move your money to bonds or maybe cash Mr. Dumbguy”. WOW, scary stuff when you got a family and parents who will soon be depending on you for their care in the near future.

    Just venting, TPC thanks for all the great info.

  • Oroboros

    Not sure whether this was sarcasm or not … I’ll just take it strait …

    My point is, it doesn’t make sense to me that most people should feel the need to know about this kind of stuff. In a more perfect world, a butcher, baker, doctor, or candlestick maker would concentrate on their particular trade, with their savings secure. They’d get their 4-ish% per year, and not try to be experts in two separate fields. If they wanted to gamble and make more than 4-ish%, then fine, their call. But these days, people feel the need to listen to the likes of Cramer just to survive, just to make any money at all, because rates are at zero. I mean, the existence of Cramer almost proves the problem; what professional would listen to this guy? Thus those who are listening, and there are a lot, cannot be professionals. And in case you weren’t aware, Cramer’s calls are not always spectacular.

    That’s my point. A culture where so many people are obsessed with the market and investments, and not their own careers, is not a good sign. People are getting squeezed and trying to make up for it “in the market”. If they’re getting their advice from the likes of CNBC, then I feel sorry for them.

    Then why does the government give me tax deductions for my ‘phony’ investments

    So you invest more.

    and why are these guys even on TV if they are misdirecting the public?

    To get you to come back to the trough. Look at the ads; ads control content.

    I guess at this point, the best thing to do with my investments is sell it all and invest in something tangible like a house or property.

    I’d recommend arable farm land, myself.

    Wall street is a great big hustle.

    Pretty much.

  • Oroboros

    TPC makes the case that loans are not made against reserves. Click on ‘Tools & Resources’ > ‘Understanding MMT’ for more. It’s somewhere in there.

    I agree with your QE assessment, other than the reserve part.

  • first

    If as you say “QE is not inflationary and it is not ‘money printing’.”

    Why then worry about when will the dollar dips. Money does not devalue when there is no inflation.

    If it does you will know that there was printing.

  • first

    If as you say “QE is not inflationary and it is not ‘money printing.”

    Why then worry about when will the dollar dips. Money does not devalue when there is no inflation.

    If it does you will know that there was printing.

  • Christian

    “Yeah, which bank do you own? You need to read you some TPC more often because all your points are redundant and have been discredited here numberous times.QE is not inflationary and it is not ‘money printing’”

    so, moving less liquid assets (or risky assets) from our balance sheet to the feds balance sheet, paid for with treasuries. Those treasuries are then purchased back by the fed.

    You call the first part QE and thus say it’s not printing money. In the real world, it’s all part of QE, thus the open market operation of selling treasuries is a DIRECT result of the asset transfer. Prior to QE the bank had no new treasuries to sell. This is EXACTLY what happened with the first QE, although we had no need for second QE.

    You can say I’ve been discredited a number of times as you hide behind a false name and a computer monitor. That’s fine, whatever floats your boat. However I worked for one of the largest banks in this country doing these EXACT transactions. If you think this is not whats going on out there when QE happens, then you live in fantasy land. All of us bankers who deal with FOMC every day have been in direct communication with our local fed bank so we are pretty much in the loop on the purpose of QE.

    Note: Not all treasuries are sold so in that case QE would not result in immediate excess reserves. However, those treasuries WILL be sold eventually, so it will lead to an increase in reserves.

    Also, no where did I say I owned a bank. If it’s because I referred to it as my bank, I was implying my employer. Also, I’ve posted on this site maybe four times total so not sure how I’ve been discredited ‘numerous’ times. Again, whatever.

  • Rob

    “Whatever happend to that dollar crash?”
    Don’t look now, but it looks like that trade is back on as of today…

  • http://howfiatdies.blogspot.com Vincent Cate

    In order to claim the Fed is not adding to the money supply and just “doing an asset swap” you need to count 30 year bonds as money just like the new money they are creating. The 30 year bond can go up or down by 1% in a day compared to the dollar. If interest rates double the 30 year bonds will be worth about half as many dollars. Clearly the market does not count a 30 year bond the same as dollars. Any theory that does is just wrong.

    The 30 year bond is a promise to get some dollars 30 years from now. By then the dollar could be worthless. If the market decides that hyperinflation is coming to the dollar sometime in the next 30 years people will flee the 30 year bonds at that point, even if hyperinflation was not yet evident.

    Making new money and buying government bonds is “monetizing the national debt”. This experiment has been performed by many other countries throughout history. It does cause inflation, and too much causes hyperinflation when people flee the bonds. The facts of what is going on are not changed by calling it “quantitative easing” or “an asset swap”. Look at the historical experimental results.

    Still looks like hyperinflation is coming to the dollar. Just a question of when it gets here.

    http://pair.offshore.ai/38yearcycle/#hyperinflation

  • http://howfiatdies.blogspot.com Vincent Cate

    Also, if you count government bonds as money it just means that you count the Treasury as increasing the money supply when they issue the bonds and not the Fed when they buy them, but you still agree the money supply is going up by over $1 trillion per year. Again, historically this type of “monetizing the debt” in such large ratios relative to government taxes and GNP results in high inflation or hyperinflation. About the only case that has not yet resulted in hyperinflation is Japan, and there are a number of extenuating circumstances in Japan’s case that have helped it last so long. I think it will get hyperinflation in the next couple years though.

    http://pair.offshore.ai/38yearcycle/#japan

  • http://howfiatdies.blogspot.com Vincent Cate

    The dollar is down 2% in less than a week and paying like 1% per year. Holding dollars for a few years is a fools investment. Risk reward ratio is way out of wack.