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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  1. 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.

  2. 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.

  3. 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.

    • 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.

      • 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.


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

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

      • 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?

  5. 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.

    • 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.

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

    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.

  7. 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.

    • 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.

  8. “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?

    • 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.

    • 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.

    • 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.

      • 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.

          • 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.

          • 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.

  9. 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.

  10. 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.

  11. 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.

    • 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.

      • 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.

        • 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.

          • 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?

            • 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:

              • 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.

          • 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.

        • 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.

          • 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 ?

            • 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.

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

              • 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.


                • 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.

                • “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 ?

                  • 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.


  12. How about a little spice with that Palin and Beck


    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?

  13. 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?

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

  15. 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.


  16. 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!

    • 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.

  17. 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.


    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.


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

  18. 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.

  19. 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.

    • 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.

  20. 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?

  21. 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%

    • 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.

  22. “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.

  23. 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.

    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.

  24. 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?

  25. 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.

  26. 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.