Does the New QE3 Concern You at All?
I know there are many other things to discuss in the Ricochet community, but I thought I should put a placeholder for comments for the question above.
The Federal Reserve, yesterday, announced it will now pursue zero interest rate policy into mid-2015, by purchasing even more mortgage backed securities at $40 billion per month. They do this by printing money. They are also extending their Operation Twist program of finding whatever short-term securities they can find and selling them in return for longer-term maturities. It's hoped that will decrease mortgage rates and lending rates; it has the additional effect of reducing the debt service costs of the U.S. Treasury.
Concerning the discussion of what I'd tell Romney/Ryan, I'd've run to the nearest microphone and said this shows the failure of Obama economic policy. Obama has taken us to a position where the only policy they seem willing to take is zero interest rates for the entirety of the next administration. (They've probably done this, but the press is probably preparing to ask Romney if those comments are premature since we don't know what economic growth in 2014 will be yet.) The House Republican Conference has already done the hard stuff, guys. Get to work.
I'd also make the point that the Fed is playing a dangerous game with inflation in the long run, and is just giving away revenue to the banks in the short-run. Those banks hold the MBS that the Fed will buy in QE3. Rather than lend that money out, banks are parking that money with the Federal Reserve, which is paying them interest for it. That's right, folks: The Fed is paying banks for not lending money to the economy. And then it says in its statement that business investment is down, and can't seem to see why.
Take it away, Ricochetland! Do you care? Or is this a non-story?
- Comment (60)
- · Quote
- · UnfollowFollow (7)
Comments:
Sep '12
Re: Does the New QE3 Concern You at All?
TeeJaw
If the Fed cannot keep the government’s cost of debt service at zero forever, and if interest rises even to just 3%, on all that outstanding debt, what do you suppose will happen to the Federal budget?
That just means the cost of future borrowing becomes 3%. The existing debt is going to be what it was when we took it.
Jun '11
Re: Does the New QE3 Concern You at All?
Josiah Neeley: Mark,
Great question. For me, the best test is to look at the reaction of market indicators to the news. If the response to the Fed's announcement is a big jump in equities and a jump in real yields, that suggests that the market is forecasting more growth as a result of the move.
The market isn't infallible, but it's smarter than me and certainly smarter than the Vice President. · 3 hours ago
So by that argument, Obama has been a fantastic President because under "his watch" the SPX has made an historic run.
Markets are not always right. Remember people getting long NoBalance sheet.com because it was getting short squeezed and going up 30 points a day?
I think that in order to make money in the SPX, you have to read market psychology with accuracy.........but that same psychology is not always indicative of what is about to happen.
Market direction can be wrong.
UAL in the late 80's when it went parabolic. Gold in 1980.
I just think Bernanke is doing his best with what he has been told to do and with what he has available.
Jun '11
Re: Does the New QE3 Concern You at All?
CoveredUp
TeeJaw
If the Fed cannot keep the government’s cost of debt service at zero forever, and if interest rises even to just 3%, on all that outstanding debt, what do you suppose will happen to the Federal budget?
That just means the cost of future borrowing becomes 3%. The existing debt is going to be what it was when we took it. · 27 minutes ago
And if there is real growth associated with that 3% handle, then it's a wash because tax revenues will cover.
Jun '11
Re: Does the New QE3 Concern You at All?
Mark Belling Fan
My admittedly simple understanding is that inflation is a function of quantity and velocity of money. The last 4-5 years have seen a fairly modest velocity, to say the least.
If this is wrong, or besides the point, I'm willing (eager even) to learn why. · 2 hours ago
So let's accept that this is what creates inflation - quantity and velocity of money (although over the years, I have seen many economists fall on their sword predicting hyperinflation according to their academic models. It would seem that no one really has a great grasp of these factors).
So then lets say that the velocity of money increases which it has exponentially since the late 70's.
Why would that velocity, especially if it was accompanied by a real 3-4% growth in GDP produce inflation?
Like you, I like to learn.
Jul '10
Re: Does the New QE3 Concern You at All?
The QE3 adds a new level of destabilization to the international house of cards, in exchange for kicking the can down the road some more. Under this regime: the federal credit rating has been degraded; the Treasury has, for the first time, offered bonds for which there were no takers; the Fed continues its ridiculous easy money ways for the billionth consecutive month, long past the point where traditional savings banking mechanisms work at all, destroying private loan capital formation through personal banking; and Europe has shown the euro as implemented is a circular firing squad where the debtors compete to see who will break the creditors fastest. If this were the start of a second Obama term, I might take extreme measures. If Obama is re-elected, game over. A generation of worldwide depression.
If Romney is elected, and actually tries to put this stupidity right, the pain will be unimaginable. What stable currency and fiscal arrangements should be in the modern age does not appear to be a settled question, I hear many propositions, from the gold standard to MMT debauchery, but f0r practice it seems everywhere is just as bad off or worse.
Jan '11
Re: Does the New QE3 Concern You at All?
Ah yes! The Quantitative Easing with The Ben Bernank. Because QE1 and QE2 went so well.
Jul '10
Re: Does the New QE3 Concern You at All?
CoveredUp
TeeJaw
If the Fed cannot keep the government’s cost of debt service at zero forever, and if interest rises even to just 3%, on all that outstanding debt, what do you suppose will happen to the Federal budget?
That just means the cost of future borrowing becomes 3%. The existing debt is going to be what it was when we took it. · 1 hour ago
Except both groups of bond holders will be penalized by inflation as we enter the final act. We absolutely need to transition to real interest rates, and that will be painful as a mountain of bad debt finally plays out.
Apr '12
Re: Does the New QE3 Concern You at All?
I am impressed by the depth of the love Romney and Ryan must have for America that they are prepared to put themselves in the middle of this mess to sort it out.
Sep '12
Re: Does the New QE3 Concern You at All?
michael kelley
Mark Belling Fan
My admittedly simple understanding is that inflation is a function of quantity and velocity of money. The last 4-5 years have seen a fairly modest velocity, to say the least.
If this is wrong, or besides the point, I'm willing (eager even) to learn why. · 2 hours ago
Why would that velocity, especially if it was accompanied by a real 3-4% growth in GDP produce inflation?
Like you, I like to learn. · 1 hour ago
I feel as though these are really complicated questions. I would look to Wikipedia for answers since there aren't 200 word limits and the answers are already there (at least for general questions).
An interesting tidbit is that massive printing doesn't necessarily bring about inflation. Here's a piece that might answer some questions by my boy, Johnny Cochrane. Not to be confused with My Girl, Sandra.
Who knew the guy who got O.J. off was also a renowned freshwater economist/soaring pilot...?
May '10
Re: Does the New QE3 Concern You at All?
Concern? Of course. However, like anything else there are good and bad elements. On the personal front:
- It makes me happy that my portfolio, overweight in bullion and mining equities, is pretty much assured of continued appreciation.
- It confirms my decision to buy real estate outside the USA, where infrastructure improvements are greatly appreciating their worth in a currency strengthening against USD/EU/GBP.
- It gives me a few more months to prepare for a major market correction.
- It increases the urgency of finding how & where to protect my liquid assets in the face of increasing risk of financial system implosion. With every major central bank showing a willingness to QE to oblivion, and European bank capital ratios around 11-12%, one has to more than a little concerned.
On a global basis, I am far past concerned. It is like the developed world has entered into a suicide pact. This will not end well.
By the way, if this is such a strong signal of economic improvement in the USA, how does one explain the reaction in precious metals and other commodity prices + the EU/USD + Egan Jones immediate dowgrade to the announcement?
Jun '11
Re: Does the New QE3 Concern You at All?
CoveredUp
michael kelley
Mark Belling Fan
My admittedly simple understanding is that inflation is a function of quantity and velocity of money. The last 4-5 years have seen a fairly modest velocity, to say the least.
If this is wrong, or besides the point, I'm willing (eager even) to learn why. · 2 hours ago
Why would that velocity, especially if it was accompanied by a real 3-4% growth in GDP produce inflation?
Like you, I like to learn. · 1 hour ago
I feel as though these are really complicated questions. I would look to Wikipedia for answers since there aren't 200 word limits and the answers are already there (at least for general questions).
An interesting tidbit is that massive printing doesn't necessarily bring about inflation. Here's a piece that might answer some questions by my boy, Johnny Cochrane. Not to be confused with My Girl, Sandra.
Who knew the guy who got O.J. off was also a renowned freshwater economist/soaring pilot...? · 1 hour ago
Will do. Excellent thought. I'll have my people call yours or not? Wikipedia?
Jul '10
Re: Does the New QE3 Concern You at All?
CoveredUp
...
I feel as though these are really complicated questions. I would look to Wikipedia for answers since there aren't 200 word limits and the answers are already there (at least for general questions).
...
Pffft. Wikipedia. Almost as poor a source as the media for anything of the slightest importance.
If I were looking to sort this stuff out, I would look for the best economics program I know (in my case, Walter Williams' program at GMU), check to see what the text is for freshman economics (not the offal they teach the lit majors), get that, learn the theories, run the numbers, and prepare to be terrified. Not just because the public monetary and fiscal policy is just a plunge from one disaster to another egged on by the siren song of voodoo economists that, contrary to history and Milton Friedman, the printing press and MMT is the way to go.
And having done that, the literature becomes almost accessible. Again, be prepared for the Texas Chainsaw Massacre in revelation after gory revelation. Not for wusses.
I did it 20 years ago as part of preparation for writing a novel I never sold. I recommend it to everyone.
Mar '11
Re: Does the New QE3 Concern You at All?
May '10
Re: Does the New QE3 Concern You at All?
King, This is really your area of expertise, but my answer as an old business guy to the question of what negative inflationary impact if this works I.E. QE if the economy grows in proportion to monetary growth:
This is the only QE so far that is truly geared towards liberating capital for the private sector. It is introduced at a time when Europe/humongous major market, is a mess. Our business model since 1971 has been for a doubling of debt every 8 - 10 years, well ahead of the economy growth rate. We have created a morass of regulatory barriers to small business growth. Energy policy/physical limitations, that guarantees higher energy costs. We run the risk/certainty, all over the developed world, of significantly higher interest cost on sovereign debt that runs a gamut of ramifications.
Thus the likelihood is that economic growth and monetary growth will be in synch is nil. It hasn't been for more than 40 years, with far fewer complications than we now have. The probability is that money growth will exceed economic growth, inflating commodity prices & a bunch more. Given the debt, already created liquidity - buckle up.
Jun '11
Re: Does the New QE3 Concern You at All?
Not being an expert on monetary policy, here's my understanding of the Fed's action: The Fed is creating money out of thin air and giving it to the banks in hopes that they will lend it to businesses so that those businesses will expand and hire more workers. This would seem to me to be a trade-off between the inflationary effect of creating worthless money and the stimulating effect of helping expand the private sector. Having made that move the Fed then sabotages its own tactic by paying the banks interest on the money thus incentivizing the banks not to lend. It seems to me that the only winners in this current scenario are the banks.
I hate to say it but this lends support to those conspiracy theorists who say the Fed was created by bankers for the benefit of bankers.
May '11
Re: Does the New QE3 Concern You at All?
michael kelley
So by that argument, Obama has been a fantastic President because under "his watch" the SPX has made an historic run.
Markets are not always right. · 12 hours ago
There are a lot of things that affect the economy besides who is president, so you can't just judge a president a success or failure based on what the S&P did during his time in office. Note that when judging the effect of QEternity, I cited the market's immediate reaction. A better analogy would be to look at what the stock market did the day after Obama's election.
The market gets things wrong. But so does everybody else. The fact that the market responded so positively to the announcement of QEternity should at least make those who think it obviously horrible more hesitant in that opinion.
Dec '11
Re: Does the New QE3 Concern You at All?
King Banaian:
Obama has taken us to a position where the only policy they seem willing to take is zero interest rates for the entirety of thenextadministration.
Take it away, Ricochetland! Do you care?
I care. Because future consumption depends on current investment. A zero interest rate (and maybe a negative real interest rate) means that the Fed values current consumption more than future output. Or, as Grandma Skinner would say, "We're eating our seed corn."
Apr '11
Re: Does the New QE3 Concern You at All?
CoveredUp
TeeJaw
If the Fed cannot keep the government’s cost of debt service at zero forever, and if interest rises even to just 3%, on all that outstanding debt, what do you suppose will happen to the Federal budget?
That just means the cost of future borrowing becomes 3%. The existing debt is going to be what it was when we took it. · 22 hours ago
This is technically true, but I think slightly misleading. Not only is new debt caused by ongoing deficits going to be more expensive, but current debt will need to be rolled over at a higher price. It adds up surprisingly fast.
Jul '10
Re: Does the New QE3 Concern You at All?
Muleskinner
King Banaian:
Obama has taken us to a position where the only policy they seem willing to take is zero interest rates for the entirety of thenextadministration.
Take it away, Ricochetland! Do you care?
I care. Because future consumption depends on current investment. A zero interest rate (and maybe a negative real interest rate) means that the Fed values current consumption more than future output. Or, as Grandma Skinner would say, "We're eating our seed corn." · 1 hour ago
Zero interest rates means negligible (traditional) savings rates means the banking reforms that took us through the post WWII recovery to LBJ's guns and butter inanity and the resulting inflation is NOT working in our favor today and contributing to the madness. Now, instead of savings being routed through banks to deserving neighborhood debtors for a modest interest rate, the same money is taxed by the federal government to give to the banks to lend to politically preferred recipients, with ACORNs assisting and no individual robustness through savings.
Uncorking that stupidity will take time and pain.
Feb '11
Re: Does the New QE3 Concern You at All?
I care greatly, but there's nothing that I can do about it unless Romney wins, other than move funds to more stable currencies (e.g. Canadian Dollar, Swiss Franc, Singapore Dollar).