THE QE3 CONUNDRUM

We’re now nearing the end of QE2 and some concrete conclusions can be made.   I’ll save my overall analysis of the program until after its conclusion, but I think the impact of QE2 can be pretty much summed up with the following chart:

Economic growth peaked with QE2’s inception

Real GDP peaked as soon as QE2 began.  Now, this shouldn’t be shocking to anyone who has been reading pragcap over the duration of this program.  From its onset I said QE2 would do nothing for the real economy.  In fact, operationally, it could do nothing.  But its impacts actually appear to have been damaging to bottom line growth.  How so?  QE2 helped contribute to a massive surge in speculation in commodity prices.

You see, QE2 didn’t monetize anything.  It didn’t cause the money supply to explode.  It didn’t really do anything except cause a great deal of confusion and generate an enormous amount of speculation in financial markets that now appears to be contributing to turmoil and strife around the globe.  Operationally, it is no different than what the Fed does at the short end when they implement monetary policy.  The important distinction, however, is that this policy was implemented incorrectly.  Instead of targeting price they targeted size.  And the results in the bond market speak for themselves.  Rates have meandered up and down and up and down without a care in the world for the Fed’s $600B purchase program.  In other words, the program had no impact on rates.

Aside from targeting rates, the program was intended to generate a portfolio rebalancing effect.  I won’t repeat the comments I’ve made in the past or those of Richard Koo, but the portfolio rebalancing effect is essentially a form of putting the cart before the horse.  Creating nominal wealth without an accompanying real effect that results in real economic growth is very misguided and the worst form of ponzi finance.

Where we saw a real impact was in commodity prices, general price speculation and the financing pyramidI believe the BOJ has written the finest piece of research detailing this speculative effect.  The pass through effect from commodity prices is a contributing factor in the declining real GDP.  Inflation has risen marginally due to commodity price increases and the underlying real economy has remained stagnant.  In other words, QE2 caused margin compression without helping spur growth.  This helped create the disequilibrium I have often discussed. The result is the current air pocket in the economy.

Critics of this analysis are likely to claim that we don’t know what would have happened to the economy without QE2.  This is true of course.  What we do know is that the economy was growing at 3.3% at the time QE2 was initiated, ISM surged to 57 just days after the announcement and climbed to 58 as the program was beginning.  In other words, we can confirm, definitively that the economy wasn’t collapsing as QE2 was beginning, but weakened as the program progressed.

So, the only question left is – if the evidence appears to point to the fact that QE2 didn’t help the economic recovery then why in the world would anyone even consider QE3?

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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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  • LVG

    Cullen, I am not sure that most people see it this way. I think most people still don’t understand QE so they’re inclined to say that it was stimulative because it created more money. More importantly, it definitely helped cause a rally in risk assets so I think the Fed will hang their hat on that.

  • http://www.pragcap.com Cullen Roche

    True, but what if investors are beginning to realize that QE2 didn’t help the real economy? Risk assets can’t just continue to rise forever without underlying growth, right?

  • http://www.3spoken.co.uk Neil Wilson

    I’m not sure that the purchasing of bonds is causing anything. It may be correlated with a mania, but if the Fed continued to buy back bonds and cancel them then eventually people would realise it isn’t do anything and you’d get the snap back anyway.

    I suspect this would have happened anyway. There is a load of money around the world that is short of somewhere to live. It will chase whatever is the current fad.

  • Koos

    If QE was meant to get the banks in a position to earn their way out of debt, get them in line with Basel III and supply their managers with ever larger bonusses, then it’s definitely been a blatant success.
    The point seems to be that US-government financial management has been outsourced. You can not expect all these Greenspan-friends running your economy to invest in the “common good” because their bias since the ’80’s has been with the financial and not the productive part of the economy.

    That’s a bit structural and not very NMT, but I personally don’t see any other rationale behind the decisions US-government has come up with so far.

    As for the continent overhere: we had a bail out, but nothing like QE. Our ECB is officially “independent” of politics; there’s just a directive to put price stability at the heart of it’s policies. Just adding money is not an option. Come to think of it: doing anything is not an option for the ECB.
    As far as the ECB is concerned commercial government borrowing and corresponding deflation through austerity are the only way out.
    Common sense – and historical evidence – seem to point to the fact that this way out most probably is also the way down.
    There’s no sign of an average increasing GDP here either and there is no sign of anybody forcing the economy out of the current stalmate of non- or mal-investment.

    So QE is a bit of an attempt to do something. Europe does not seem to be in a position to do even that. So in comparison the US is trying but failing.
    Us overhere is just failing.

    What our shared common good needs, seems to be a way of forcing investment-money into production instead of inflating real estate and stocks abroad.
    Maybe it’s time for the financial sector to start paying taxes on some of the income they generate from speculation? From what I know about your theories, taxes are primarily meant to keep the monetary system balanced, but imho they COULD be used to try to direct the money to where it would be productive.

    Using taxing to force investments probably sounds a bit alien to US-economists these days. Please forgive me in this respect, since I just started out reading and learning about economy some four months ago.

    And sorry for sounding like a communist. Please post any contradictonary insights, because with the current state of affairs and my current knowledge I can’t think of any just now.

    Cheers from Holland [recentely upgraded to the triple A-status!] anyway.

  • http://ralphanomics.blogspot.com/ Ralph Musgrave

    I agree with Neil Wilson above when he says “There is a load of money around the world that is short of somewhere to live.” This could be partially because we are becoming more like the Japanese: happy to hoard large amounts of cash/government debt even at near zero rates of interest. Another contributory factor is that the cash is piling up in the hands of the rich and corporations. The former’s spending habits are not much influenced by a rise or fall in their bank balances. As to corporations, they won’t spend their cash, i.e. invest, till they see demand.

    Anyway, there is a bonus here which is that cash and government debt are almost indistinguishable: they both pay near zero rates of interest. That means the Fed could just print large amounts of money and buy back national debt. So an advantage of QE3 would be that it would make the national debt disappear in a puff of smoke!

  • NR

    The US has lost a tidy sum of money since the real estate bubble burst. QE2 loomed large on a mental way because a crash in the stock market after the damage occured in the real estate market might have kicked the US right over the edge into a great depression. QE2 helped to stabilize the stock market after the fast crash and its decline under the 200 SMA line last summer. A rising stock market feels good, lifts up the mood and may create a wealth effect.
    For good measure, QE2 helped also the USD to devalue which will likely boost the SP500 earnings to a record high of 912 bn USD in 2011. Even though, commodity prices spiked in Q1, 60% of the SP500 enterprises had beaten estimates and improved margins that might also be traced back on a weak USD as an impact of QE2. According to current estimates the forecast of SP500 earnings for 2012 is even better than 2011 with a new track record of 1 trillion USD in total.
    Thus, I consider that QE3 might support corporate`s and investor`s confidence. Let`s welcome it with a warm applause.

  • nottpc

    Because almost everyone calling for QE3 is a wall street speculator who never saw a ponzi scheme they would not be happy to partake in. They could care less what happens to the real economy in 6 months as long as their nominal economy ala wall street is injected with short term steroids. Have to go buy another home in 6 months plus trip to Tiffanys and the Hamptons is not cheap. Fake asset values it is and let the fallout that occurs happen to the little people.

  • Brick

    I think it is right to look at QE2 as not being beneficial to a large swathe of the economy, but there are exceptions. I think it might have helped large global corporations to improve efficiency through cheap loans. The unintended consequences of margin stresses and suppression of employment as a result rather suggests that it targetted the wrong areas of the economy, although you do have to take into account pension cost benefits which would have been somewhat mitigated by the rise in equities.
    The question I would perhaps ask is would QE2 have been more effective without the currency pegs elsewhere in the world. The Fed seems to suggest so , though I have my doubts and suspect the liquidity provided would just have gone elsewhere.
    As for QE3, then if core inflation dips to low you can expect it to happen regardless of the political barriers. It will not be sold as QE3 of course and will take a different format. Most likely it will be targetted at credit for the consumer and involve suppressing the ten year US debt yields to a specific point or the Fed stepping into the securitization business in a big way. Off course the banks will mess things up so that only the over leveraged will bite and the Fed will find it almost impossible to exit. Longer term the imbalance this causes will remain untill the world market structure changes so that the imbalances can be corrected. In otherwords in my view QE3 will have negative impacts if it is continued too long.

  • http://www.shmish.com Adam Ruchka

    Because it’s a confidence game. Without more government intervention (QE3) speculators would start pulling their money off the table across the board and then the bottom drops out. Right now, we are staying afloat.

    So governments across the globe have used the ‘fake it till you make it’ approach.
    Like you say – it’s more or less a Ponzi scheme and we know how those tend to end.

    BTW – submitted this article onto shmish.com – social news site for finance.

  • Sostegno

    How can economy grow when everyone takes his money out of the economy and instead places it in a segregated casino account. In the last year more banks went bankrupt than 2009. QE2 was intended to have tht destructing effect.

  • boatman

    QE3 will come because it is the only thing they can actually do, help GDP or not.

    The big surprise will come when the DOW eventualy goes down during its implementation.

  • B Ferro

    This is a good piece. It is beyond comical that CNBC is talking about and asking guests incessantly about the need for QE3.

    The lack of incisive journalistic questioning and the inability to pinpoint the real issue you’re pointing out, that being why is growth so weak in conjunction with QE2 and by default given this, why would we even consider QE3, is a tragedy for the average investor looking to better understand the real economy.

  • flow5

    “Instead of targeting price they targeted size”

    Then there’s Bernanke in 2002:

    “A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt…”

    Then there’s ZeroHedge:

    “If, say, the 10-year note were to be capped at 2 1/2%…”

    The problem is that Keynes’s liquidity preference curve is a false doctrine. The money supply can never be managed by any attempt to control the cost of credit.

  • Willy2

    The graph would suggest that all that QE2 money went abroad. Europe, China, Brazil, India ? It’s consistant with the falling USDX and rising commodities prices. And that has resulted in the highest price inflation in the US. Poor US consumer. He’s the the vitum of Benny (Bernanke) and his gang at the FED.

  • jt26

    Actually, the real economy has been signaling no need for stimulative policy and QEx for years (notwithstanding the liquidity squeeze funding of 2008). Look at VC returns for the last 10 years. Declining, ROI in major drug companies. Overbuild in shale gas, cleantech etc.

  • El Viejo

    QE = superstitious behavior.

    Agree with Neil also.

    401Ks carry a lot of political weight.

  • El Viejo

    Risk is not alone to be rewarded. Patience is also.

  • T. Blazedman

    Interesting to see how the monthly jobs report comes in….I think if it misses there is a lot of downside left.

  • Ben W

    Well, to be fair, it helped economies – just not ours. Countries that are producing the speculatively-bid-up commodities are doing great! (Canada, Australia, etc).

  • But What Do I Know?

    CR, did you notice a confirmation of MMT in the daily Treasury report yesterday? The balance in the Treasury’s account went up by almost $60 billion with no increase in debt (and it wasn’t from tax receipts either).

  • chris

    QE3 will be the fed holding onto its assets and reinvesting redemptions.

    ben has told you this:

    “Secondly, we subscribe generally to what we call here the stock view of the effects of securities purchases, which—by which I mean that what matters primarily for interest rates, stock prices, and so on is not the pace of ongoing purchase, but rather the size of the portfolio that the Federal Reserve holds. And so, when we complete the program, as you noted, we are going to continue to reinvest maturing securities, both Treasuries and MBS, and so the amount of securities that we hold will remain approximately constant. Therefore, we shouldn’t expect any major effect of that. Put another way, the amount of ease, monetary policy easing, should essentially remain constant going forward from—from June. At some point, presumably early in our exit process, we will, I suspect, based on conversations we’ve been having around the FOMC table, it’s very likely that an early step would be to stop reinvesting all or part of the securities which are coming—which are maturing. But take note that that step, although a relatively modest step, does constitute a policy tightening because it would be lowering the size of our balance sheet and, therefore, would be expected to essentially tighten financial conditions.”

    i still see the fed’s reserve creation as creating the potential for a significant expansion of money given the money multiplier effect ONCE funds start flowing. given a continuation of zero short term rates and 3% long term rates, the economy can only heat up (eventually) (imho)

  • baychev

    What if the Fed initiated the QE sequel precisely to fake artificial demand for gov’t and agency debt? Maybe all they are aiming for is fund the gov’t spending and keep rates low otherwise if the cost explodes all debt holders (banks, insurers) will face huge margin calls.

  • Bear

    Good stuff CR

  • quark

    We should be analyzing both QE1 and QE2. The difference between these two collosal misallocation of intellect. The beneficiaries of this form of distortion have not been the citizens of this country (with the exception of the allusion of value created from artificially inflated stock values), it has been the financial and commodity market players.

    So what has QE1 or QE2 done for the real economy. One could argue that psychology of the individual on the street has been driven deeper into cognitive dissonance. They understand that the current grand scale market manipulation will end in a bust. They also know if they don’t wake up ever ymorning thinking that today is going to bring better opportunities for tomorrow they would fall into a depression. So they live a life of insecurity while the likes of Buffet, WS, FDIC and Fed continue to play a gave of charades with our nations financial markets.

    As I’ve said before: the markets are no longer predictors of squat. They are backward looking becuase they are trying and failing to fix YESZTERDAYS financial disaster instead of building capital for FUTURE productivity.

    It’s going to get ugly: batten down the hatches the pressure is going to get very accute and destructive.

  • VRB II

    CR-sent from my ipad-BEAR-(i’m not a bear…it’s my sons name)
    Again…good piece. Can’t thank you enough for the last 6 months. You’ve really delivered excellent points of views both for and against various topics.

  • john

    QE2 was a tremendous success in the eyes of the fed, it raised equity prices as planned and raised tax revenue. The companies love it as they are able to issue and sell more stock and cash out with huge profits, in some cases insiders are selling more in stock than the companies are making in quarterly profit. the banks continue to buy equities knowing that they cannot fail, so it is win win and you get perfect trading days every day. If the market collapses you have underfunded the FDIC so the FED will just keep replacing your losses with fresh cash and your balance sheet remains pristine. If assets rise you can sell them and keep 100% of your gains. I say QE3 and we can keep absorbing the insider sales until it all falls apart, at which point the FED will just buy all of the equity and everyone walks a winner. the only loser is our children, but we stopped caring about them years ago.

  • beowulf

    “Actually, the real economy has been signaling no need for stimulative policy…”

    One prong of the Fed’s dual mandate is to promote maximum employment, unless you think 9.0% unemployment fits the bill, that’s a signal (albeit one that Congress should be tackling instead of the Fed).

  • Mark

    QE2 has been a massive boost to the wealthy class.

    Continuing stagnation in the real economy is giving the government grounds for increasing regulations and controls on most things (Fascism). Eg. Preventing Boeing from conducting business in an efficient manner and instead forcing them to use union labor.

    QE appeases the wealthy (Power structure of the US) and continues the spread of governmental control over the masses.

    More QE?

    Bank on it!

  • t boyle

    J Sin ClairQ E ‘s to .. in fin i ty 00

  • quark

    Mark…I’m not a union member…I worked for a slaughterhouse through college some 30 years ago. One of the jobs I had was working with a band saw that had a tension blade which would come off now and again. When it did I simply fixed the tension to keep the line moving. A union official came to me and told me to stop fixing the blade as it was managements job. So the line was shut down for 5-15 multiple times during the day. The entire plant was shut down 3 years later, reopened with non union workers (mostly illegals).

    Like all systems when it is forced out of balance it seeks equilibrium but not before it over corrects. The past thirty years corporate management has swung the pendulum to the extreme in the opposite direction where corporations now control so much of our government that our citizens armies are mobilize to fight on another countries soil for corporate interests while their corporate charters are protected on US soil.

    Just a few examples of corporate malfeasance: gov’t bailout, unsafe mining practices, drug screening, fracking, Pinto’s, Enron, WorldCom, S&L’s, repeal of Sarbanes-Oxley, mortgage fraud…christ, the list goes on and on and on and on.

    Yes…government intrusion and unions are to blame. Keep believing the news is fair and balanced.

  • arrrgh

    what the economy really needs is fiscal stimulus. there is insufficient demand.

    unfortunately, politics precludes any more fiscal help. so the task of doing something/anything is left to the fed. but all the fed has is monetary tools. i believe that ben b. knows these are mostly useless at this juncture. but, rather than just give up, he implemented QE2. sort of like trying to remove a screw with hammer

    “Mr. Bernanke warned on Friday [11/19/2010] that the country is on an economic trajectory that will leave millions of people unemployed or underemployed for many years, and he said there were limits to what the central bank alone could do to help.

    A fiscal program that provided near-term support while addressing long-term budget deficits “would be an important complement to the policies of the Federal Reserve,” he said.

    It was a clear call to Congress to do its part to generate faster growth, and perhaps a tacit acknowledgment that the Fed’s controversial US$600-billion bond-buying program simply cannot fill the gaping economic hole.”

    http://www.vancouversun.com/business/Bernanke+plea+fiscal+help+goes+unanswered/3872212/story.html#ixzz1O9gWKffj

  • quark

    Markets look like they are about to enter a vacuum.

  • Gary_Uk

    I make the same point here over and over, yet our host seems blind to the ways of the real world, living in some kind of theoretical economic world.

    The Fed is owned by the banks, and the primary dealers have been raking in the profits from QE2. That was always all it was about. Same as TARP, save the banks.

    Do you Americans not see that the banking giants are squeezing every last drop of blood and money out of your country?

    They have speculated on their trading desks, pumping up prices in all markets, hurting the economy at the same time. Plus, they’ve been flipping bonds back to the Fed within a few weeks of buying them, always at a huge profit.

    QE3 wil come along to save the banks from the effects of the next deflationary event, not to help the masses.

    It’s not rocket science, it’s as plain as day.

    Keep buying gold folks, hyperinflation is looming.

  • Octavio Richetta

    Take a look at this:

    To QE or Not to QE? That is the Question
    March 25, 2011
    by Paul Kasriel and Asha Bangalore

    http://www.northerntrust.com/pws/jsp/display2.jsp?XML=pages/nt/0601/1138283684288_6.xml&TYPE=interior&er=useoDetail&c=primary/resource/1103/1301064343800_12.xml

    The NT people say:

    After having read our commentaries through the years, you will not be surprised that we have a criterion for deciding on the issue of continuing or ending quantitative easing that is out of the mainstream. We believe that the FOMC should look to the behavior of a credit aggregate we have called Monetary Financial Institution (MFI) credit for guidance with regard to its quantitative-easing decisions. To refresh your memory, MFI credit is the sum of the credit created by the Federal Reserve, the commercial banking system, the savings and loan system and the credit union system. All of these entities have the ability to create credit figuratively “out of thin air.” The Federal Reserve can theoretically create an unlimited amount of credit out of thin air. The commercial banking, savings and loan and credit union system’s ability to create credit out of thin air is limited by the amount of “seed” money provided them by the Federal Reserve. A unique characteristic of an increase in MFI credit is that no entity in the economy needs to cut back on its current spending when the recipients of MFI credit increase their current spending. This categorically cannot be said of increases in non-MFI credit. The genesis of MFI credit is the Austrian school of economic thought’s concept of created credit. A theoretical implication of the unique characteristic of MFI credit – recipients of MFI credit increase their current spending while no other entity need cut back on its current spending – is that changes in MFI credit would be positively correlated with changes in nominal GDP, the value of goods and services produced in the economy.

    After showing a chart of MFI credit & GDP showing a 0.6 correlation between MFI credit and GDP, plus and a bunch of Federal Reserve and Commercial Bank credit charts they conclude:

    To summarize, historically, percent changes in MFI credit “explain” a large proportion of percent changes in nominal GDP. Commercial bank credit accounts for the largest component of private MFI credit. Since the FOMC commenced its second round of quantitative easing in early November 2010, the increase in combined Federal Reserve and commercial bank credit has been dominated by the increases in Federal Reserve credit. If the FOMC terminates its quantitative easing policy in June and private MFI credit creation does not pick up, then total MFI credit growth will slow, perhaps even contract. All else the same, this would augur poorly for nominal GDP growth in the second half of 2011.

    The FOMC has given no public indication that its criterion for continuing or terminating quantitative easing beyond June is based on our concept of MFI credit. Regardless of the FOMC’s criterion, if the FOMC were to terminate quantitative easing after June and private MFI credit creation fails to pick up, we would be inclined to lower our second-half 2011 nominal GDP forecast with the real component of nominal GDP accounting for most of the lower growth forecast.

    So they seem to believe QE2 worked; and based on the data I’ve seen since this piece came out, they would also conclude more QE will be needed.

    I recall reading at least another one of their notes praising QE2. if I find it I will post it.

  • Octavio Richetta

    This is what I had read:

    November 4, 2010
    QE2 Is Likely to Be More Successful than QE1

    http://www.northerntrust.com/popups/popup_noprint.html?http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/1011/document/us1110.pdf

    It would be nice to know what they think now that QE2 is almost over and the economy is loosing steam despite QE2.

  • http://www.pragcap.com Cullen Roche

    Kasriel’s had QE wrong since the minute it started…..he still doesn’t understand how it works.

  • http://www.pragcap.com Cullen Roche

    I said QE2 was a bank bailout 6 months ago…..

  • YM

    Does it really make sense to compare initiation of QE2 with GDP contemporaneously? As we all know, there is a lag in the transmission of monetary policy to the real economy. I think your chart simply indicates that QE2 was implemented in response to indications of a slowing economy.

  • JWG

    Wall Street loves the idea of QE because it thinks QE is “free money” and it likes the PD commissions. If the S&P gets close to 1000 the Fed will most likely announce QE3. It seems focused on the stock market and the wealth effect, and what other tools does it have left? Interest rates are very low already, but there is low demand for loans. Overleverage is the problem in the economy but the Fed doesn’t want the banks to take any writedowns. Markets don’t clear and uncertainty reigns. It’s self-defeating. Remember the RTC’s role in liquidating insolvent bank assets in the S&L crisis in the late 1980’s? One great big fire sale, and it worked.

  • Mediocritas

    Don’t blame QE2 for commodity speculation. Just look at the history of trading volumes:

    http://cdn.wallstreetpit.net/wp-content/uploads/2011/05/image166.png

    Clearly there was a surge before QE2. This, as Bruce Krasting pointed out in May (http://wallstreetpit.com/75253-blame-the-fed-for-commodity-speculation) is a consequence primarily of ZIRP (in combination with QE).

    Bernanke took credit for causing the equity rally and washed his hands of the commodity rally, inferring that the Fed knew this would happen. I’m not convinced. I suspect that in 2008, the last thing on the Fed’s mind was triggering rallies, it simply wanted to save the banking sector. These rallies were an unintended consequence.

    As the graphs above show, QE2 did have an increased effect on commodity speculation, but said speculation was *already* very high. Surging commodity prices could have occurred without QE2 at all, QE2 just increased the odds. Having the Fed provide a monster bid in treasury auctions artificially suppressed yields, pushing fixed income (particularly pension funds) out of the market and into more risky speculation. At that time, stocks probably looked overdone, so attention spilled over into commodities.

    I really do think that QE2 was an attempt to push cash into the real economy via the government. The idea was right, but it simply didn’t work as planned. The unintended consequence of a commodity rally negated any benefit of QE2, forcing higher costs on Main St that offset the gains from government spending. Overall, taking leverage and ZIRP into account, the force of speculation easily exceeds that of injection from QE2, making the program a net negative for US GDP.

    Sorry for repeating it again, but I think QE3 WILL happen, probably not immediately given all the bad press the Fed has received over QE2 (which was FUBAR). There are lessons to be learned, and if they are, properly, QE3 could be done the RIGHT way, which would be to helicopter drop money to the peons and tighten monetary policy at the same time. ZIRP has to end.

  • jt26

    Agree that it is in the fed’s mandate. But, this is one of the debates that has been going on in all these great TPC threads … if I was to summarize the many viewpoints that has been presented, we have quite a diversity on the trade-off between unmployment vs. interest rate policy …
    (a) taylor rule(strict:j taylor)
    (b) taylor rule(arbitrary:greenspan/BB)
    (c) global central banks, e.g. Bund vs. BOJ
    (d) even TPC says deficits matter (i.e. there is a limit to the tradeoff).
    My comment is more that we don’t seem to have a liquidity squeeze for productive use of capital … if there is a good idea, there doesn’t seem to be a lack of capital (in fact VC returns show there is probably too much capital).

    The other problem with the USD is that a lot of the stimulative policy is wasted outside of the US so US savers are penalized (my grandma), while creating no US jobs.

  • boatman

    bill gross “the jobs number will not be an isolated incident. QE3 is likely”

    its their only tool

  • flow5

    “based on our concept of MFI credit”

    “The genesis of MFI credit is the Austrian school of economic thought’s concept of created credit”

    No, as Written June 1980 – Dr. Leland James Pritchard: BA, Political Science, MS, Statistics -Syracuse, Ph.D. Economics -Chicago, 1933:

    The DIDMCA became law on March 31st, 1980. The Act created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions. The intermediary financial institutions effected were the nation’s savings and loan associations, mutual savings banks, and credit unions. Trust companies and stock savings banks have been commercial banks for many years…

    MFI’s are money creating depository financial institutions (or called DFIs by the frbST’s research staff).

    Just like the TMS money supply concepts, the Austrians are always copying the Chicago School.

  • flow5

    Also, Paul Kasriel missed one big money creating depository institution (which should be included in his “MFI”).

  • paul skinner

    Fellow Prag Cap readers,

    Mark my words – the destruction of the US economy is not an accident; it was planned by the banking elites (illuminati).

    The end game is one world currency, one central bank and the new world order.

    The Euro was brought in a few years ago and the Amero will soon follow. These banksters want total control of the world – he who prints the money, rules the world.

    Governments are just puppets put in by the banking elites (Rockefeller, Rothschilds, Morgan, Warburg families) as a smokescreen so that people can continue to blame these pigeons. Obama, Bush, Merkel, Sarkozy – they are all puppets being controlled by the illuminati families.

    The idea is to indebt the society to such an extend that people beg for a solution – that ‘solution’ will be the introduction of the Amero followed by one world currency (probably many decades down the road).

    The Fed is an inflation machine – under its rule, the Federal Reserve Note (wrongly called the US Dollar) has lost over 97% of its purchasing power. The Federal Reserve system is a SCAM, a facade – its real objective is to protect the banks, extend unlimited amounts of credit (so that is can collect interest on money which it creates by a click of a mouse) and bankrupt nations.

    The Fed has done a super job so far and served its masters perfectly.

    Bernanke and Greenspan are not stupid – they have carried out the agenda perfectly.

    Wake up people and buy gold, silver and get out of debt.

    The collapse is here. Wake up for Christ’s sake!!!!!!!!!!!!!!!!!!

  • okl

    can anyone explain the meaning and effects on a country’s balance of payments when “every dollar that a govt issues is backed 100% by foreign reserves”?

    i don’t quite understand the statement… for example;

    1) govt spends 1000
    2) govt taxes 600
    3) so 400 is in the hands of the private sector & the govt owes that to the private sector

    the only way i can make sense of the above statement is if the govt takes 400 of the 600 it receives in taxes, and uses that to buy a foreign currency. in that sense, money isn’t exactly destroyed.

    oh wait, did i just describe the China-US treasuries affair?

    hmmmm……

  • BRIC Skeptic

    Hello Cullen,

    I highly appreciate your unique analysis in these confusing economic times.

    I would be very interested to hear your take on Zerohedge’s assertion that QE2 money was a hidden attempt to recapitalize European banks:

    http://www.businessinsider.com/where-did-all-of-the-qe2-money-go-2011-6

    Thanks in advance!

    BRIC Skeptic

  • skeptic

    It seems that the Fed has a single goal and that is to support the equity markets and the “risk on” trade. A decline or slowdown in GDP growth appears to elicit a yawn at best whereas a stock market correction of 20%+ will guarantee QE3 no matter what it may or may not do to GDP.

  • http://www.pragcap.com Cullen Roche

    That article shows a frightening lack of understanding of modern banking. The fact that the article even mentions that reserves are lent out makes it clear that the premise is flawed. The idea that QE2 improves the capital position is also wrong. I’d just ignore the whole piece. The only way QE2 becomes a bank bailout is if they swap out more of the risk assets such as MBS or other such high risk assets.

  • Jay

    <>

    Bingo! The Bernank mainly cares about the big banks. I wish this weren’t true.

  • Jay

    My above comment was in response to this quote:

    “QE3 wil come along to save the banks from the effects of the next deflationary event, not to help the masses.

    It’s not rocket science, it’s as plain as day. “