PALIN AND BECK RING THE QE BELL

The nonsense regarding the world’s greatest monetary non-event just continues to spiral out of control.  Last week it was Glenn Beck pretending to know something about the monetary system and economics.  This week it is Sarah Palin. In a talk today Mrs. Palin went on a politically motivated rant about government intervention and “money printing”:

“I’m deeply concerned about the Federal Reserve’s plans to buy up anywhere from $600 billion to as much as $1 trillion of government securities. The technical term for it is “quantitative easing.” It means our government is pumping money into the banking system by buying up treasury bonds. And where, you may ask, are we getting the money to pay for all this? We’re printing it out of thin air.

The Fed hopes doing this may buy us a little temporary economic growth by supplying banks with extra cash which they could then lend out to businesses. But it’s far from certain this will even work. After all, the problem isn’t that banks don’t have enough cash on hand – it’s that they don’t want to lend it out, because they don’t trust the current economic climate.

And if it doesn’t work, what do we do then? Print even more money? What’s the end game here? Where will all this money printing on an unprecedented scale take us? Do we have any guarantees that QE2 won’t be followed by QE3, 4, and 5, until eventually – inevitably – no one will want to buy our debt anymore? What happens if the Fed becomes not just the buyer of last resort, but the buyer of only resort?”

Glenn Beck made equally irresponsible comments last week.  Why these people feel as though they are qualified to discuss monetary operations is beyond me.  It would be like me walking into the Kennedy Center and telling the National Symphony Orchestra that they are playing the music all wrong (and I have not one ounce of musical talent in my entire body).

I won’t repeat the entire argument I have consistently made in recent weeks because I fear readers might bludgeon me with my keyboard, but let’s reiterate a few things:

  • QE is NOT money printing.  They are adding reserves to the banking sector and removing government bonds.  Mr. Bernanke has explicitly stated this:

Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed.”

  • QE is NOT adding net new financial assets to the private sector.  They are merely swapping assets – assets that were already in the private sector!
  • QE is NOT inherently inflationary.   It does not add to the currency in circulation.  It does not make banks more capable of lending.

The misinformation regarding QE has caused severe market distortions in recent weeks as investors misinterpret the effects of QE.  The one thing I agree with Mr. Beck and Mrs. Palin about is that QE is a bad idea, though I disagree with them for vastly differing reasons.  Spreading fears about “money printing” and big government intervention are not only misguided and irresponsible, but extremely harmful to the country.

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.

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  • James

    If they are buying bonds then that means other people won’t buy them and put their money else where. Isn’t that inflationary?

  • quark

    Not sure why it is necessary to address comments made by Glenn Beck a Paul Joseph Goebbel disciple and Sarah Palin a disciple of the village idiot.

  • http://fridayinvegas.blogspot.com Kid Dynamite

    are you now trying to tell me that you think you’re so smart that you can tell the former Vice Presidential Candidate that she doesn’t know what she’s talking about? phffoooey… (/sarcasm)

    have a nice night.

  • http://www.pragcap.com TPC

    Oh man KD. For a second there I thought you were about to get me involved in another all night debate!

  • http://www.pragcap.com TPC

    Anyone who reaches 10s of millions of people on a daily basis needs to be corrected when they are spreading that sort of misinformation. This is really dangerous. I mean, how many of these people are running out and buy gold at an all-time high because they are terrified that their govt is printing money? I have no problem with owning gold, but telling people they should own it (as Beck explicitly did last week) because the Fed is printing money is beyond destructive.

  • LZ

    Crap hits the fan. Also gold makes news on Yahoo front page. I sense “a” top is near so I am taking risk off table. May join TPC on dark side. But we are far from the top.

  • prescient11

    I AM SO SICK OF THIS NONSENSICAL ATTACK ON BB.

    BEFORE ANYONE WRITES ONE MORE WORD ON THIS DAMN BLOG NEGATIVE ABOUT QE OR BB, RIDDLE ME THIS BATMAN, WHAT SHOULD THE FED DO?????

    NOTHING?????!!!!!!!

    Ok, now that that is out of my system, I’ll retort with this, BB is a damn smart man and his people “behind the scenes” know exactly what they’re doing.

    It’s all about CAPITAL FLOWS… That’s the key to the game. Is everyone blind?? You put up all these pretty little damn graphs showing this or that but do you want to know a significant part of what hollowed out our industry!!!!!!!

    It was an overt currency war that we didn’t even participate in, or fire a shot!!

    Now what, now that we’re dealing with a mess of epic proportions and we intend to drop the value of the dollar, everyone is bitching?? Well f off. Bernanke and co, now hopefully with Repub. sanity in Congress, are going to try and make America an ATTRACTIVE place to do business.

    At the end of the day, that’s what matters. Less regulation overall, sound and competitive tax structure, etc., etc.

    BUT BEFORE ONE MORE PERSON WHINES ABOUT BB, tell me, what do you suggest he do and why would it be helpful?

    Frankly, I think he is doing exactly the right thing given his limited tool set.

    I look forward to some actual responses on this. best.

  • prescient11

    What the hell? My entire post is missing.

    THE COMMENTS HERE ARE TURNING TO CRAP. TELL ME EVERYONE, WHAT IS BB TO DO???

    And I’ll start that I think he is doing the very best that he can given his limited tool set…

    Again, you’re the Fed Chair, tell me what you’d do? I’m all ears.

  • Mountaineer

    This is my first experience with the phenomena known as Glenn Beck’s Utter Stupidity. Millions of people really watch that nonsense on a daily basis? Even worse, they take their political and investment advice from it? People really will believe anything if you dress it up and present it from a place of authority, especially in times like this.

  • Gary

    Yeah, I agree Glenn Beck is not qualified on economics. But, he has been saying for two years to buy gold and it has since gone up over 50%.

    Do you really believe what the fed is telling you TPC? How about we audit the fed and find out the truth?

    Why are gold, silver, and oil prices going higher? Why are all commodities for that matter skyrocketing in price? Grocery prices are outrageous!!

    Why did the president of the world bank today suggest moving back towards some type of gold standard?

    Why are China,Germany,Brazil, and other countries so angry at Bernanke for what he is doing? What will this mean at the G20 meeting?

    Just some easy questions I am sure you know all the answers to. Fact of the matter is the Fed/Government only has two choices really in order to get out of the debt spiral we are in. Massive inflation is one of those choices and the easiest to survive politically, considering very few Americans have any savings.

  • prescient11

    What are you people talking about???

    Forget about Glenn Beck, the man obviously does not understand what he’s talking about and I have been very disappointed at his sensationalism on this issue.

    Now, again, tell me what BB is supposed to do or what you would do in his shoes??

  • http://www.pragcap.com TPC

    Prescient,

    I’ve called a spade a spade. This is a bank bailout. He’s preparing to buy MBS in case the housing market turns south. But that’s not what the market thinks. The market thinks he is printing up a bunch of fresh new bills and dropping them out of choppers. That’s wrong.

    Is it bad that he’s preparing to bailout the banks? Not necessarily. You and I agree there. 100%.

  • prescient11

    Ok, number one on this topic, a “strong” dollar would be a nightmare and potentially depressionary for the good ole USA right now.

    Agree or disagree?

  • Cowpoke

    Folks, is it really wise to bash Palin or Beck on this? If So, then you also have to bash:

    The head of Brazil’s central bank
    who said on Thursday “QE creates excessive liquidity that flows over to countries like Brazil,” Meirelles said.

    AND
    The Hong Kong Monetary Authority:
    The Fed’s move to buy another $600 billion of Treasuries, announced yesterday, will “definitely add pressure to the asset markets in emerging-market economies,” Chan said.

    AND
    China central bank adviser:
    Unbridled printing of dollars is the biggest risk to the global economy, an adviser to the Chinese central bank said in comments published on Thursday, a day after the Federal Reserve unveiled a new round of monetary easing.

    AND
    German Finance Minister Wolfgang Schäuble:
    Schäuble: I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy, which is why I don’t recognize the economic argument behind this measure.

    HELL, Even Obungler today said this:
    “I will say that the Fed’s mandate, my mandate, is to grow our economy. And that’s not just good for the United States, that’s good for the world as a whole,” said Obama,
    So now the FED has another Mandate Right Out of the Prez’s mouth….

    So my point here is that If even these Finance Leaders of Countries seem to “miss the Mark” on QE2, how can you blame Beck, Palin, or the common man?

    Links to Quotes:
    http://globaleconomicanalysis.blogspot.com/2010/11/south-korea-hong-kong-brazil-china.html

    http://www.spiegel.de/international/world/0,1518,727801,00.html

    http://www.reuters.com/article/idUSTRE6A30G020101104

    http://www.guardian.co.uk/business/2010/nov/08/obama-defends-qe2-g20-summit

  • AWF

    Were Sarah Palin comments THAT MUCH DIFFERENT than the FED governor Fischer’s??

    In Substance–I don’t think so

    The Intent of QE2–different than Banzai Ben’s??–I don’t think so

    Its OK for this Board ( The Shadow FED ) to lampoon Banzai Ben

    But–No one else can??

  • Captain America

    Beck was telling people to buy gold last week because of misinformation. How is that legal? Why is he allowed to give financial advice on TV?

  • Gary

    Misinformation? Do you actually believe Bernanke?

    Freedom of speech is why he can advise people what to do in his opinion. He also tells every viewer to consult alternate views and to NOT listen to him only.

    No different then Jim Cramer on CNBC telling people to buy stocks or slander profitable companies for his and his hedge fund buddies benefit.

  • prescient11

    cowpoke, are you really citing the central bank of China as an example.

    How about we say, IN ONE DAY, that the dollar is 35-40% less than what it was the day before, eh, how bout that???????

  • Nils

    Beck is especially distasteful and unethical. Between his Fearcasts he is a spokesman for Goldline…

  • Cowpoke

    Gary, EXACTAMUNDO!!!!
    Here let’s revisit Bank Bustin Ben’s comments:

    Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”
    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agmj05AcqWHo

    NOW WE READ:
    Dallas Fed Admits “For The Next Eight Months, The Nation’s Central Bank Will Be Monetizing The Federal Debt”, Opens Door To Bernanke Impeachment

    http://www.zerohedge.com/article/dallas-fed-admits-next-eight-months-nation%E2%80%99s-central-bank-will-be-monetizing-federal-debt-op

    SO, it’s easy to see how folks can get confused on this issue.

  • Dmitro

    QE is really just an asset swap unless FED buying Treasuries directly from the Treasury, then that become a debt monetization, which indeed is very inflational

    “The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt.” – Richard Fisher, Dallas Fed President

  • prescient11

    I find it hilarious that of all the so-called economic “minds” on here, that no one AND I MEAN NO ONE can tell me what BB is supposed to do instead of what he is doing.

    Very telling.

    Also, the lack of currency knowledge and capital flows, and how businesses actually work, is astounding.

    TPC, BB’s implementation of QE is actually the perfect test of your theory regarding asset swaps.

    At heart I agree with your baseline analysis, which is why I think it is beautifully brilliant. think about that deep and hard and I think you’ll see where I’m going here. BB is brilliant, even if he doesn’t mean to be!

  • Cowpoke

    Not Me Brotha love, Dallas Fed Chief Richard Fisher:

    Combining wage imperatives with recent commodity price increases, the manufacturers of low-tech Chinese products, from wicker to clothing to the lower end of entertainment devices, have started their bids for supplying the fall of 2011 needs of this particular large importer at dollar price levels 30 percent higher than current levels. Alternative production sites like Vietnam and India, according to this source, are only slightly underbidding these Chinese suppliers.

    Read more: http://www.businessinsider.com/dalls-fed-chief-fisher-debt-monetization-2010-11#ixzz14kSK8AGC

  • barry soetero

    Easy cowgirl. You seem to be suffering from shock. You criticize the Fed for overstepping its bounds, increasing risk to the USD and failing at many policies, AND you criticize the people who actually make a good argument against the FED?!?! WTF is wrong with you?
    I’ve seen people on the fence in trying to appease both sides, but never trying to take down both sides. Good thing you aren’t running for office or you would be dead in the water.

  • billw

    TPC is correct and I have said the same before as well; this is preparing for a bank bailout. Chris Whalen nailed it on the head a month ago when he even set a time for it. As of his calculations he believes that BOA and Wells at the least are so bad off in their current business models that they will not make it past 1st qtr 2011 without some form of restructuring ( as in they go bust). BB is tyrying to help them with their balance sheets before that time arrives.

  • Cowpoke

    How bout this prescient11 for what Beranke should do, “TELL THE TRUTH”

    http://globaleconomicanalysis.blogspot.com/2010/11/bold-faced-lies-of-day-from-geithner.html

  • Cowpoke

    Dude, ease up on the bong, the resin is getting to your brain.

  • nottpc

    Amerika will have jumped the shark when palin wins in 2012.

  • prescient11

    Cowpoke,

    Ok, besides supposedly “telling the truth” what actual policy moves should BB do? That’s what I was asking about.

    Whalen is very very smart and I like him immensely. I do not know if I really abide by his calculations, (I seem to recall the same clarion call being sounded by Whalen a year and a half ago), but yes, one significant thing BB is doing is shoring up the banking system.

    AND GUESS WHAT, LADIES AND GERMS, THAT’S THE FED’S NUMBER ONE PRIORITY, AS IT SHOULD BE.

    Ok, so the Fed is doing what is created to do. What else are they doing then that is wrong??? And what are the alternatives.

    I wait in anxious anticipation…

  • Cowpoke

    If So, it will make for good theater with CHAIRMAN Ron Paul Manning the Vault.
    http://www.youtube.com/watch?v=u6wSd_i-IMs&feature=player_embedded#at=229

    Grab some popcorn and enjoy…LOL

  • Captain America

    Prescient,

    How about this. They set the overnight rate and then back the f$ck off? No more bailouts. No more QE.

    Do you think we’re better off ever since LTCM? Or worse?

  • Cowpoke

    Instead of what they SHOULD do, how bout what they Should NOT DO!

    “I did not tell Bank of America’s management that the Federal Reserve would take action against the board or management” if they decided to invoke a “material adverse event” clause in the acquisition contract, Bernanke told the Committee on Oversight and Government Reform on June 25. “Moreover, I did not instruct anyone to indicate to Bank of America that the Federal Reserve would take any particular action under those circumstances.”

    http://www.businessweek.com/bwdaily/dnflash/content/jun2009/db20090625_472808.htm

  • prescient11

    Captain,

    Ok, and what should the overnight rate be. Happy with current levels, or do you want it higher?

    LTCM has nothing to do with the current situation, nor to do with bailouts or QE…

    So all you would do is let them set the overnight rate, at some figure, and that would be it.

    That is a recipe for a second depression, imho. Our balance sheet troubles have nothing to do with QE or the stimulus, they have to do with gargantuan entitlement programs that keep getting added to, imho.

    The real real real conspiracy theory against the banksters is that they buy all these T-bills at 0% rates, and then THEY TRY AND CONVINCE the Fed to raise interest rates under the guise of fiscal sanity, and THEY MAKE A KILLING!!

    Just like Volker, the man who singlehandedly doubled the national debt with his crazy policies. Do you know why the dollar was so strong back then, it’s because Europeans flooded into the market because they thought that the US was going to adopt a two-tiered currency system (the so called “blue dollars” as it were).

    I would love to combine TPC’s monetary knowledge with a deep understanding of currencies and capital flows, the messiah to lead us out of the wilderness!!

  • prescient11

    No, no, no. No more shaking the finger.

    You’re in charge, what do you do here? It’s really as simple as that. If you can’t provide an answer, fair enough, but then I wouldn’t go criticizing BB then.

  • Cowpoke

    What is my mandate?

  • prescient11

    You are the Federal Reserve, which first and foremost, was created to bailout the banking system in times of crisis and provide all necessary liquidity.

  • prescient11

    Ok TPC, I took your stupid survey. Now let’s get it on!!!

  • Cowpoke

    I would instruct the Banks to short the hell out of OIL, do everything I could to drive the price into a COLLAPSE.

    Problem solved. The world runs on OIL. Cheap Oil/Energy is Good for 99% of the population/economy.

    There, I have saved Main Street. OH But is that my mandate? Who tha hell cares, no one else follows theirs..LOL

  • prescient11

    So the Fed has the power to use the public balance sheet to not only buy equities/commodities directly, but short them!! How about naked shorting!!

    See it all falls apart.

    I would respectfully submit that, given what we’re facing and the limited tool set that the Fed has, they are doing a tremendous job trying to keep the wheels greased so to say.

    Is there risk, of course. But such is the nature of life. There are definitely risks in doing nothing, just the same as acting.

  • quark

    My only point is that these two are lunatics and those individuals that sit up in their chair with their ears perked nodding their heads while Beck and Palin are speaking are helpless.

  • Cowpoke

    Just as they used their psudo mystic power power to manipulate the markets?

    “Our understanding of the best practice in monetary policy evolved during Alan Greenspan’s tenure at the Fed, and it will continue to evolve in the future,”
    Ben Bernanke
    LOL

    In 2005, Mr. Bernanke — then a Bush administration official — said a housing bubble was “a pretty unlikely possibility.”
    LMAO..

  • Cowpoke

    Seems Bernanke is NOT so prescient..haha.

    I am going to watch the rest of the Football game..
    Later.

  • prescient11

    It is a good game, at least turning into one. Well, i’d just reread your comments, other than make fun of BB for his comments, nothing constructive has been offered.

    Running the show is always tougher than watching on the sidelines and carping. Are they perfect, no, but I like what BB has been doing to be honest, and it has nothing to do with so-called asset bubbles.

    Has anyone actually looked at Asian trends in commodities, my view is that this is no bubble, but the super bull cycle in commodities that was briefly interrupted by the financial crisis.

  • kayman

    prescient11,

    Given BB’s past achievements on spotting the bubble, ignoring it….I’m not , NOT a fan. What would I do if I were the Fed, I WOULD NOT let the bubble get to that point where it was dangerous. Not only the FED but the house and senate finance committees alll need to resign, if something like this happens on thier watch.

    The system needs to be purged, so hit the reset button and let the chips fall where they may.

  • Johan

    So this balance sheet viewer is wrong about QE?

    http://econviz.com/balance-sheet-visualizer.html#

  • Johan

    So this balance sheet is wrong about QE?

    http://econviz.com/balance-sheet-visualizer.html#

    Does the QE could help houselholds to get rid of bad investments?

  • boatman

    listening to palin on economics is a waste of time as listening to obama on anything but sports.

  • john

    Interesting comments. I was going to add to the debate on the issue however most arguments have been made. However to the people who defend Bernanke with the argument what else can he do, all I can say is to remember the end never justifies the means. I realize that nowadays it’s all right to torture people in the name of the US. they were on the same slippery slope you are. His policies will and are having a profound effect on many people and they are not good effects.

  • http://www.thoughtofferings.com/ hbl

    Johan,

    I am the author of the visualizer you linked to… when I added QE almost a year ago I was under the impression that the more common scenario was the Fed buys assets from the private sector overall (via primary dealers as intermediaries, who can sell on behalf of “clients”). But recently I’ve seen suggested that it is common for banks to sell their own treasuries. Yesterday I updated the description text a bit to reflect this, but as I understand it both variations can occur. Would love to hear if that’s wrong. The main difference is just whether there’s a jump in broad money supply, but even if there is, that doesn’t make it inflationary.

    But I don’t think it’s accurate to say QE helps households get rid of bad investments… especially when the Fed is buying treasuries.

  • Adam

    prescient11,

    You wont like this, but here is what BB should do…

    Start with telling the truth and a little education. When Nixon closed the gold covertability window in 1971, what appears to be a small change radically reshaped how the US government interacts with our monetary system. Taxes and Bond issuance no longer fund the US governments spending. A government sovern in its own currency which is floated on the international currency market can spend as much money as it wants up to the point that the economy is maximized. Spending beyond that will generate inflation.

    The FED has very few tools to help manage the economy and given the level of private household debt and the fact that interest rates are already rock bottom there is almost nothing the FED can do.

    The US and world economy is suffering from a massive overhang of private debt. Household balance sheets need to be fixed and to do that households need to save more. Since spending equals income at the national level, the only way to grow household incomes and finance that savings is to grow the economy. Right now we can’t expect the private sector to step up and grow the economy the only game in town is massive government deficit spending. We need not worry about the debt now (or ever).

    I BB implore congress to create a MASSIVE multi year spending initative to rebuild the nations failing infrastructure at take up the slack in the US economy; fully finance national health care; and pass a payroll tax holiday. It will take years, as in Japan and as in the 1930′s, for the massive credit bindge to be wiped out. He need to be strong and we need to be committed to large government expenditures until households are healthy enough to grow the economy on their own.

  • Cowpoke

    Adam, with all due respect, Japan did this exact same thing and it FAILD.

  • Oplefty

    I don’t watch Glenn Beck because I think his take on America is too far outside of the realities of the day. However, when I turned on my TV the Beck show was on and he was talking about QE, so I watched for a few minutes to get his take versus what I have been reading online (this site particularly ). I immediately told my wife he was wrong, that he had know idea what is was talking about. He was only scaring the American public and leading them to the wrong conclusions. Hey, I think , I’ve finally gotten my head around MMT , the FED , the US banking system , effects of QE, etc. Thanks TPC and all the other enlightened contributors to this site. Knowledge is power.

  • http://none Juan

    Let’s see. “Glenn Beck is an idiot.”
    “Beck doesn’t know what he’s talking about.”
    “Beck knows crap about economics.”
    and finally, “Beck has been advising people to buy gold for the last two years.”
    If you had followed his advice you’d have doubled the money you have in gold. There’s a bit of a conflict here. Beck is an idiot, but following his advice would’ve doubled your investment… ??? Wow, how IDIOTIC is that?

    I know. Even a stopped clock is right twice a day… but TWO Friggin years??

    Actually, Beck has been advocating gold owner ship since 2007, when it averaged $550/oz. Gold closed at $1416.25/oz in England today. That’s real close to 3x.

    I only wish that I had been so idiotic.

  • asha101

    A devaluing dollar only encourages dollar borrowing and investing elsewhere, not U.S. It only frightens people who has savings and push them to park their money elsewhere. Again, people who has done the right thing get punished.
    It does little good in the short run, and it has ugly effect in the long run. It’s like someone who has caught a viral infection, rushed to get an antibiotic shot hoping that it’ll improve the symptoms, only ends up in long term complications.

  • Ryan

    Prescient,

    I have somewhat of a contrary opinion. Look at the export base of the United States. Which of our key exports are truly price sensitive and would be markedly boosted by a substantially weaker dollar? Weapons, pharma, technology, consumer goods, agriculture? For the most part, the US is a high value added producer. A weak dollar is a red herring–an excuse for why the US is struggling and the supposedly least painful solution. But I think this is supremely misguided.

    Why is it that Japan and Germany can compete despite a strong currency and the US supposedly cannot? I think the answer is that the US competes just fine and that our deficits are a function of spending too much as opposed to not producing enough. Therefore I do not view a weak dollar as some sort of panacea. In fact, you rightly bring up the issue of capital flows. By committing to a weak dollar, the US is guaranteeing that capital flows move out of the US and into nations that treat capital better. This cripples domestic innovation and future job creation.

    If you are looking to make an investment and you know the currency will decline, it requires a much higher return on capital to warrant said investment. Thus the US is discouraging much needed investment due to its unnaturally low interest rates. Moreover, ZIRP punishes savers and encourages speculation rather than productive investment in the capital stock. For corporations, that means they engage in financial engineering such as buybacks and recaps rather than R&D. For the financial sector and for individual investors, that means allocating capital based upon speculative premises. Unfortunately, this undermines the most basic role of capital markets: the productive allocation of capital. Job creation requires capital formation, which does not occur optimally in the presence of zero rates. In a broader sense, to the extent that savers and the prudent are continually punished by monetary policy in favor of speculators and the well connected financial sector, it engenders resentment and promotes an “every man for himself” attitude at a time that we need to be making broad-based sacrifice.

    It seems that your view of the Fed is that they cannot just do nothing, and thus it is worth gambling with QE2. I think the Fed’s first ideal should be “do no harm.” Fiscal and regulatory policy would be much more capable of addressing the issues than monetary policy. It seems as though the Fed is saying that they know that nothing productive will be coming on those fronts, therefore it is up to the to overcompensate. I understand their point of view, but, in my opinion, they should not be allowed to move beyond their basic function. It is not the Fed’s job to try to create jobs (legislative and funding decisions belong to Congress), nor is it their job to dictate currency policy (that is the job of the Treasury).

    One of my big issues with the Keynesian doctrine is that every time it has proven insufficient/wanting empirically, its practitioners simply state that its because they did not act quickly enough or with enough force. This is a counterfactual that is impossible to refute, thus they can never be wrong. When I look at monetary policy post 1929 or in post-bubble Japan, I actually believe that zero interest rates and QE are part of the problem and not part of the solution. I think that ZIRP simply transfers wealth from savers to financial institutions while enabling weak entities to survive when the system would be better off with consolidation. Likewise, the ability of corporations to borrow at unnaturally low rates due to ZIRP/QE effect on the yield curve exacerbate the issue of excess capacity and thereby prevent the productive capital formation that would ultimately occur if the debt markets inflicted discipline upon weaker corporate players.

    So here is my contrary viewpoint: the Fed should normalize short-term rates to 2-2.5%. This is necessary if we want our economy to function properly. It will help consumers rather than financial institutions to shore up their balance sheets. And in my opinion, this is the biggest obstacle to a recovery. Even if this leads to more bank failures, their is enough debt capital in these institutions to avoid losses to depositors and taxpayers. Also, at higher short rates, banks would be forced to lend to consumers and businesses rather than to the government via the yield curve.

    The problems is not that we do not have solutions; the issue is that real solutions will require a degree of sacrifice and short term pain that politicians and monetary authorities are unwilling to take. And in the case of monetary authorities, I think that they are utilizing a failed economic paradigm to try to solve our problems. Bernanke’s understanding of the Great Depression and post-1989 Japan is flawed: depressions did not occur because monetary authorities didn’t do their jobs post bubble, they occurred because debt bubbles popped. The Fed’s job should thus be focused on preventing bubbles rather than on trying to assymetrically clean up after them. The Fed’s current policy is only leading to increasingly more consequential bubbles; each Fed-induced bubble has been bigger than the last and the denouement of the next one will likely entail a breakdown of our currency system, the bankrupting of nations, and the dissolution of free trade. The Fed has it all wrong. Rather than doubling down on patently failed policies, they should change courses and raise rates.

  • palp

    TPC, if banks are not reserved constrained in their lending, why is Bernanke trying to raise reserves? Thx.

  • Allen

    I read your column daily and read with interest your comments on QE. I left a comment a few days ago but still have questions. My main question today was, ‘where does the money come from that the Federal Reserve uses to buy the bank assets in order to convert these assets to cash?’. It looks to me like that ‘money’ was created. I found this explanation Wikipedia and would like your comments on it.

    “A central bank implements quantitative easing by first crediting its own account with money it creates ex nihilo (“out of nothing”).[2] All fiat money is created out of nothing: out of thin air. It is, however, backed by all – the sum total of – the underlying value systems in an economy, namely sound governance, sound economic policies, sound monetary policies, sound industrial policies, sound commercial policies, sound external policies, sound education, sound legal system, sound law enforcement, sound defence force, sound transport policies, sound health policies, sound agricultural policies, sound banking policies, sound accounting principles, etc. The annual rate of inflation above the central bank´s target indicates how much fiat money has been created in excess of what is considered by the central bank as required in the economy. The central bank then purchases financial assets, including government bonds, agency debt, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations. The purchases, by way of account deposits, give banks the excess reserves required for them to create new money, and thus hopefully induce a stimulation of the economy, by the process of deposit multiplication from increased lending in the fractional reserve banking system.”

    If this is correct, it seems like a reasonable action by the Federal Reserve, however, it is fraught with assumptions. Depending on your comment on this, I might have further dialogue. Thank you.

  • Chris

    You can use gold as collateral on ICE beginning Nov 22nd…

    http://www.mondovisione.com/index.cfm?section=news&action=detail&id=94090

    Let the games begin…why stop at a bubble. Let the specs lever up into some super spikes.

    Let’s see how high we can push silver…its only a $30 Billion annual market. $30 an ounce, the Hunt brothers hit $50 over 30 years ago…pick up the pace boys.

    Remember to use other people’s money and lever up, 2X year end bonus for everyone. Corner’s aren’t profitable unless you front run with futures/options…don’t forget to do things in the correct order out there on wall street.

    This is definitely going to end in another crisis, but for now its all just a bit of fun. Why do I play along…cause its the only game in town, and the money is just too easy.

  • Adam

    Actually all Japan proves is that it didn’t spend enough. You should really review Richard Koo’s data on Japan. I don’t agree with everything he says, but in real charts you can see what happened and what we’re repeating again with the possibility of actually doing worse by not spending enough.

    http://ineteconomics.org/people/participants/richard-koo

    The presentation that goes with the video is a PDF right above it. That’s where are the charts are he speaks to.

  • JH

    I believe that the argument of whether the Fed is printing money or swapping assets is a red herring.
    The real issue people need to be concerned with is where these funds are going and what effect they will have on the economy.
    Even if Beck and Palin are wrong about the semantics of what the Fed is doing, they are telling people the truth about getting into commodities and the need to have disclosure on Fed operations.
    QE will cause commodity inflation, and world wide currency wars.
    Trade and currency wars have a way of turning into real shooting wars when the diplomacy of failed economic policy breaks down all together.

  • mj

    TPC:

    You said:

    “Spreading fears about “money printing” and big government intervention are not only misguided and irresponsible, but extremely harmful to the country.”

    I disagree. If this is what is required to get people off their asses to stop the sociopaths at the Federal Reserve it is beneficial not harmful. You are right that QE does not cause inflation in the classical economic sense of inflating the money supply. However, it has in fact caused debasement of the dollar, and therefore price inflation, which is really the only thing that matters. You are falling into the trap of defending
    arcane academic theories which are best left among the useless parasites in academia, where at least they can do no harm.

  • Lilly

    “A central bank implements quantitative easing by first crediting its own account with money it creates ex nihilo (“out of nothing”).” ~Wikipedia

    “It means our government is pumping money into the banking system by buying up treasury bonds. And where, you may ask, are we getting the money to pay for all this? We’re printing it out of thin air.” ~Sarah Palin

    So if Wikipedia is wrong and Sarah Palin is only on a politically motivated rant, where does the central bank get the money to buy the treasury bonds?

  • http://www.pragcap.com TPC

    It’s most certainly not semantics. The Fed is not printing money. They are not dumping new dollars into the economy. That should not be downplayed or used for political gain.

  • Randall

    AMEN!

  • Adam

    Also with regards to Japan… Fiscal policy has supported the economy but Japan in general has done little to address the imbalances within its economy that helped set off its debt bubble. Michael Pettis has a good write up on it too…

    http://mpettis.com/2010/03/stuck-in-neutral-%e2%80%93-what-japan%e2%80%99s-rebalancing-can-teach-us/

  • http://www.pragcap.com TPC

    There’s a big difference between being lucky and being right. Buying gold because the fed’s QE is “money printing” just shows that you are lucky and frankly, rather ignorant.

  • http://goodrichardsalmanac.com Richard

    Honest people should not be afraid to listen to what Beck and Palin have to say.

  • http://www.pragcap.com TPC

    Now that is something I would love to ask him myself! He’s trying to get rates down and create demand for loans.

  • http://www.pragcap.com TPC

    Where does the money come from? It comes from nowhere. But the kicker is that it does not go INTO the pvt sector. It sits as an accounting identity on the Fed’s balance sheet.

  • http://www.pragcap.com TPC

    I am 100% in favor of political activism in the face of govt ignorance. And I spend my fair share of time here railing against the Fed. But it should not done by spreading total falsehoods.

  • http://www.pragcap.com TPC

    As above, it gets it from nowhere, but the money is merely swapped with the pvt sector. It is not adding net new money. The “extra” money sits as an accounting identity on the Fed’s books.

  • Chris

    They are just swapping IOUs with the treasury if you cut out the bank middle men. TPC makes the subtle, but very important point that the money printing (inflation) occurs when the government commits deficit spending.

    The FED is just retiring treasure bonds and replacing them with dollars (bond with no duration). I believe they over pay the bank in their attempt to manipulate the treasury yield curve, but this is debatable.

    The only reason I can come up with inflation expectations out of QE 2 is that the FED has in effect handed a loaded gun to the children in congress. If the FED is willing to operate QE to cover deficit spending lets raise spending and lower taxes. Why even pay taxes? While the whole issuing treasuries is somewhat archaic, the idea (held by a significant # of Americans) is that the interest rates on treasuries would limit government deficit spending. QE stops this price discovery in the market.

  • mj

    Lilly:

    Your post is a succinct and therefore excellent description of the problem. TPC is right that this process is an asset swap, but, it is the swap of an asset that did not previously exist ( the Fed’s money) for an asset that did (the bonds). This new asset (the Fed’s money) is then put into circulation thereby increasing the money supply. Doing a simple T-chart illustrates this. I guess double entry accounting does not apply to the Fed.

  • first

    FDO 15 You say: “The entire country and world is convinced that we are trashing the dollar.”

    On planet heart it as been crashing. No Inflation ? If so why is the same dollar buying less cotton (up 54%), corn up 29%, soybeans (up 22%), orange juice is (up 17%), and sugar (up 51%). All in the last 60 days if that is not inflation where do you buy your food? Who I forgot its not included in the inflation basket. Brilliant.

    “where does the central bank get the money to buy the treasury bonds?”
    Reserves are is essentially deposits that commercial banks hold with the Fed but how did they get those reserve in the first place? Buy swamping nothing for something. Mi was stable or down reserve are at all time high.

  • Scott J.

    Okay, so I’m confused about something. I know QE1 was the Fed buying Tsys and MBS from bank balance sheets, but I have been understanding that that’s not the case in QE2, during which the Fed is buying mid-range Tsys from the Treasury itself. Is that correct? Operationally, how does QE2 happen step by step? And is there a meaningful difference btw the two? Would appreciate the clarification.

  • http://www.pragcap.com TPC

    This is factually incorrect. Please refer to the simple accounting that takes place:

    As you can see the net financial assets are UNCHANGED. They are merely changing the composition.

  • Eric

    Where does the fed get the money that they are swaping…thin air, hence the fed balance sheet continues to grow…hence commodities and all tangible assets go up and hence deflationists are wrong and getting pounded. Maybe you could put up the chart you put up a little while ago showing how the deflationists are winning the arguement and update the figures.

  • http://www.pragcap.com TPC

    No difference. Just a change in the asset type.

  • http://www.pragcap.com TPC

    I could also cherry pick by saying that the largest asset on the American balance sheet is contracting again (housing is double dipping). That’s 40%+ of the average American’s costs. The fact remains, the environment remains disinflationary because not all assets are rising. Cherry picking commodities proves nothing.

  • steve

    Palin and Beck are entertainers, just like Limbaugh. They push what is popular, not what is right, and they are one sided. Therefore, you cannot trust what they say. When they finally get one right that does not mean they are smart. Even a broken clock is right twice a day.

    With regards to this post. Printing money will cause inflation (Beck and Palin are right here). All you have to do is look at the prices of commodities, which are dollar denominated. Oil, up. Corn, up. Gold, up. There ARE more dollars in circulation and this IS driving up commodity prices (weaker dollar). Remember, when a bank gains one dollar they can loan out an additional $9 of fiat money, that is the real problem.

    We are in a global recession/depression, prices should be drastically coming down and the reverse is happening. Prices will escalate well in advance of incomes and we will all lose out from the Fed’s actions. This is both a Dem and Rep problem and inflation is a “hidden tax” on all of us. I would rather them look me in the eye and tell me what the tax rate is as they raise it vs. to claim they are NOT raising taxes and kill me at the pump and grocery store, as I cannot prepare for what I cannot see.

  • first

    That makes it clear TPC but can the bank not use the 40 in reserve ?

  • AWF

    How about a little spice with that Palin and Beck

    QUOTE OF THE CENTURY

    Some people have the vocabulary to sum up things in a way that you can quickly understand them. This quote came from the Czech Republic. Someone over there has it figured out. It was translated into English from an article in the Prague newspaper Prager Zeitungon on 04.28.2010.

    “The danger to America is not Barack Obama, but a citizenry capable of entrusting a man like him with the Presidency. It will be far easier to limit and undo the follies of an Obama presidency than to restore the necessary common sense and good judgment to a depraved electorate willing to have such a man for their president. The problem is much deeper and far more serious than Mr. Obama, who is a mere symptom of what ails America. Blaming the prince of the fools should not blind anyone to the vast confederacy of fools that made him their prince. The Republic can survive a Barack Obama, who is, after all, merely a fool. It is less likely to survive a multitude of fools, such as those who made him their president.”

    When are we moving to the Czech Republic?

  • first

    Housing is an asset not like consumer goods when you sell a stock to someone and it goes down nothing as realty changed except a money transfer.

  • http://www.pragcap.com TPC

    Well, banks don’t USE their reserves to lend anyhow so it’s inconsequential. Loans create deposits. That’s why, when we added 1.2T in reserves in QE1 lending did not explode. Banks are never reserve constrained.

    This operation is targeting int rates and hoping to create demand for loans. Personally, I think BB is preparing to buy MBS as well so he can keep the credit channels smooth. Not a bad idea really, but it should be posed as such since I am quite certain he’s thinking about it. But that would be very political if it became known that the Fed was preparing to buy bank assets. It would be framed as a bailout and BB knows that’s a no no.

  • http://www.pragcap.com TPC

    Tell that to the millions of people who bought a house in 2006. Monthly mortgage costs fluctuate enormously and play a vital role in the spending habits of Americans.

  • Chris

    Yes, but they could have also sold the treasuries to someone else outside the FED, instead the treasuries are taken out of “circulation” by the FED. It takes a bit to understand the point TPC is making and that is the increase of money in circulation actually occurs when the government spends money it doesn’t have (deficit spending) and issues more treasuries. The FED move is simply an asset swap unless the bank uses the added reserves to make loans which I judge unlikely due to the lack of demand for loans by credit worthy borrowers. QE 2 doesn’t directly cause inflation, but MJ’s point that it is creating hysteria that is increasing inflation expectations in the public while providing cheap money to speculators to pump up the commodity/stock bubble is vaild.

  • http://www.pragcap.com TPC

    NAILED IT Chris. Thanks.

  • Allen

    This is fun. Not only fun but intellectually stimulating. I notice your simple accounting example and I agree with that. What I would like to see is a simple accounting example for the Federal Reserve, before and after QE. Or, is it really true, that they play by different rules?

  • first

    “the vast confederacy of fools that made him their prince”
    Since close to 50% do bot vote so there is hope. Ha Ha Ha

  • Captain America

    TPC,

    First of all let me just say that your work on this subject has been top notch. It’s amazing how many times you’ve explained this and yet the vast majority of people still can’t wrap their heads around it. You are showing us in real-time how irrational a market can be. Nobody understands QE it seems and yet commodities and gold surge every day. It’s amazing.

    Thanks!

  • Chris

    Wrong…most people buy a house with a mortgage which is equivalent to buying a stock or commodity on margin. When it goes down, instead of getting margin called and the bank closing the trade…you get the fun of being underwater with walking away being the only way to stop the bleeding.

    The housing bubble was blown extra big because the banks were able to skim mortgage originations and push the crap loans on MBS investors. These home owners/holders of mortgages got screwed by an appraisal on a house that was grossly inflated. The home owners have an asset that has deflated and the mortgage holder has a loan out in excess of the collateral.

    Now we have millions of homes owners with ridiculous mortgage payments and investors unwilling to buy the houses that do default cause of title/abandonment/vandalism of the property. TCP is making a valid point that M3 is likely to continue to collapse. The commodity/stock bubble is just a carry trade by speculators utilizing the media to get average Joe’s to bid up commodities that they already have the futures/options for.

  • first

    TPC

    Remember that when rates where going down during the Greenspan utopia monthly payments did not reflect the increase in home price. As rate fell one could by more with the same monthly payments. Home price up no inflation according to the FED so why is it different when my payment are the same but the price of my house is down?

    Should Inflation be on Housing price or housing monthly cost?

  • palp

    Instead of driving down rates to induce demand for loans, do you think it’s plausible that the purpose of QE is to discourage foreign reserve recyling back into UST, thereby effectively devaluing the dollar?

  • haris07

    While agreeing with TPC on the mechanics, I still disagree that this has no inflationary effect. My thesis is as follows:

    - Treasury bonds were issued in the past (sometime in the past) to finance “productive assets” (lets not get into why bother financing and not just increase reserves, yes, you can do that but that’s not the way the world operates).

    - When the Treasury buys bonds, it increases cash reserves on bank books. Tese “cash reserves” ARE new $ that are created electronically. While it is an asset swap and hence does not alter net financial assets, it has increased cash $.

    - Therefore, there is an excess of $ in the system.

    - This drives down the value of the $.

    - Therefore it is “inflationary”…whether it is in core CPI or in “other” assets such as hard assets like gold, oil, agriculture.

    The KEY point I have been making is that Bubble Ben is creating fresh $ that will be used and has been used for “unproductive uses” (like speculation) while buying back Treasuries that were presumably used for “productive purposes” (lets also not get into whether they were really for productive purposes, taking this logic back far enough and you can get to the point that at some point they really were used for productive purposes).

    Creating fresh cash $ that are used for unproductive purposes is inherently inflationary – and the main way it is inflationary is that it drives down the value of the $ w/o creating any productive asset. Taken to the next level, when the govt wants to do stupid things, it will just ask BB to create more fresh $. At the very extreme, the govt will spend $ into existence (as it does today) but purely for profligate and unproductive purposes (for e.g. to buy back and retire mortgages that are defaulting) creating a country that penalizes honest citizens and rewards unproductive citizens (in order to buy votes).

    This is all inflationary….and at some point will cause a run on the $.

    And that is my 2 cents!

  • http://www.pragcap.com TPC

    The two are pretty highly correlated. I use the monthly payment in my calculations. I added a mortgage component to CPI which I think provides a better real world view of what households are going through:

  • Where did money come from?

    TPC – you noted “This is a bank bailout. He’s preparing to buy MBS in case the housing market turns south.”

    Where is the Fed getting that $600 billion to bail the bank out? Isn’t the Fed/Treasury minting more money to accomplish this?

  • Chris

    This isn’t amazing, this is sad. The commodity/stock is in the second phase of bubble formation because the FED is flailing about trying to create growth. It is gaining awareness and institutions are trying to enter very small markets that are being front run by very good traders. See the graph…its for housing, but the commodity ramp will be similar…it will run for as long as the QE continues, but the collapse will be epic.

    http://ftalphaville.ft.com/blog/2009/03/12/53476/bubble-theory-and-uk-housing/

    Bernanke is risking the entire system because he won’t face the truth…the large banks have committed rampant fraud and have trillion dollars holes in their balance sheets.

    http://www.youtube.com/watch?v=O3JTPzW3xmg&feature=player_embedded

  • first

    A carry trade to the grocery store. If you are correct and it is not inflation then we should have a squeeze very soon since it would not be pass on to consumers. That would make even more problems would it not ?

  • okl

    at the end of the day, i think i’ve learnt these:

    1) yes the money is printed out of thin air
    2) but it’s still stuck with the banks
    3) banks don’t use reserves to lend
    4) what the Fed does/is trying to do is to
    (a) push rates lower,
    (b) take all the derivative rubbish off the banks in order to entice
    as a result of (a), consumers to lend and
    as a result of (b), banks to have no problem in lending.

    the problem is

    5) it doesn’t help the consumers because they
    (a) still have loads of debt to pay down and
    (b) jobs are still in short supply

    6) and it doesn’t help businesses because
    (a) of tax and healthcare changes
    (b) of manpower costs-benefits relative to EEMs
    (c) the consumer is still down on the mat

    7) there is still loads of crap to come as a result of the housing frauds, which means
    (a) banks still have lots of lousy assets based on the FASB accounting changes
    (b) lawsuits based on the mortgage fraud to come, this also means the banks will be doing ‘financial terrorism’ again because if they don’t manage to keep the laws as they are, they cannot lend due to uncertainty and will encourage buying gold to use it as collateral

    8) there is more political nonsense to come from both parties and maybe even the EU, because of weak growth thus far and nobody knows what the heck any party might do… given the domestic knot, presidents normally leverage on foreign policy, which means markets expect something to happen in Iran, which means “whatever it is, buy oil- just in case that noob of a president does something silly”

    so the markets are moving higher because;

    a) they expect more lending… i suppose there is some marginal effect, but whoever is lending is not investing it in the US economy because as mentioned earlier, the EEMs look better

    b) and if they are, they are speculating it the US markets because the banks are doing the same thing to try and improve their balance sheet, which no one has any idea how much is necessary

    c) they expect the govt to go bonkers with another stimulus plan sometime soon

    i guess i could go on and on… but at the end of the day, I think those politicians have really let a crisis go to waste… how useful would it be to do some real reform in infrastructure, education, fin-reg… as opposed to kicking the can down the road and pointing fingers at china.

    bleagh.

    well, the entire global financial system is kinda screwed anyway… with interest rates in Japan, EU and US this low, this is all the growth we can manage? how bloody efficient. looks like everyone is more interested in paper profits/gains as opposed to real and tangible improvements.

    lovely.

    let me know if i got the points right, TPC… thanks

  • Chris

    Precisely, dollars are just zero duration treasuries. When the FED bids up treasuries they are reducing the yield effectively making dollars less attractive to hold. This makes dollars very attractive for carry trading leading to the bubble that is just building, its 2003 in housing…party on.

    That the same duration dollars/treasuries can have different rates just shows how bad the system is broken. 1 year t-bills at 0.21%, but Ally selling a 1 year CD at 1.34% with a govt guarantee. Stop the insanity, put the broken banks in receivership.

  • j

    The Fed is out of control, and any honest person knows this. More dollars chasing the same amount of goods is a problem, as is the potential trade/currency war this may ignite. Furthermore, we are looking at a papered over sovereign and municipal debt crisis … papered over with printed money.

    Democrats are supporting this money printing policy because they are hoping this money printing will improve the job picture, and their political fortunes. Democrats are willing to bet the future of the country for political gain. That is what this is turning into. Sick.

  • http://www.pragcap.com TPC

    Yessir!

  • http://www.pragcap.com TPC

    I could probably add a few of my own frustrations, but you summed it up pretty nicely. Thanks.

  • Chris

    No the demand from speculators is going to keep the price rising even beyond what the poor can pay. In the US we have food stamps so this won’t cause starvation, but I do expect food riots throughout the third world in 2011.

    We are going to potentially starve a significant portion of the world population just because we can make money by squeezing a finite commodity.

  • first

    Tanks.

    You sure get a lot of attention with this topic every time and it very good that you take the time.

    I hope doctors know more about medicine than economist do about the economy when the do operations.

  • first

    But Chris is this not a contradiction if the poor can not afford food you gave price increase. Thats Inflation? I lost you .

  • Jon

    This begs the question as to what type of assets are being swapped. The Fed is swapping limited term money for money of infinite duration. As reserves, they are both high powered money, so isn’t really “more” inflationary, except that the “new” money needn’t be retired.

  • Chris

    So in a nut shell…it would be good if we got a collapse in commodities, but I don’t see that happening until the FED takes away the punch bowl.

    You have to understand that in the beginning stages of a bubble leverage/momentum players aren’t in the game or haven’t got their position rising yet. Rising price action gives a leveraged player even more money to buy more…its sick and twisted, but in a small market like silver it is profitable to buy out of the money futures/options then have an entity you control (or a sucker) utilize margin to move the spot price. As the price rises the crap entity has even more power to buy more. That is why this move by ICE is so dangerous…and why trading multiple books at different entities should result in going to jail.

    http://www.mondovisione.com/index.cfm?section=news&action=detail&id=94090

  • j

    I disagree. The Fed is buying assets for more than they are worth. MBS and Treasury markets would be higher yielding if the Fed was not in there. The MBS runup from Fed money is extreme. Furthermore, Fed is clearing the Fixed Income market of much of the supply. This leaves money with no where to go but stocks and hard assets. This is easy to understand, unless you are a Democrat and you are more worried about your political alliance than the risk of a currency crisis.

  • Chris

    You are correct about inflation, but it is not a direct result of QE 2.

    Bernanke needs to clear the banking system…every day he waits trying to grow are way out results in more cracks appearing in the system. My message isn’t that there won’t be inflation…I see a commodity bubble in stage 2. The FED financing to speculators is way to accommodating. TPC has stated the margin compression will keep this from causing significant inflation – and in the long run he is right. In the mean time we are running full steam ahead into a commodity bubble to rival summer 2008. Where silver tops is just a function of how much money the cornering entity is willing to throw in the market versus the sellers. Cornering is never profitable for the entity doing it, but can make lots of money for future/option holders.

  • Cowpoke

    Isn’t the “Spread” on what the Private sector purchases from the treasury and then sell back to the FED inflationary to dollars already in circulation?

  • http://goodrichardsalmanac.com Richard

    Did you forget fractional reserve banking? When the fed uses reserve dollars to purchase stuff, it’s using money that otherwise wouldn’t have been active in the economy. Okay, so they aren’t putting ink to paper, but they are certainly raising the amount of money active in the economy.

    What would happen if the Fed’s depositors tried to withdraw their money? Do you think the fed would tell them “sorry, no money for you,” or get the printing presses going?

    To beat Beck and Palin up over semantics seems silly when you agree with their conclusions.

  • Chris

    I’m a libertarian so as a third party I can tell you, you really aren’t that far from agreeing with TPC on QE 2 and ranting about democrats isn’t really going to help us as a country. The republicans are no beacon of light spending trillions on war while cutting taxes. I’d like to start over without political parties, but I am but a small fish in a very large ocean.

    QE 2 is an asset swap of dollars for treasuries, the money creation occured when the government does deficit spending. This I “think” you would agree with TPC. You can blame Mr. Obama or Mr. Bush or random congress members, they all played a part and we have way too many problems to waste time pointing fingers. I choose to blame the banks because I believe they are responsible for many of the holes in their own and government balance sheets and by refusing to cut deals to work through the housing backlog (might have to admit they are insolvent) they are stalling the recovery.

    There is nothing forcing people to exchange their dollars for commodities, but there are extermemly attractive rates for speculators to borrow dollars to buy assets and I believe this carry trade has been building since the FED cut rates to near 0%

  • first

    “buy out of the money futures/options” yes, If done right = much less risk and more leverage. Thanks.

    Those large investment banks should have been dismantle in a orderly way over a a year or two period and there clients account transfered to some of the 10,000 smaller banks that where healthy.

    The share holders of the investment banks should have lost there money and the banksters should be in jail. Instead they got bonuses for phony profits and sold valueless garbage to the Fed and are re-capitalizing them self receiving free money wile the American public that saved there money are getting 0% so that those bums can survive investing our savings at higher rate in other countries (Carry trades) as you mention.

    They are getting a free ride on the back of responsible people. The Fed is never audited and no one knows what the hell is going on. How can this be compatible with freedom ?

  • http://goodrichardsalmanac.com Richard

    QE is not just an asset swap, unless you believe depositors have forfeited the dollars in their accounts.

    If the Fed uses its reserves (deposits) to purchase stuff, what happens when the depositors make a withdrawal? Do you think the Fed turns them away without giving them anything, or prints those dollars?

    TPC – You had the cash before. Except it was invested in the bonds. Now the Fed has taken your bond and given you cash. Did the money supply change? No.

  • Cowpoke

    Funny thing about these threads, the longer they get, to more FED like confusion builds like Chinese Whispers.

    All I said in the beginning and backed it up with links is that if folk sare going to blast Palin and Beck for being misguided about the FEDS policy, then it would seem fair to throw other world leaders and central bankers in there with them.

    The point being is that if the others in the Finance and Banking community mis the mark, is it so suprising that Beck/Palin, or anyother common folk miss it as well.

  • Chris

    In total agreement there…American won’t be truly free until we put people who commit securities fraud in jail and have banks with clean balance sheets regulated by those that understand how to recognize control fraud at a bank. Red flags…trading multiple books at different entities, encouraging “high” appraisals, exponential mortgage origination/balance sheet growth, ect.

    I got into a fun debate a couple threads ago for calling GS the squid. A bunch of greedy bankers taking private gains (bonuses) when they win and sticking the rest of with their losses when they lose is crap. The biggest mistake during the crisis was not letting the market put Morgan and Goldman out of their misery. The rest of the banks could have been put into receivership as they failed and let healthy banks buy their assets at auctions. If there are no healthy banks then just charter new ones.

    BAC, C, and Ally are still insolvent, put them in receivership. Put someone like Bill Black in charge of cleaning up the mess if there is anything worth auctioning off to healthy small banks then the bond holders get some of their money back. If not, well too bad. We don’t recovery until we solve the housing issue and trying to grow our way out of fraud is crazy.

    http://www.youtube.com/watch?v=O3JTPzW3xmg&feature=player_embedded

  • prescient11

    “the system needs to be purged, so hit the reset button”…

    Do you realize what would happen if that were allowed to “reset” with no safeguards. The ones that advocate such an action are already sitting in their paid for houses throwing coins into the air like scrooge mcduck.

    I would rather pay $3.50/gal. in gas than watch the whole damn country break down into depression.

    But, you really don’t provide any concrete steps here other than say that the Fed. should do nothing I suppose. If that’s the case, then I would submit that we would be in chaos at this point or else very much worse off.

    The dollar is being hurt… So what!!!!! Don’t you understand that will help business and capital flow into this country??

  • prescient11

    Adam,

    I agree with much of what you say, except for the “full national healthcare” bit and that debt does not matter. Of course it does.

    I would submit that anyone who thinks otherwise does not know what they are talking about and has not reviewed history. Guess what, this is not the first time this is happened and it will happen again.

    I’m big on infrastructure and payroll tax holiday. Government can build roads.

    Government sucks at running a hospital.

    But again, you’ve made my point which is that BB is limited in his tool set and all he can do is beg Congress to do the right thing.

  • prescient11

    Adam,

    I agree with much of what you say, except for the “full national healthcare” bit and that debt does not matter. Of course it does.

    I would submit that anyone who thinks otherwise does not know what they are talking about and has not reviewed history. Guess what, this is not the first time this is happened and it will happen again.

    I’m big on infrastructure and payroll tax holiday. Government can build roads….

    Government sucks at running a hospital.

    But again, you’ve made my point which is that BB is limited in his tool set and all he can do is beg Congress to do the right thing.

  • prescient11

    Ryan,

    Thanks for the thoughtful and lengthy response. I would submit, however, that you are making several key errors in the supporting columns of your argument.

    1) Capital flows are not purely domestic, in fact capital has no country, no identity, it goes where it can make the best return. Thus, what BB is trying to do is attract capital into the united states. Capital has been playing these arb games before Goldman Sachs was a glimmer in its father’s eye. Way back to before midevil times.

    So, foreign capital will convert at much better rates and be INVESTED into the United States.

    2) I would say that Japan is not competing very well with the yen and these levels will break them if they don’t do something about it. In fact, it is currency speculation that is killing them and I think that the central bank should intervene such as described in a recent Zero Hedge article, whereby Japan offers unlimited yen at 120, and then one month later at 130 to kill the speculators.

    Perhaps not that drastic, but that is what BB is doing, trying a milk toast approach to devalue the dollar, at least as far as the market sees.

    3) I disagree with your premise that a weak dollar would not help our economy, as far as jobs go I absolutely believe it would. That’s what the CHINESE AND JAPANESE DID TO US!! I mean, in one day the Chinese said that the yuan was now worth 35-40% less, and we have been losing jobs to them since that time.

    And not sure if you notice the windmills coming back from China, they’re not just making crappy copies of the statue of liberty anymore.

    How the Germans do it? Who knows, they’re German!!! Always in a different category, lol.

  • Lilly

    “Yes, but they could have also sold the treasuries to someone else outside the FED, instead the treasuries are taken out of “circulation” by the FED. It takes a bit to understand the point TPC is making and that is the increase of money in circulation actually occurs when the government spends money it doesn’t have (deficit spending) and issues more treasuries. The FED move is simply an asset swap unless the bank uses the added reserves to make loans which I judge unlikely due to the lack of demand for loans by credit worthy borrowers.” ~Chris

    Thank you. As MJ said, if the Fed creates money out of nothing to buy treasuries, then you have both treasuries and money. That’s a doubling of assets. BUT, if the treasuries are taken out of “circulation” then I can see that no new money is added and I understand your point.

  • quark

    To debate the opinion of another human being on a specific subject one is required to determine if at the least one of the conditions are met. If the first condition is met the second condition is met, however, the second condition can be met without the first condition being met.

    Conditions:
    1) whether the person is delusional to the point of approaching insanity 2) whether they are incompetent in the subject matter under debate.

    After observing Glenn Beck it is evident that he is both 1)delusional approaching insanity and therefore 2) incompetent in every subject.

    Sarah Palin is simply incompetent in nearly every subject.

  • Adam

    It’s absolutley a complete fiscal failure! Ben’s failure is not pointing it out and acting like he can do anything about it. He’s just perpetuating myth.

    As for the national healthcare and government running hospitals. Why does national healthcare have to equal running hospitals? I guess its easy to jump to that conclusion since everyone refers to UK’s system as national healthcare, but that’s really nationalIZED healthcare. Why do we pay any money to so called insurance companies? They are profit seeking institutions which means they are cost minimizers – MY HEALTH expenses are their costs. I don’t like the fact that someone is profiting from minimizing my access to healthcare. Why not let the government (and it could be more localized then a Federal level beaurocracy) just write the check?

    Debt – debt only matters for those that are fiscally constrained (i.e. you and me). The fact that the US government issues debt right now is more procedure than a requirement. And in the end it isn’t much more than a subsidy to treasury bond holders and a way to allow the FED to manage interest rates by draining excess reserves caused by the deficit spending.

  • Ryan

    Prescient,

    I very much appreciate this well reasoned back and forth. I agree that Bernanke is trying to make the US a better place to do business by taking down the dollar. Unfortunately, as long as their is downward pressure on the dollar, investors and businesses will be reluctant to put capital to work in this country. And Bernanke seems committed to a weak dollar policy for years to come, making it difficult to attract capital in the interim.

    While I agree a weaker dollar can help some with jobs, I do not believe his approach is to be a prudent one. The dollar is already cheap against the Euro, Yen, Swiss Franc, and Aussie. The issue is its value versus Asian currencies. While Bernanke is certainly turning the heat on Asia through his policies (or at least the market’s reaction to his policies), this seems likely to cause more bubbles. The available cash freed up by QE bond purchases is largely leaking abroad, causing distortions in Asian economies. While this could potentially force China’s hand on its currency, its more likely to just further inflate China’s infrastructure bubble and cause more global problems down the road. And so far I do not see much evidence that China will kowtow to the US on its currency policy. Hence, Bernanke seems to be causing greater dislocations in the financial markets with very little to show for it.

    I do think that the US can already compete in high-end exports against its major competitors, Germany and Japan, as the dollar is already cheap against those currencies. The one place on the high end that the US could stand to take additional action is in the technology sector (the main value-added area in which I see Asia effectively competing against the US), but I think that this should take the form of tax and regulatory policy rather than monetary policy. The government should, in my opinion, provide tax breaks to incentivize domestic manufacturing as well as offer tax breaks on the repatriation of funds from abroad to the extent that they are invested in domestic manufacturing. As a small business owner myself, I would also add that the regulatory environment has become increasingly cumbersome especially in terms of health care.

    Rather than simply being a function of a too strong dollar, I think that outsized domestic consumption and energy policy have an under-appreciated effect on the US trade imbalance. Consumption and additional consumer debt are being encouraged, which only exacerbates the issue. And energy policy does not seem to be the focus of our government. I would like to see the US create a stimulus package premised upon building scores of nuclear reactors; and I think this is an area that could conceivably get bi-partisan support. While the import of oil is the main issue, movement to electric cars (to reduce oil consumption) requires that the US have additional sources of energy for the electricity grid. A sound and aggressive nuclear plan could simultaneously provide short-term stimulus to offset a less aggressive monetary policy and much needed consumer retrenchment, while helping to decrease trade outflows for oil.

    On Japan, I agree that they are in heaps of trouble (in fact I own forward payer swaptions betting on much higher rates 3-5 years forward). However, I think that they are still competing effectively in the high-end export market. Their issues appear to revolve around their unsustainable debt level combined with horrible demographics. One reason that I think Bernanke needs to take a different tact than Japan is precisely because their efforts at QE and stimulus have not solved their longer-term problems. They are in a serious bind, and I think that a short yen position will be highly rewarding over the next few years as they try to extricate themselves from their debt problem. But I do not think a yen devaluation is a competitive issue, but a function of over-leverage combined with demographic decline.

    Thanks for the discussion; I look forward to your response.

    Ryan

  • Ben Franklin Jr.

    If it walks like a duck and it quacks like a duck, a reasonable man would conclude that it is a duck.

    What asset is Ben Bernanke bringing to the table to “swap”?
    If it is money(whether a magic entry in a computer database or printed reserve notes) then where did he get the money? Not from taxes. Not from return on investments, not from contributions. Conclusion, the money is being created.

    Are there any restrictions on withdrawals of the “created” moneys? If not then the money may, at the behest of the owner of the account, be used for any purpose that they so chose.

    How is this not adding to the currency in circulation?

  • Huckleberry

    I can’t read music, and couldn’t carry a tune if it had handles, but I damnsure know when a wrong note is hit, whether it is the National Symphony or Willie and the Poor Boys. I might not be able to tell ‘em how to play, but I can tell ‘em how not to play.

    Of course, I usually wait until the music has started before making my mind up as the whether it’s any good or not (a practice a lot of the folks hereabouts have a hard time wrapping their minds around).

    Can’t see how we can be so sure about something that hasn’t happened yet.

  • Ebihara Shinji

    Sorry, how do mortgage payments for individuals fluctuate with house prices? I don’t have a mortgage so I don’t have experience. My rent keeps going up though.

  • RkD

    If Bernanke is not introducing any new cash in the market, then why has the Dollar Index lost 30% of it’s value in 6 months?

    TPC – Mainly because the Euro and Yen have rallied against it.