QE 4 Update/ Review

English: President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)

The Big Picture

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• Our market letter will return in the New Year

What Is The Purpose of QE? Posted: 25 Dec 2012 02:00 PM PST As detailed earlier in the month, the Federal Reserve announced more stimulus, otherwise known as QE4, at its recent meeting. Lots of the discussion thus far has focused on whether or not QE will happen and not on the purpose of QE. What we discuss below is a good example of economists discussing the probability of QE rather than why QE is necessary or what it will accomplish. So, what is QE supposed to do?  Bernanke told us in his speech over the summer in Jackson Hole: “After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields. For example, studies have found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points.12 Three studies considering the cumulative influence of all the Federal Reserve’s asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are economically meaningful. LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions. While there is substantial evidence that the Federal Reserve’s asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual–how the economy would have performed in the absence of the Federal Reserve’s actions–cannot be directly observed. If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.15 This is not the first time the Federal Reserve has laid out this argument.  In a November 4, 2010 Washington Post op-ed, the day after QE2 was approved, Ben Bernanke defended their actions with the following passage: Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion. And in January 2011 Bernanke said: Federal Reserve Board Chairman Ben Bernanke said Thursday that a controversial $600 billion bond buying plan has contributed to a stronger stock market. “Our policies have contributed to a stronger stock market just as they did in March 2009 when we did the first iteration of this program,” Bernanke said at a Federal Deposit Insurance Corp. forum on small businesses. “A stronger economy helps small businesses more than larger businesses. Interest rates are higher but that’s mostly because the news is better. It has responded to a stronger economy and better expectations.” To sum it all up: • The Federal Reserve buys Treasury bonds in order to push down interest rates, making them an unattractive investment (last shown here, page 6) . • Investors respond by moving out the risk curve and buying assets like corporate bonds and stocks, pushing them higher.  The Federal Reserve believes this happens via the portfolio balance theory. • But according to the Federal Reserve, moving out the risk curve does not include buying agricultural or crude oil futures, so do not blame them for higher food or gasoline prices. • Higher asset prices create a wealth effect, which increases spending and confidence and improves the economy. The Federal Reserve believes this has helped create 2 million jobs. We agree with half of what is written above. • QE does produce lower interest rates, or at least the belief that rates are too low.  This then pushes investors out the risk curve which is why stocks have such an immediate and positive reaction whenever QE is speculated. • The Federal Reserve is playing politics in regards to the effect of QE on commodity prices.  There is no reason to believe the risk curve ends at low-rated stocks.  How much QE affects food and gasoline prices can be debated, but to argue there is no effect at all, and will never be an effect under any scenario, merely because the Federal Reserve does not want to answer for these higher prices, is just wrong. • The argument that higher asset prices produce a wealth effect is only partially correct.  Two conditions must be met for a wealth effect to ensue.  Net worth must reach a new high and it must be perceived to be permanent.  This is why housing produced such a powerful wealth effect before 2006.  Home prices always went up and their gains were perceived to be permanent.  Currently we have a retracement of losses and a widespread distrust of financial markets.  These conditions will not produce any wealth effect and we believe they have not. QE is great for Wall Street as it produces more volatility (brokers like this), higher stocks prices (fund managers like this) and draws lots of attention (analysts like this).  It is not good for Main Street because it does not create wealth.  QE’s effects are not perceived to be permanent, so it does not lead to higher GDP or job growth. What Will The Federal Reserve Do? In Septmber we noted that the median expectation in a survey of primary dealers calls for $500 billion of additional purchases heavily tilted toward mortgage-backed securities.   If the purpose of QE is to push stock prices higher, then the Federal Reserve has to deliver at least $500 billion in purchases.  Otherwise it will disappoint risk markets. Right now, if we have to guess, we believe the Federal Reserve will announce purchases of less than $500 billion. In January the Federal Reserve adopted an inflation target of 2.0%.  As we detailed in a conference call last month (transcript, handout, audio), inflation expectations are running well above this target.  One measure of inflation expectations, the 10-year TIPS inflation breakeven rate, is shown below.  Further, in April, when Bernanke was asked if he would adopt a suggestion from Paul Krugman to expand the target to 3%, he flatly rejected the idea (explained here). The hawks will argue expected inflation is too high to add more stimulus, an argument which will carry some weight.  The compromise will be a program of less than $500 billion in purchases which will disappoint the markets. Click to enlarge: Source: Arbor Research

Related articles

• QE4 Is Here: Bernanke Delivers $85B-A-Month Until Unemployment Falls Below 6.5%. The US Must Go Down So The World Can Go Up!!! (tarpon.wordpress.com)
• Rumors of QE4 (amp2012.com)

Rumors of QE4

Go Away Federal Reserve System! (Photo credit: r0b0r0b)

The Federal Reserve will hold its last policy meeting of the year next week, and two key issues are expected to dominate the gathering and the market’s attention — the expiration of “Operation Twist” and a potential change in interest rate guidelines.

Implemented in September 2011, Operation Twist was designed to lower rates for mortgages and corporate bonds. The program, which expires at the end of this month, entailed the Fed buying $667 billion (roughly $45 billion per month) in longer-term Treasuries above 6-year durations, while selling the same amount in shorter-term securities under 3-year durations.

The goal of the monetary twist has been to lower long-term rates to fuel consumer and corporate borrowing and spending.

“With Operation Twist ending, that means they’ve run out of short-dated securities to sell in order to purchase more [longer-term securities], so what they’ve got to move to now is buying up pure $40 billion per month of mortgage-backed securities [QE3],” says Andrew Wilkinson, chief economic strategist at Miller Tabak. “They probably have to compensate for that loss of $40 [billion] to $45 billion per month.”

Rumors of QE4

Wilkinson is touching on concerns that have recently been addressed by various Fed governors. That is, that simply carrying out the third round of quantitative easing is not enough to boost the economy. QE3 is an open-ended program that has the Fed buying $40 billion per month in mortgage-backed securities.

So will the Fed turn Operation Twist into another outright securities purchasing program, essentially becoming QE4? Or are they more confident in the economy given the improvement in the November jobs report?

The market will be watching very closely to see if the Fed changes its tune. The decision on handling Twist’s expiration will be very telling as to how the committee views the recovery and how much stimulus will be pumped into the economy in 2013.

 

FOMC Rate Policy: Debating Numerical Thresholds

“There’s something else on the table with the Fed though,” says Wilkinson. “They may move to targeting a specific rate of unemployment as a guarantee to when they can stand by the promise of low interest rates.”

The Fed’s current policy is to hold rates near zero through mid-2015. Chatter is growing louder that the Fed will change its guidelines, and instead of tying interest rate policy to a calendar date, they will link it toward set goals for the unemployment and inflation rates. This would directly link rates to the Fed’s dual mandate to promote maximum employment and price stability.

Fed Vice Chairman Janet Yellen recently joined several other Fed officials calling for specific thresholds to guide policy. These thresholds would not be triggers to change policy, merely guidelines for debate.

“For now, it doesn’t really matter,” Wilkinson says of the possible shift. “As next year progresses we’ll hear more in terms of jawboning from the Fed, how it’s going to go about this process, how it’s going to anchor its inflation expectations, and whether we should be focused on more than purely employment. Inflation is equally important, but there’s a lid on it at around 2%, according to the Fed’s projections. We also have to factor in GDP as well.”

The Fed’s gathering will end Wednesday with a 12:15 p.m. ET policy statement, and a press conference with Fed chief Ben Bernanke will follow a short time later.

Related articles

• Why Gold Prices Will Soar After the Dec. 12 FOMC Meeting (chasvoice.blogspot.com)
• Boston Fed President Defends QE, Sees Tools Against Inflation (dailyfinance.com)
• Operation Twist will give way to expanded QE3: Capital Economics (business.financialpost.com)

Nomura Forecasts A Market Spike Then A Dramatic Fall

English: A frame from a screencast from the US House Financial Committee full committee hearing “An Examination of the Extraordinary Efforts by the Federal Reserve Bank to Provide Liquidity in the Current Financial Crisis which took place Tuesday, February 10, 2009, 1:00pm, 2128 Rayburn House Office Building. The frame shows Chairmen Ben Bernanke responding to a question posited by John E. Sweeney Full Committee (Photo credit: Wikipedia)

Nov 13

Nomura’s bearish macro strategist, Bob Janjuah, is out with his latest update on the stock market in nearly two months. 

Nothing has changed about his long-term view–he is still very pessimistic on markets and the economy.

However, Janjuah thinks we could see a major move higher in the over the medium term, owing to some sort of fiscal cliff deal that kicks the can and full-blown QE from the ECB.

Here’s what Janjuah has to say in his note:

If I look out 3-6 months I am open to the idea of one last parabolic spike higher in risk-on markets in this interim timeframe. I think we will eventually get fiscal and debt ceiling fudges in the US. Of course long-term credible solutions are needed, but are the most unlikely outcome.

Instead we may well be ‘forced’ to celebrate another round of horrible fudges which DO have a consequence. Namely, that the private sector continues to ignore Bernanke and the Washington elite (who between them continue to enjoy printing significant sums of money and/or spending way beyond their means) by instead doing the exact opposite, which means holding onto/building cash and savings, delaying spending/investment/hiring and thus hurting growth.

Markets will I think worry about these negative consequences eventually (see paragraph above), but in the interim the knee jerk reaction of markets to fiscal/debt ceiling fudges will likely be positive. Furthermore, and again on a 6 to 12 month interim timeframe, I think we could also see the ECB finally move to all out QE driven by another round of eurozone panic and driven in particular by the strong deflationary data trends that are emerging in the eurozone and which we in GMS think will get much stronger.

A combo of ECB QE and fiscal/debt ceiling fudges in the US – perhaps also complimented by a short-lived centrally planned but debt fuelled and ultimately wasteful China uptick – could even cause a parabolic spike powerful enough to take S&P – briefly – into the 1500s, before resuming the longer-term march over the rest of 2013 and 2014 to the 800s.

However, for the rest of 2012, in the short-term, Janjuah still remains bearish.

Bill Gross On Quantitative Easing – No Evidence Of Success

Nov 2. I am reprinting some of the October article from Investment Outlook. for the full meal deal go to PIMCO

Time To Vote!

William H. Gross

( Jack Bass , author of The Gold Investor’s Handbook )

 

Bill Groos :On The Election

 

I’ll tell you what isn’t new. Our two-party system continues to play ping pong with the American people, and the electorate is that white little ball going back and forth over the net. This side’s better – no, that one looks best. Elephants/Donkeys, Donkeys/Elephants. Perhaps the most farcical aspect of it all is that the choice between the two seems to occupy most of our time. Instead of digging in and digging out of this mess on a community level, we sit in front of our flat screens and watch endless debates about red and blue state theologies or listen to demagogues like Rush Limbaugh or his ex-cable counterpart Keith Olbermann.

 

Bill Gross On  : QE To Infinity

 

Aside from a little squiggle back close to 0% over the last year or so, there is no evidence that investment is being incented by quantitative easing. All of the money being created and freed up is elevating asset prices, but those prices are not causing corporations to invest in future production. Admittedly, the chart shows this downward spiral has been underway for decades, but financial repression and quantitative easing were supposed to be the extraordinary monetary policies that kick-started the real economy in the other direction. They have not. We have been using the lower interest rates, the $9,975 of free money, to consume as opposed to invest.

To be fair, Ben Bernanke has been operating with one arm behind his back and has been calling for cooperative stimulation from the fiscal side of this government. He has received little response – not from Democrats, not from Republicans. They have all focused on re-electing themselves as opposed to constructively plotting a way forward. That is why Election Day seems like such a futile gesture to me. Red/Blue; Republican/Democrat. What kind of choice do we have when we pull the lever? If monetary policy has shown its impotent limits, can we now trust Washington to constructively reverse a downward slide in our net national savings rate? I suspect not. I doubt if either Obama, Romney, or many of their economic advisors even know what the definition is, let alone how to reverse it.

Investment strategy

Investors should recognize that asset and currency prices ultimately rest on the ability of a real economy to grow. If growth cannot be boosted by monetary policy, and fiscal policy is in the hands of a plutocracy more concerned about immediate profits as opposed to long-term vitality, then no Genie or Flavor Flav with a magic clock can make a difference. If, therefore, real economic growth is stunted in the United States and globally, then portfolio strategies should acknowledge bite-sized future returns and the growing risk that the negative consequences of misguided monetary and fiscal policy might lead to disruptive financial markets at some future point. The approaching fiscal cliff might be the first of a series of future disruptions. Although PIMCO expects a middle ground fiscal compromise from Washington, when that is combined with the fading influence of QE monetary policies, it leads only temporarily to 2% real growth in the U.S. at best – growth that is clearly not “Old Normal.” We are in a “New Normal” world where the negative effects of private sector deleveraging are only being weakly addressed by monetary and fiscal authorities. If so, then Treasury yields should stay low and my money market fund should continue to read “.01%.” The “cult” of equity – or better yet the cult of “total return” – for both bonds and stocks – is over, if that definition presumes a resumption of historical patterns anywhere close to double digits. The era of financial repression continues.

QE Not Preventing Slowest Growth Since 2009 Recession

October 21

QE Ad Infinitum: Why QE is Not Reviving Growth
In a speech in November of 2002, Fed chairman Ben Bernanke made the now infamous statement, “the U.S. government has a technology, called the printing press, that allows it to produce as many U.S. dollars as it wishes essentially at no cost,” thus earning the nickname “Helicopter Ben“. Then, he was “confident that the Fed would take whatever means necessary to prevent significant deflation”, while admitting that “the effectiveness of anti-deflation policy would be significantly enhanced by cooperation between the monetary AND fiscal authorities.”

Five years after the 2008 financial crisis, Helicopter Ben undoubtedly has a greater appreciation for the issues the BoJ faced in the 1990s. The US 10-year treasury bond (as well as global bond) yields have been in a secular decline since 1980 and hit new historical lows after the crisis. What the bond market has been telling us even before the QE era is that bond investors expect even lower sustainable growth as well as ongoing disinflation/deflation, something that Helicopter Ben has been unable to eradicate despite unprecedented Fed balance sheet deployment.

A Broken Monetary Transfer Mechanism

Effective monetary policy is dependent on the function of what central bankers call the Monetary Transmission Mechanism, where “central bank policy-induced changes in the nominal money stock or the short-term nominal interest rate impact real economy variables such as aggregate output and employment, through the effects this monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and corporate balance sheets.”

Yet two monetary indicators, i.e., the money multiplier and the velocity of money clearly demonstrate that the plumbing of this monetary transmission mechanism is dysfunctional. In reality, the modern economy is driven by demand-determined credit, where money supply (M1, M2, M3) is just an arbitrary reflection of the credit circuit. As long as expectations in the real economy are not affected, increases in Fed-supplied money will simply be a swap of one zero-interest asset for another, no matter how much the monetary base increases. Thus the volume of credit is the real variable, not the size of QE or the monetary base.

Prior to 2001, the Bank of Japan repeatedly argued against quantitative easing, arguing that it would be ineffective in that the excess liquidity would simply be held by banks as excess reserves. They were forced into adopting QE between 2001 and 2006 through the greater expedient of ensuring the stability of the Japanese banking system. Japan’s QE did function to stabilize the banking system, but did not have any visible favorable impact on the real economy in terms of demand for credit. Despite a massive increase in bank reserves at the BoJ and a corresponding increase in base money, lending in the Japanese banking system did not increase because: a) Japanese banks were using the excess liquidity to repair their balance sheets and b) because both the banks and their corporate clients were trying to de-lever their balance sheets.

Further, instead of creating inflation, Japan experienced deflation, and these deflationary pressures continue today amidst tepid economic growth. This process of debt de-leveraging morphing into tepid long-term, deflationary growth with rapidly rising government debt is now referred to as “Japanification”.

Two Measures of Monetary Policy Effectiveness

(1) The Money Multiplier. The money multiplier is a measure of the maximum amount of commercial bank money (money in the economy) that can be created by a given unit of central bank money, i.e., the total amount of loans that commercial banks extend/create. Theoretically, it is the reciprocal of the reserve ratio, or the amount of total funds the banks are required to keep on hand to provide for possible deposit withdrawals.

Since September 2008, the quantity of reserves in the U.S. banking system has grown dramatically. Prior to the onset of the financial crisis, required reserves were about $40 billion and excess reserves were roughly $1.5 billion. Following the collapse of Lehman Brothers, excess reserves exploded, climbing to $1.6 trillion, or over 10X “normal” levels. While required reserves also over this period, this change was dwarfed by the large and unprecedented rise in excess reserves. In other words, because the monetary transfer mechanism plumbing is stopped-up, monetary stimulus merely results in a huge build-up of bank reserves held at the central bank.

The Automatic Earth

If banks lend out close to the maximum allowed by their reserves, then the amount of commercial bank money equals the amount of central bank money provided times the money multiplier. However, if banks lend less than the maximum allowable according to their reserve ratio, they accumulate “excess” reserves, meaning the amount of commercial bank money being created is less than the central bank money being created. As is shown in the following FRED chart, the money multiplier collapsed during the 2008 financial crisis, plunging from from 1.5 to less than 0.8.

Further, there has been a consistent decline in the money multiplier from the mid-1980s prior to its collapse in 2008, which is similar to what happened in Japan. In Japan, this long-term decline in the money multiplier was attributable to a) deflationary expectations, and b) a rise in the ratio of cash in the non-financial sector. The gradual downtrend of the multiplier since 1980 has been a one-way street, reflecting a 20+ year dis-inflationary trend in the U.S. that turned into outright deflation in 2008.

The Automatic Earth

(2) The Velocity of Money. The velocity of money is a measurement of the amount of economic activity associated with a given money supply, i.e., total Gross Domestic Product (GDP) divided by the Money Supply. This measurement also shows a marked slowdown in the amount of activity in the U.S. economy for the given amount of M2 money supply, i.e., increasingly more money is chasing the same level of output. During times of high inflation and prosperity, the velocity of money is high as the money supply is recycled from savings to loans to capital investment and consumption.

During periods of recession, the velocity of money falls as people and companies start saving and conserving. The FRED chart below also shows that the velocity of money in the U.S. has been consistently declining since before the IT bubble burst in January 2000—i.e., all the liquidity pumped into the system by the Fed from Y2K scare onward has basically been chasing its tail, leaving banks and corporates with more and more excess, unused cash that was not being re-cycled into the real economy.

The Automatic Earth

Monetary Base Explosion Not Offsetting Collapsing Money Multiplier and Velocity

The wonkish explanation is BmV = PY, (where B = the monetary base, m = the money multiplier, V = velocity of money), PY is nominal GDP. In other words, the massive amounts of central bank monetary stimulus provided by the Fed and other central banks since the 2008 financial crisis have merely worked to offset the deflationary/recessionary impact of a collapsing money multiplier and velocity of money, but have not had a significant, lasting impact on nominal GDP or unemployment.

The only verifiable beneficial impact of QE, as in the case of Japan over a decade ago and the U.S. today is the stabilization of the banking system. But it is clear from the above measures and overall economic activity that monetary policy actions have been far less effective, and may even have been detrimental in terms of deflationary pressures by encouraging excess bank reserves. Until the money multiplier and velocity of money begin to re-expand, there will be no sustainable growth of credit, jobs, consumption, housing; i.e., real economic activity. By the same token, the speed of the recovery is dependent upon how rapidly the private sector cleanses their balance sheets of toxic assets.

QE falls into a black hole. And it leads into an – if possible even larger – black hole. Ben Bernanke and Mario Draghi have neither the power nor the tools to stop deleveraging and debt deflation. That’s just a myth they, and many with them who stand to benefit from that myth, like you to continue believing. It makes it all that much easier for them.

That surge in excess bank reserves (see the second graph above) comes from QE. It is your money, everyone’s money. And it does nothing to “heal” the economy you live in and depend on for your survival; it just takes away more of it all the time. That is the one thing Ben and Mario have power over: they can give money away that you will have to pay for down the line. They can lend it out to banks knowing that it will never be repaid, and not care one inch. Knowing meanwhile that you won’t either, because you don’t look at what’s down the line, you look at today, and today everything looks fine. Except for that graph, perhaps, but hey, how many people are there who understand what it says?

One thing Ben and Mario can not do, however, is create hyperinflation. They can’t even truly create any type of real inflation (which is money/credit supply x velocity vs goods and services), for that matter. They’re stuck as much as you yourself are in the dynamics of this bursting bubble.

U.S. Housing -: No Recovery ? – A Subsidized Bounce

Wipe our Debt (Photo credit: Images_of_Money)

October 21

Instead of actual responsible behavior of paying down debt, the primary if not only reason there has been any “deleveraging” at all at the US household level, is because of excess debt which became insurmountable, not because it was being paid down, the result of which is that more and more Americans are simply handing their keys in to the bank and walking away, and also explains why the US banking system is now practicing Foreclosure Stuffing, as defined first here, as the banks know too well, if all the housing inventory which is currently in the default pipeline were unleashed, it would rip off any floor below the US housing “recovery” which is not a recovery at all, but merely a subsidized bounce, as millions of units are held on the banks’ books in hopes that what limited inventory there is gets bid up so high the second housing bubble can be inflated before the first one has even fully burst.

The Automatic Earth

Naturally, two concurrent housing bubbles can not happen, Bernanke‘s fondest wishes to the contrary notwithstanding, especially since as shown above, US households do not delever unless they actually file for bankruptcy, and in the process destroy their credit rating for years, making them ineligible for future debt for at least five years.

It is thus safe to say that all the other increasingly poorer US households [..] are merely adding on more and more debt in hopes of going out in a bankrupt blaze of glory just like everyone else: from their neighbors, to all “developed world” governments. And why not: after all this behavior is being endorsed by the Fed with both hands and feet.

The following graph from TD Securities ( through Sam Ro at BI ) makes a good case for the “subsidized bounce” definition Durden applies to the present US housing market. It’s no secret there’s a huge shadow inventory overhanging US housing, and now it comes out that those great new home numbers are not what everybody would like to think they are.

The Automatic Earth

Many more houses are built than sold. And get shoved on top of the pile that’s already there, both the shadow inventory and the out of the closet one. Which begs the question: how long does a home stay in the “new” category? Does it take 1 year of staying empty for it to move to “existing”? 2 years, 3 years? 5? For one thing, builders and developers certainly have a huge incentive to continue to advertise it as new.

A graph from the same source:

The Automatic Earth

How this constitutes a recovery I just can’t fathom. I think that is just something people would like so much to see that they actually see it. Moreover, there remains the issue that it’s very hard for most to comprehend what debt deflation is, what its dynamics are, and what consequences it has.

QE 3 – The Chief Benefit – Raising Inflation

Liar Ben Bernanke (Photo credit: Ondrej Kloucek)

The Apprentice Millionaire Program Watchlists performed well after Ben Bernanke / The Fed announcements.

September 14,2012

The reality is that the quantitative easing is a spent force. What potential house buyer is moved to action if rates drop one-tenth of one per cent or even two-tenths. What employer will hire – regardless of bank rates , if there is no appreciable upturn in demand for his products.

Banks will have billions more in cash on deposit at the Fed because the demand remains sub-par .

Where then is the effect to be seen.

Resource stocks enjoyed a great end-of -the week because ultimately all those trillions will boost inflation. The place to save your portfolio and sanity is to own the oil, gold etc that will keep pace with real buying power .

Start with building your own safety net in a portfolio hedged against  the almost three  trillion dollar U.S. debt impacting assets denominated in U.S. dollars.

“I think the Fed will likely continue easing until it’s unequivocal that the unemployment rate is on a permanent downward trajectory and is no higher than the mid-to-low 7-per-cent range, accounting for a cyclical correction (up) in the labour force participation rate,” said senior economist Michael Gregory of BMO Nesbitt Burns.

“It will likely take sustained payroll job growth well above 200,000 [a month] to accomplish this, and some time to get there – perhaps by 2014 … The Fed is going to throw the veritable kitchen sink of policy measures at ensuring economic growth becomes both ‘substantial’ and ‘sustainable.’

The precious metal charts are forming bullish formations as their 50 day moving averages are moving to penetrate the 200 day moving average to the upside. Let us look at the gold miners (GDX). At $52 this has broken out and formed a strong bottom, our near term target is $60. The (GDXJ) is also breaking out at $24 and breaking through resistance.
Read our AMP Sector recommendations in your copy of  The Apprentice Millionaire Portfolio ( available at Amazon.com )

Peter Schiff Forecasts An Inflationary Recession

Ben Bernanke, Vampire Chairman (Photo credit: DonkeyHotey)

September 7th column by Shiff

As far back as his time as an academic, Bernanke made clear that when the going got tough, he wouldn’t hesitate to fire up the printing presses. He specialized in studying the Great Depression and, contrary to greater minds like Murray Rothbard, determined that the problem was too little money printing. He went on to propose several ways the central bank could create inflation even when interest rates had been dropped to zero through large-scale asset purchases (LSAPs). Sure enough, the credit crunch of 2008 gave the Fed Chairman an opportunity to test his theory.

All told, the Fed spent $2.35 trillion on LSAPs, including $1.25 trillion in mortgage-backed securities, $900 billion in Treasury debt, and $200 billion of other debt from federal agencies. That means the Fed printed the equivalent of 15% of US GDP in a couple of years. That’s a lot of new dollars for the real economy to absorb, and a tremendous subsidy to the phony economy.

This has bought time for President Obama to enact an $800 billion stimulus program, an auto industry bailout, socialized medicine, and other economically damaging measures. In short, because of the Fed’s interventions, Obama got the time and money needed to push the US further down the road to a centrally planned economy. It is also now much more unlikely that Washington will be able to manage a controlled descent to lower standards of living. Instead, we’re going to head right off a fiscal cliff.

The Fed Chairman even admitted to this reality in his statement. Here are two choice quotes:

“As I noted, the Federal Reserve is limited by law mainly to the purchase of Treasury and agency securities. … Conceivably, if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery.” [emphasis added]

“…expansions of the balance sheet could reduce public confidence in the Fed’s ability to exit smoothly from its accommodative policies at the appropriate time. … such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability.” [emphasis added]

So we all agree that the prospect of inflationary depression was made worse by the Fed’s actions – but at least Ben Bernanke has pleased his boss. As a guaranteed monetary dove, Ben Bernanke appears to be a shoo-in if Obama is re-elected.

Meanwhile, Mitt Romney has pledged to fire Bernanke if elected. While I am not confident that Mr. Romney has the economic understanding to appoint a competent replacement – let alone pursue a policy of restoring the gold standard or legalizing competing currencies – he may well be seen as a threat not only to the Fed Chairman’s self-interest, but also to his inflationary agenda.

Given this background, let’s look at Bernanke’s quotes that have been the focus of media speculation for the past week: the US economy is “far from satisfactory,” unemployment is a “grave concern,” and the Fed “will provide additional policy accommodation as needed.” These comments seem designed to reassure markets (and Washington) that there will be no major shift toward austerity in the near future. The party can go on. But they also hint that Bernanke might be planning to double down again. I have long written that another round of quantitative easing is all but inevitable. It now seems to be imminent.

In reality, when the money drops may have more to do with politics than economics. The Fed may not want to appear to be directly interfering in the election by stimulating the economy this fall, but there are strong incentives for Bernanke to try to perk up the phony recovery before November and deliver the election to Obama. However, if Romney wins, Bernanke can at least fall back on his appeal as a team player as he lobbies for another term.

For gold and silver buyers, either scenario is likely to continue to stoke our market in the short- and medium-term. As the past week’s rally indicates, there is no longer a fear that the Fed has had enough of money-printing – in fact, it looks prepared for much more.

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Damn Inflation And Run The Printing Press ; Part 5678

Fed. Res. Board: P. Warburg, J.S. Williams, W.G. Harding, A.C. Miller, C.S. Hamlin, W.G. McAdoo, Fred. Delano (LOC) (Photo credit: The Library of Congress)

Septemeber 2

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Federal Reserve Bank of San Francisco President John Williams called for additional bond purchases by the Fed to spur economic growth that would be open- ended and total at least $600 billion.

High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.

Federal Reserve Bank of San Francisco President John Williams called for additional bond purchases by the Fed to spur economic growth that would be open- ended and total at least $600 billion.

High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.

Jonh Mauldin comments:

“No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future.”

– Ludwig von Mises

We heard from Bernanke today with his Jackson Hole speech. Not quite the fireworks of his speech ten years ago, but it does offer us a chance to contrast his thinking with that of another Federal Reserve official who just published a paper on the Dallas Federal Reserve website. Bernanke laid out the rationalization for his policy of ever more quantitative easing. But how effective is it? And are there unintended consequences we should be aware of? Why is it that the markets seem to positively salivate over the prospect of additional QE?

I missed the part where Congress gave the Fed a third mandate, to target the stock market. But Bernanke not only takes credit for the stock market, he points out that the rebound in the housing market is also due to Fed policy, because it fostered lower mortgage rates. Which it did. But let’s also remember that it was Fed policy that helped create the housing bubble to begin with. Which I don’t remember Bernanke taking credit for, even though he was on the Fed then and up to his eyeballs in supporting that policy.

Joan McCullough, in her own irreverent style, gave us a few must-read paragraphs this afternoon:

“And then [Bernanke] has the sand to make a public comment that stocks go up when he prints money because discount rates have gone down and the economic outlook has improved on account of it? This is what makes the hot dogs run stocks up the flagpole when The Bernank saddles up? Better economic outlook? Amazing.

Republicans eye a return to gold standard

Gold Key, weighing one kilogram is used to access a ten digit account number which is known only to the bearer of the Gold Key. (Photo credit: Wikipedia)

 

August 24

Is gold money? Some Republicans think it should be.

The Republican Party is considering setting up a commission to examine the pros and cons of going back to the gold standard, according to draft documents of the party platform.

The official party platform won’t be decided until Monday, but a Republican National Committee spokeswoman confirmed the draft language to CNNMoney.

The commission harkens back to the early 1980s, when President Ronald Reagan set up a Gold Commission with the same intention. Only two members of the 17-member commission endorsed a return to the gold standard. One of them was Rep. Ron Paul, who remains an avid gold supporter.

“Now, three decades later, as we face the task of cleaning up the wreckage of the current Administration’s policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar,” the new proposal says.

It’s highly unlikely the United States would actually return to the gold standard. The country first moved away from the gold standard in 1933, and dropped it altogether in 1971. Despite support for its return by some on the political right, few mainstream economists support its reinstatement.

Federal Reserve Chairman Ben Bernanke has repeatedly expressed concerns about the idea, sometimes evensparring with Paul in Congressional hearings. Research has shown the rigid constraints of the gold standard worsened the Great Depression, he said. Gold prices can also be volatile.

Plus, there’s not enough gold in the world to support such a system, as Bernanke noted in a lecture earlier this year.

“To have a gold standard, you have to go to South Africa or someplace and dig up tons of gold and move it to New York and put it in the basement of the Federal Reserve Bank of New York and that’s a lot of effort and work,” he said.

It’s an “awful big waste of resources,” he added.

But just in case the idea does gain more traction, here are some rough calculations of what would happen to gold prices, courtesy of Julian Jessop, chief global economist for Capital Economics.

The U.S. monetary base, which includes paper bills, coins and some deposits at the Fed, is currently around $2.6 trillion. Meanwhile, the U.S. Treasury and Federal Reserve hold about 260 million ounces in gold.

That means, if the government wanted every single dollar to be swapped with gold, the price of gold would have to be $10,000 per ounce.

Of course, that’s an “extreme assumption,” Jessop notes. He points out that under another scenario, the government could simply opt to have just 15% of the money supply redeemable for gold at any given time. If that was the case, the price could be set at around $1,500 an ounce — not far from its current market value of around $1,670.

— CNNMoney’s Charles Riley contributed to this report.

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