Quantitative easing is a joke

[Guest Fedup]

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. - President Barack Obama

 

 

[Guest littlecapitalist]

One of governments' greatest rackets:

 

Taxing inflation generated gains that fail to keep up with the inflation they intentionally generated.

 

Probably the only government racket worse than inflation and its subsidiary abuses, is war.

[Luke_Wilbur]

Federal Reserve is buying U.S. treasury bonds from Goldman Sachs, Bank of America, and the rest of the finance industry at an inflated price instead of buying it directly from the U.S. Treasury. It will be interesting to see who actually purchased large amounts of treasuries before QE2.

 

Edited November 13, 2010 by Luke_Wilbur

[Guest Chuck]

Why doesn't the Federal Reserve require any bank that takes the money is forced to lend it to the people. This looks like another way for the banks to make free money again.

[Guest greenzen]

This is why QE2 is bad. What message does this send to the American people if the Central Bank pays Goldman Sach funny money to pay Warren Buffet the money they owe him.

 

http://www.cnbc.com/id/40193208

 

Goldman Sachs has apparently hit a snag with the Fed in its bid to repay Berkshire Hathaway's $5 billion investment. The delay may be related to the Fed's unwillingness to allow Goldman to make adjustments to its capital levels before allowing other banks the same opportunity. Goldman Sachs is paying a burdensome 10 percent annually on the debt — and would presumably wish to replace it with funding at a better rate, now that the debt markets have unfrozen and financing costs have dropped dramatically.

[Guest dcase]

The decsion has been made to turn the US into a second/third world socialist worker's state, and to pay the debt with worthless script ala the Weimar Republic. But first, all the wealth needs to be stripped, and the left needs to codify their policies and strengthen their hold on power.

 

No one is this stupid. The Asians are beyond pissed off over this- that 'missle' that was fired last week was in all probability a Chinese sub showing us 'what's what' just in case we decide to throw them into poverty as well- while all the international concerns- the Goldman Sachs ponzi scheme- make out like bandits.

 

Both Bernancke and Geithner said we wouldn't monetize our debt. They lied.

 

What else are they lying about, pray tell?...

[Guest NIA]

If there is one American who deserves to be charged with treason, it is Federal Reserve Chairman Ben Bernanke. Bernanke, this past Sunday on '60 Minutes', outright lied to the American public when he said that the Federal Reserve isn't printing money. Less than two years earlier on the same television program, Bernanke admitted that the Federal Reserve is printing money. However, back then, nobody was questioning the Federal Reserve's actions. Thanks to alternative media organizations that have worked tirelessly to help expose the Federal Reserve's dangerous and destructive actions, Americans are starting to finally question the Federal Reserve and Bernanke is now clearly on the defensive.

 

Bernanke's lie on '60 Minutes' that the Federal Reserve isn't printing money is similar to the lie he made under oath on June 3rd, 2009, when he testified in front of Congress saying, "The Federal Reserve will not monetize the debt." Today, the Federal Reserve is monetizing the debt (as admitted by both the Kansas City and Dallas Fed Presidents). When Bernanke uses the term "quantitative easing", he is insulting the intelligence of Americans. "Quantitative easing" is nothing more than printing money.

 

Bernanke said in his interview that the purpose of the Federal Reserve's "quantitative easing" is to keep interest rates low, but the yield on 10-year U.S. treasuries rose to a new six month high today. The truth is, "quantitative easing" is causing interest rates to rise because all of the money being printed is about to cause an outbreak of massive price inflation. The yield on the 10-year bond has risen by 38 basis points during the past three days alone and is now up to 3.26%. NIA continues to believe that interest rates have seen their lows and yields on the 10-year bond will likely rise above 4% in the first half of 2011.

 

When the 10-year bond yield rises to above 4%, instead of Bernanke admitting that he lied to the American public and his money printing actually caused interest rates to rise, Bernanke will likely claim that his "quantitative easing" just wasn't large enough. Bernanke will use rising interest rates as an excuse to expand the size of QE2 and/or possibly launch QE3. Remember, every 1% rise in interest rates means an extra $100 billion that will need to be spent each year on interest payments on our national debt. Rising interest payments on our national debt can only be paid by Bernanke printing even more money.

 

Bernanke promises that he won't let price inflation in the U.S. rise above 2%, but all Americans who live in the real world realize that price inflation is already well above 2%. Whether it be food, gas, heat, clothes, healthcare, college tuition, entertainment, or just about anything else, prices have risen over the past twelve months for just about all goods and services in America by a lot more than 2%. It is a real shame that absolutely nobody in the mainstream media has acknowledged this fact and called Bernanke out on it. Bernanke deserves to be impeached for his previous acts of perjury and for blatantly ignoring the price inflation that exists all around us.

 

Bernanke is currently leading a misinformation campaign that will prevent the majority of Americans from preparing for and surviving U.S. hyperinflation. Bernanke's misinformation campaign is similar to what took place in Weimar Germany in the 1920s when they experienced hyperinflation. In Weimar Germany, the misinformed public always focused on rising prices, but never understood that prices were rising because the German mark was losing its purchasing power.

 

The Germans believed that there was a shortage of marks and it was therefore necessary to print as many marks as possible. Germans placed all of the blame for their crisis on the symptoms of inflation. They blamed greedy tourists, selfish industrialists and profiteers, the wage demands of labourers, speculators in Germany who were buying foreign currencies and sending their wealth out of the country, and other nations that were buying up German assets with foreign currencies. They failed to grasp that it was their government's own printing of marks and increasing the money supply that caused the inflationary disease.

 

Bernanke is trying to convince the world that he can create an economic recovery through "quantitative easing" (printing money), without creating price inflation, because he claims to have the tools to unwind the Federal Reserve's massive asset purchases. He is trying to trick the world into believing that he has the ability to pinpoint an exact time in which the U.S. economy is recovering without massive price inflation, where he can exit his inflationary strategy before prices start to dramatically rise. Bernanke has no exit strategy that he can implement without sending the U.S. economy into the next Great Depression.

 

Bernanke, being a self-proclaimed scholar of the Great Depression, is not going to allow another one to occur. Bernanke didn't like the market's reaction when he allowed Lehman Brothers to fail (the only right decision he made during the whole panic of 2008). After the failure of Lehman Brothers caused the stock market to crash, Bernanke didn't allow another major U.S. bank to fail. NIA predicts that we will one day see Bernanke attempt to launch his exit strategy by raising the Federal Funds Rate, but as soon as the stock market begins to go south like in late-2008, Bernanke will reverse his decision and either lower the Federal Funds Rate again or leave it at artificially low levels until the U.S. dollar loses all of its purchasing power.

[Guest LAW]

President Charles I. Plosser provides a thoughtful perspective on whether we the Federal Reserve should implement the $600 Billion QE2 U.S. Security Buy.

 

Economic Outlook and Monetary Policy

 

Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia

 

32nd Annual Economic Seminar, Sponsored by the Simon Graduate School of Business, Rochester Business Alliance, and JPMorgan Chase & Co., Rochester, NY, December 2, 2010

 

http://www.philadelphiafed.org/publications/speeches/plosser/2010/12-02-10_university-of-rochester.cfm

 

So, while we are in our sixth quarter of economic recovery, it doesn’t feel like one for many people. Admittedly, growth for 2010 will be somewhat lower than the 3 percent annual rate that I projected a year ago. We started out the year with a fairly nice rebound. Real GDP grew at a 3¾ percent pace in the first quarter as firms began to restock the inventories they had drastically cut during the recession. House sales were boosted temporarily by the homebuyers’ tax credits, which pulled sales forward. However, when the credits ended, sales dropped off sharply. So going into late spring and early summer, the pace of the recovery slowed to less than 2 percent, due in part to the expected decline in housing sales. The mood and tone of the recovery were further shaken by the sovereign debt problems in Europe, which led some to worry that the economy could dip back into recession. While this loss of momentum did cause me to revise down my forecast for the year, I was less concerned about a double dip. History has taught us that recoveries are rarely a smooth upward trajectory. Yet, the most recent data suggest that the economy is emerging from the summer doldrums. Growth in the third quarter accelerated to 2½ percent and readings on consumer spending and manufacturing activity have also picked up.

 

As we end 2010, I now project that GDP growth will be around 2½ percent for this year and will pick up to 3 to 3½ percent annually over the next two years. A key to this growth will be increased private demand, which is essential for a sustainable recovery. While neither business spending nor consumer spending is likely to take off rapidly, I do expect continued improvement in economic conditions that will support moderate growth going forward. As with all forecasts, this projection carries some risks. But for now, I expect moderate growth overall, with strength in some sectors offsetting weakness in others.

 

Housing is one sector that I expect to remain weak. We entered the recession highly overinvested in residential real estate, and the sector is likely to remain depressed for a while longer. Commercial real estate markets are also weak. Nonresidential construction spending declined this year, and I do not see much growth until after the economy is well into a healthy expansion.

 

In contrast, business spending on plant and equipment is strengthening. While some smaller firms report difficulties in getting access to credit, banks have begun to ease credit terms and loan rates are at historic lows. Larger firms have been able to finance investment out of retained earnings or to issue new debt on very favorable terms. Some of these investments have been used to replace aging equipment; some have gone toward productivity improvements, which are good for the economy in the long run.

 

The Philadelphia Fed’s monthly Business Outlook Survey of regional manufacturers showed significant improvement in general activity, orders, and shipments in November, following some weakness during the summer months. The survey’s measures of expected future activity indicate that businesses are becoming more optimistic as well. So I expect business to continue to make these fixed investments at a healthy pace over the coming year.

 

Consumer spending, though, makes up about 70 percent of economic activity in the U.S., so the speed of the overall recovery will depend on how the household sector fares. Even during recessions, it is rare to see sustained declines in consumer spending. Yet in 2008, households cut their spending by over 1¾ percent (measured fourth quarter over fourth quarter). This was the first yearly decline since 1980, and the largest since World War II. The fall in house prices and the decline in equity portfolios hit households hard, destroying the net worth that had supported spending. Additionally, job losses have meant lower incomes. Concerns about future job losses caused consumers to retrench. However, households are now in the process of shoring up their balance sheets. As debt levels fall, and savings are rebuilt, consumers will be in a better position to spend. But with unemployment remaining stubbornly elevated, aggregate wealth will recover only slowly. Those who have lost their homes or spent down their savings while unemployed will recoup their losses only over time. This year, consumer spending is up at a 3 percent pace. I don’t expect a stronger rebound without more improvement in the labor markets.

 

So far, the private sector has added over a million jobs this year, reflecting some of the reallocation of displaced workers into new positions. Unfortunately, the pace of employment growth hasn’t been strong enough to make much of a dent in the unemployment rate. When we met last year, the unemployment rate was 10 percent. Over the course of a year, it has fallen less than half a percent to 9.6 percent, as noted earlier. Like most forecasters, I believe that the moderate pace of the recovery in output growth suggests that we will continue to see improvement in labor markets, but that improvement will be a gradual one. I expect the unemployment rate will fall to around 8 to 8½ percent by the end of next year. I wish I could forecast a faster improvement, but it will take time to resolve the difficult adjustments now under way in the labor markets. The contraction in the real estate sector and in sectors closely related to residential construction, such as mortgage brokerage, means that many workers will likely need to find jobs in other industries and this will take time. The productivity gains occurring in other sectors also suggest that many workers may need updated skills to find their next job. This may be particularly relevant for the long-term unemployed. Monetary policy will not help these types of adjustments in the labor markets go any faster.

Inflation

 

Unlike employment, inflation is ultimately a monetary phenomenon. Headline CPI inflation has been near 1 percent this year. Even if we omit the prices of energy and food, which tend to be volatile, core CPI inflation has been just under 1 percent this year, down from 1¾ percent last year. These low inflation rates have led some observers to voice concerns that we may be entering a period of prolonged decline in the level of prices, or sustained deflation.

 

While I do expect that inflation will be subdued in the near term, I do not see a significant risk of a sustained deflation. Nominal GDP has been growing at an annual rate of more than 4 percent this year. In contrast, during Japan’s lost decade of the 1990s, when deflation was a serious problem, nominal growth was essentially zero. Responders to the Philadelphia Fed’s fourth-quarter Survey of Professional Forecasters see only a slight chance of deflation next year. While inflation is currently lower than the 1½ to 2 percent level many monetary policymakers would like to see, it does not follow that sustained deflation is imminent or even likely. It is useful to remember that the U.S. saw average consumer price inflation of just 1.3 percent through most of the 1950s and early 1960s. This period of low inflation did not lead to fears of deflation nor did it lead to economic stagnation.

 

Moreover, brief periods of lower-than-desired inflation or even temporary deflation are unlikely to materially affect economic outcomes, unless they destabilize inflation expectations in a period when monetary policy could not respond, because rates were already near zero. In that case, real interest rates would rise, which would encourage consumers and businesses to save more and spend less. Given that the Fed’s policy rate is now close to zero, a decline in inflation expectations would undermine the recovery. Fortunately, this is not happening. Expectations of medium- to long-term inflation have remained relatively stable because people expect the Fed to take appropriate action to keep inflation low, positive, and stable. As the recovery continues, I anticipate that inflation will return toward 2 percent over the course of the next year.

 

Monetary Policy

 

With inflation currently running lower than what many policymakers would prefer, and with unemployment remaining very high, the FOMC voted in November to once again begin purchasing assets to expand its balance sheet. The FOMC stated its intention to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

The public has dubbed this recent asset purchase program “QE2,” which does not refer to the famous ocean liner but to the Fed’s second round of asset purchases — what some call quantitative easing. Nearly two years ago, after the Fed had reduced the federal funds rate to near zero, it began a program to purchase up to $1.75 trillion in agency mortgage-backed securities, agency debt, and long-term Treasuries. This purchase program was completed in March 2010. If the Fed completes the full amount of the second round, the Fed’s balance sheet will have more than tripled since mid-2007. The amount of excess reserves held by banks will approach $1.5 trillion.

 

Chairman Bernanke has stated that the intention of the current program is “to support the economic recovery, promote a faster pace of job creation, and reduce the risk of a further decline in inflation.” Proponents expect the security purchases to lower longer-term interest rates through a portfolio balance effect. That is, as the supply of longer-term Treasuries available to the public is reduced, prices of Treasuries should rise, which means yields should fall, to induce the public to willingly hold the reduced supply. Yields on similar assets are expected to fall as the public rebalances portfolios away from the asset with reduced supply toward other similar assets. Just as in conventional monetary policy, lower interest rates would stimulate business and consumer demand and increase exports, thus lending support to the recovery. In some models, the increase in demand leads to a rise in price levels.

 

I would note that the U.S. Treasury could achieve this same portfolio balance effect, in principle, without the Fed’s involvement, if it chose to issue fewer long-term bonds and more short-term securities. The Treasury would, of course, face interest rate risk if, when the time came to roll over this short-term debt, interest rates were higher, costing the taxpayer more to fund the debt. Yet, the Federal Reserve also faces interest rate risk by purchasing these long-term government bonds. If rates go up and the Fed were forced to sell the bonds in order to prevent inflation, the Fed would take a loss — but so would the Treasury, since the Fed would not be able to remit as much income back to the Treasury as it otherwise could. Thus, the public bears the same risk exposure whether the policy is conducted by the Fed or the U.S. Treasury.

 

Because the policy had been anticipated well before the Fed took action in November, there had already been considerable public discussion of the pros and cons of the second round of asset purchases. At that time, based on my reading of the economic outlook, I expressed the view that I did not think the benefits outweighed the costs.

 

I am still somewhat skeptical that we will see much of a stimulative effect from the new round of purchases. The Fed’s first purchase program worked to lower interest rates, although estimates vary quite a lot. Some studies suggest that the effect was 30 to 60 basis points. Others found a much smaller impact. Yet, these purchases were done at a time when financial markets were highly disrupted and asset risk premiums were extremely elevated. But markets are no longer disrupted, so we cannot expect the same effect this time. Even if we did, it is not clear to me that a further reduction in long-term interest rates will do much to speed up the reduction in the unemployment rate to more acceptable levels. Indeed, if asset purchases don’t do much to accelerate aggregate demand, then the argument that the program will reduce the risks of deflation is also substantially weakened. The asset purchase program may help anchor expectations of inflation and ensure that they don’t fall. However, one might ask why adding $600 billion of additional excess reserves would help anchor expectations of inflation any more so than the $1 trillion currently in the system.

 

Thus, I think that the benefits of the purchase program may be modest. On the other hand, one cost of expanding the Fed’s balance sheet is that it will complicate our exit strategy from a very accommodative monetary policy, when that time comes.

 

History tells us that exiting from an accommodative monetary policy is always a bit tricky. It is easier to cut rates than it is to raise them. As I discussed last year, monetary policy must be forward looking because it works on the economy with a lag. This means that the Fed will need to begin removing policy accommodation before the unemployment rate has returned to an acceptable level in order to avoid overshooting, which would result in greater instability in the economy.

 

While the high level of excess reserves is not inflationary now, as the economic recovery strengthens, the Fed must be able to remove or isolate these reserves to keep them from becoming what I have called the kindling that could fuel excessive inflation. In other words, if banks began to put the reserves to use in the same manner as they did before the crisis, money in circulation would increase sharply. We do not know when that will happen or how long it will take for the banking system to make the adjustment. To address this looming challenge, the Fed is developing and testing tools to help us prevent such a rapid explosion in money. But, of course, we won’t know for certain how effective these new tools are until we need to use them in our exit strategy. Nor do we know how rapidly or how high we may need to raise rates.

 

Because the Fed’s monetary policy must be forward looking, the hue and cry from many quarters may be quite loud when it is time to act. Even with the best of intentions, if we don’t act aggressively and promptly, we may find ourselves behind the curve and at risk for substantial inflation. I think we need to bear in mind this future potential complication when considering further expansion of the Fed’s balance sheet.

 

The November FOMC statement External Link indicated that we will regularly review the purchase program in light of incoming economic information and adjusting it as needed to foster our long-run goals of price stability and maximum sustainable employment. I take this intention to regularly review the program seriously, and I will be looking for evidence of the hoped-for benefits as I evaluate the program before each meeting. If we do not see these benefits, I would not infer that we merely need to increase the size of the program. Rather, I would take this as evidence that we need to rethink the analysis of costs and benefits that led us to this policy in the first place. If the economy grows more quickly than I currently anticipate, the purchase program will need to be reconsidered and perhaps curtailed before the full $600 billion in purchases is completed. On the other hand, if serious risks of deflation or deflationary expectations emerge, then we would need to consider whether expanded asset purchases should be used to address these risks. However, we would then need to clearly communicate that we were taking this step to combat deflation and deflationary expectations, and not as an action to speed up the recovery.

 

Conclusion

 

In conclusion, our nation’s economy is now emerging from the worst financial and economic crisis since the Great Depression. A relatively slow but sustainable economic recovery is under way. I expect growth to be around 2½ percent this year, heading up to 3 to 3½ percent annually over the next two years.

 

As the economy continues to gain strength and optimism continues to grow among businesses, hiring will strengthen. As it does, the unemployment rate will decline, but it will be a gradual decline. The shocks we experienced were huge, and it will take some time for the imbalances in labor markets to be resolved.

 

The Federal Reserve remains committed to promoting price stability. This is the most effective way in which monetary policy can contribute to economic conditions that foster maximum sustainable employment.

 

As we move forward, I will continue to monitor incoming economic developments, update my economic outlook as necessary, and assess whether the stance of monetary policy is well positioned to deliver on our goals. Should evidence suggest that the new round of asset purchases is not delivering its intended benefits, and that policy must be adjusted to foster our long-run goals, I will support an appropriate adjustment in our policy stance.

[Guest LAW]

Remarks by President Obama and President Sarkozy of France after Bilateral Meeting

Oval Office

 

PRESIDENT SARKOZY: (As translated.)

 

With the American President, we talked about the future of the G20, and I said to him in very clear terms that we wish to work hand in glove, France and the United States, on these issues.

 

We are in the 21st century, and we need new ideas for this new century. And with President Obama, we are determined to forge ahead, come up with these new ideas for the greater benefit of the peoples of the world, for their prosperity and for the stability of this world of ours.

 

I’ve always been a great friend, a tremendous friend of the United States, and I know how important a role the U.S. plays in the world, how important the U.S. dollar is as the world’s number one currency. And with Barack Obama, we are determined to propose new ideas to get things moving, both within the framework of the G8 and the G20.

 

And our teams are going to be working very hard together to come up with common papers and common positions on the issues which are of interest and which come within the agreement of the G20, such as the matter of currencies, of commodity prices, and all that needs to be done in order to reduce the current and present imbalances.

 

Lastly, I want to thank Barack Obama, my host, for his show of leadership, and also point out that something that has always struck me about him, is his ability to get to the fundamentals, the root of issues, the root causes of things. I appreciate his openness, the way he speaks very frankly about things with me. And I am convinced, ladies and gentlemen, that in 2011, we will be able to come up with the structural solutions that will enable us to settle or at least to tackle the world’s imbalances and problems.

[Guest Seeking Alpha]

A bit of recent news that hasn't gotten enough press is the fact that the Federal Reserve has surpassed China in total U.S. Treasury holdings and is now the largest holder of Treasuries in the world. As of last week, China held $896 billion of Treasuries while Japan held $877 billion. The Fed now holds $1.108 trillion and it has not even passed the halfway mark of its second round of money printing.

[Guest Fedup]

http://www.youtube.com/watch?v=2pnx8_4PsOY

We need stop making money worthless. Quantitative easing from the Federal Reserve and too much Wall Street speculation has created the largest increase in commodities and food prices.

[Guest Luke]

This scares the heck out of me.

 

http://www.reuters.com/article/2011/03/11/us-pimco-gross-fate-idUSTRE72A5H620110311

 

With his 67th birthday just weeks away, the investor widely known as the Bond King has taken one of the biggest bets of his life -- but at least Bill Gross has got some company.

 

Gross' decision to dump all the U.S. government debt holdings at his $236.9 billion PIMCO Total Return fund could be defining, either confirming him as one of the smartest investors of his generation or badly tainting his reputation.

 

He may also be taking a political risk whatever the outcome by making an extreme call against the U.S. government because of its worsening budget deficit and debt problem, especially given the fund still owns debt issued by Brazil, Spain and other foreign governments.

 

But Gross - who helps oversee $1.1 trillion as co-chief investment officer at Pacific Investment Management Co. - is far from alone among the titans of the American bond world.

 

Even some of his fiercest rivals acknowledge that Gross, whose flagship fund has performed better than 93 percent of its intermediate investment-grade peers over the last three years, may have got it right.

 

"If you think rates are going to go up for a quite long time, which I do, you get ahead of that. Bill and I are on the same page," said Dan Fuss, vice chairman of the $150 billion Loomis Sayles & Co investment group, and perhaps Gross' biggest competitor in the bond market.