QE3 is here. A bit earlier than we supposed but raring to go. The Fed will finish Operation Twist and launch open-ended buying of mortgage-backed securities (MBS) at $40 billion per month. What will this do and what will be the effect upon markets?
The Fed will be buying agency-backed MBS. These are those MBS that are packaged and sold by the Government Spondored Enterprises, Fannie Mae and Freddie Mac (and others) which constitute most of the US mortgage market. These securities are, in turn, linked to the yield of the 30 year government bond, which the Fed is also driving down using its existing ‘Operation Twist’.
By doing so the Fed hopes to keep the return (interest rates) on MBS lower than they’d otherwise be and close the yield spread between them and the 30 year government bond. Although most US mortgages have fixed rates, the result will be lower mortgage interest rates for longer and that should enable more mortgagors to refinance at lower interest rates.
According to Credit Suisse, there is also one other potential reason. As European banks deleverage, the risk is rising that some will sell their US assets. That could risk rising interest rates for MBS so the Fed is backstopping that outcome.
So, who wins and who loses when this goes ahead? Obviously US equities have gotten what they wanted. QE is a free pass for stocks so who’s going to refuse that? That may also boost consumption at the margin with some wealth effect helping consumption. The same applies for housing.
Second, we can surely again expect a weak $US for the period that QE3 persists. Whether it’s actually true or not, markets believe that Fed money printing debases the value of the $US. That will further help the US economy through a boost to export competitiveness. But it is doing so into a chronically weak global economy so the uplift is likely to be muted beyond the immediate effects of higher profits for $US exposed firms.
By extension, however, a falling $US raises the immediate prospect of higher commodity prices through the combined effects (real or imaged) of a debased $US, in which most commodities are priced, and rising inflation which prompts markets to buy real assets. Last night gold, oil, grains, copper and the CRB all rallied hansomely.
But it is not all plain sailing. The broader conditions for a commodities rally are not as good as they were during the second round of QE in 10/11 with Europe in perpetual recession and China wrestling with a hard landing. Last night’s price action was a good guide to how it may play out. Industrial commodities like copper and oil were up 1% or so. But precious metals were up twice that. Gold and silver will be the biggest winners here.
The next winner is global inflation. Thus, sadly, US households are just as likely to give up any gains from the stimulus to the secret tax at the bowser and grocer. That leaves a lower $US as the major benefit for the world’s biggest economy.
Which is where things start to go pear shaped for everyone else. The recently stabilised euro will find itself under increasing upwarps pressure, damaging ECB stimulus efforts. This may be made worse by a burst of commodity inflation which will prevent further ECB easing. The Chinese reaction may be mixed. QE in the US pours money into China through the yuan peg. That will help reverse recent capital outflows and could prompt higher lending. A falling $US is also a falling yuan so there is some export benefit too but again, into a weak global economy.
But a new flood of ill-directed liquidity will not be welcome and comes with a second problem for the Chinese, food inflation. There is a strong correlation between global food prices and Chinese inflation. Having just contained price rises, the last thing Chinese authorities will want is to see is a new outbreak. The policy environment for the Chinese has gotten more complex as it wrestles with its slowdown.
It’s not called competitive devaluation for nothing.
Which brings us to Australia. In the short term, the risk is that the Aussie will rise strongly on QE3, as it did last night. This is clearly bad news as we enter an external shock already underway from falling bulk commodity prices. It is not altogether easy to judge, but iron ore and coal prices do not tend to be as effected by monetary inflation as other industrial commodites. As still heavily contract priced commodities, with undeveloped derivatives markets, they are less subject to the short term whims of speculators (and more exposed to fundamenal supply and demand). This raises the difficult prospect that bulk commodities remain weak on the Chinese correction but the AUD remains near highs on $US monetary inflation.
A higher dollar will also choke off any benefit we might have seen as the ASX rallied in sympathy with Wall Street.
The broad Australian economy is still traveling OK, if slowing, but unemployment is set to rise as the mining boom slows. There is no obvious growth offset as mining investment comes off. The consumer remains very cautious and the broader tradeables sector and asset markets are weak. The consensus that the RBA will be cutting interest rates by the end of the year is right. But that is now complicated in some measure by the inflationary pulse that will come via oil and food.
At this stage I think it unlikely to be sufficient to derail any RBA cuts. Indeed, lowering the dollar is fast becoming a serious national prioirty.
The Libyans may have just expressed their view of American economic policy through their actions at the Embassy. Hunger is likely to set in train all sorts of predictable outcomes.
As W.Churchill once said; ‘this is not the beginning of the end, but the end of the beginning….’ meaning we have had the war declaration (GFC1), the phoney war (all is now well get on with life QE1&2) and now QE3 which will be the precursor of the turmoil that is about to hit the whole economic world. QE3 is like giving a drug addict more diluted smack….it will literally only work for a very short time. Winter is approaching fast……be cautious!
In keeping with the war reference, it is instructive to consider the German experience of 1918-1939. In particular, how Nazi Germany used monetary reform to go from post WW1 reparations/austerity-driven destitution, and subsequent hyperinflation in the early-mid 1920′s, to economic and military powerhouse with the means and aspiration to establish a Thousand Year Reich, all in the space of a handful of years –
http://www.webofdebt.com/articles/bankrupt-germany.php
*quote*
Economist Henry C K Liu writes of Germany’s remarkable transformation:
The Nazis came to power in Germany in 1933, at a time when its economy was in total collapse, with ruinous war-reparation obligations and zero prospects for foreign investment or credit. Yet through an independent monetary policy of sovereign credit and a full-employment public-works program, the Third Reich was able to turn a bankrupt Germany, stripped of overseas colonies it could exploit, into the strongest economy in Europe within four years, even before armament spending began.
In Billions for the Bankers, Debts for the People (1984), Sheldon Emry commented:
Germany issued debt-free and interest-free money from 1935 and on, accounting for its startling rise from the depression to a world power in 5 years. Germany financed its entire government and war operation from 1935 to 1945 without gold and without debt, and it took the whole Capitalist and Communist world to destroy the German power over Europe and bring Europe back under the heel of the Bankers. Such history of money does not even appear in the textbooks of public (government) schools today.
*end quote*
For any who think no fundamental monetary reform is needed -
Understanding the GFC with Clarke and Dawe
http://www.abc.net.au/7.30/content/2012/s3589450.htm
It’s funny because it’s true.
Yes, but what were the other non-monetary elements that made the Nazi economic miracle possible that you think makes other democratically inclined nations shy about replicating that particular model ?
Respectfully, I see that as a red herring. Conflating the negative consequences of the Nazi regime with the positive outcomes of their monetary reform only serves to cloud the core issue – that debt-free and interest-free currency issuance is demonstrably possible, and markedly beneficial for an economy. What some may choose to do with the benefits of the resultant strong economy is a separate issue.
I’m not talking about genocide, I’m alluding to the fact that this kind of monetary system in isolation would not have allowed the National Socialists to build a miracle economy without the concurrent abolition of trade unions, demolition of democratic institutions, co-opting of businesses, taking women and Jews off unemployment records, systematic murder of opposition to the regime, compulsion of labour, etc, etc, and generally channeling industrial activity around ambitions of military expansion.
Thanks for the clarification.
this kind of monetary system in isolation would not have allowed the National Socialists to build a miracle economy..
Understand your observation. Nevertheless, this assertion is speculative. We cannot know if the Nazi regime’s monetary reform could have resulted in significant positive economic transformation anyway, in absence of other coincident actions. Furthermore, the experience of Abraham Lincoln (link above) and the Greenback further indicates the positive benefits of debt-&-interest-free sovereign currency issuance – I am not aware that one can attribute the same coincident actions you’ve cited vis-a-vis Nazi Germany to Abe Lincoln’s presidency.
Guernsey is another example demonstrating that such a monetary system can and does work well –
http://www.webofdebt.com/articles/infrastructure-crisis.php
Ok, I think I know better now where you’re coming from. Guernsey is probably a better example of a controlled experiment of this type, less open to conflating with issues of the antics of Nazi overlords by idle speculators such as myself. I agree that we need a more honest system of money, but I have come to the conclusion that such a system is not possible because people..aren’t..*drumroll*..honest. On the whole.
I’ve been involved in a past life with firms creating those Shariah compliant financial products, and all parties involved know (when they are being honest with themselves) that it is pretty much just semantics. I’m involved now with financing that involves religious institutions who you think would be down with that concept of usury as evil, but … not so much. They’re up to their necks in providing it to their economic benefit and other’s (arguable) detriment.
So when religious organisations themselves continue to perpetuate usury, I really don’t know what hope there is for creating the kind of honest system of money whose absence honest men and women have been lamenting for quite some time.
Excellent points spleenblatt. I agree with all. Nonetheless, I have come to the conclusion that the only way for humanity to evolve beyond the state of the past XX,000 years, is if a way is found to render “money” as servant, not master. Can only point to / hope for education as a potential causative.
I’ve been busy working and have just come back to MB – the web of debt blog is amazing, it could be argued that an arm of the US Government via the Federal Reserve is doing what Ellen Brown says of Guernsey and Nazi Germany, until you realise that the Fed is a private institition! “The power to create money was delegated exclusively to Congress in the Constitution, but that power has now been usurped by a private banking cartel. Congress just needs to take its money-issuing power back.” Wow, Opinion8red could it really be that simple? All the QE has done bailed the banks out and kept the same old same old’s in power. Regards.
Wow, Opinion8red could it really be that simple?
Yes.
So… I assume you don’t get inflation so long as you’re using all that printed money to build infrastructure rather than just letting it slosh around ?
The part I struggle with is… why would anyone [outside of your own economy] sell you stuff when you’re going to pay them with money that’s essentially worthless ?
I’m not knowledgeable enough to answer that, DrSmithy. Per the first link in thread, the Nazi’s circumvented international (bankster-prompted) trade sanctions by trading directly (barter) in the goods and services their now-flourishing economy produced (and needed).
I have read elsewhere, and it is well worth noting, that those trade sanctions impacted on Germany’s energy needs, and thus was a key driver for the regime’s transition from civilian infrastructure spending, to breaking the post-WW1 disarmament rules imposed on them and throwing the full weight of their (monetarily enabled) economy at militarisation and territorial expansion.
There are many lessons to be learned from all this.
Interesting links! Thanks
The Libyans may have just expressed their view of American economic policy through their actions at the Embassy.
That’s ludicrous. You’re saying the ‘protestors’ in Libya knew of QE3 2 days before it was announced?
“Gold and silver will be the biggest winners here.”
And yet how many investors have a sizable position (or any at all!) in the metals to take advantage? Still very few.
Still main stream economists continue to deride Gold & Silver even though they have outperformed just about every other asset out there over the past 5 years.
By the time most catch on they will be driving what will probably be the parabolic peak of a bull market turned bubble.
IMO Gold and Silver will be topping out within a few years at MULTIPLES of current prices.
Absolutely right. It never ceases to amaze me how few people own any precious metals.
They haven’t witnessed a currency collapse first hand. That’s about to change.
R2M, I would suspect that even a majority of MacroBusiness readers don’t have any exposure to Gold & Silver (or even where they are following the MI portfolio it is very minimal, at least that was the case when it first started, haven’t seen recent updates).
Granted the site has a “Macro” theme but it almost seems there is more interest in how poorly others will do (via price falls in Iron Ore, property, China, etc) or politics rather than how well they could be doing investing/speculating in the few assets left performing well in the current environment.
Or maybe I’m wrong and there are just a lot of closet Gold bugs here who don’t talk about it
Or some people just don’t like to talk publicly about PMs…
BB – of my ‘cash’ holdings I have a split between gold, silver, TDs and USD
you need to read MI more often! There is definitely gold and silver exposure – across all 3 of our model portfolios.
I’ll be running a big series of trade ideas for Monday edition and of course gold/silver will be in there.
btw have you checked out the Gold Bugs index recently???
Yep, HUI has had an amazing run. 25% in 6 weeks and IMO still a long way to go. Probably new highs before the end of the year (which would be a 50%+ move in 5 months).
People dont buy gold because they are smart enough to realise, it was confiscated before, IT WILL be confiscated again.
-They will eat away at your savings: inflation
-Confiscate your assets: gold
-Asset deflation: home/land prices: down!, shares: down, bonds: down
They hate the middle class and want to destroy it.
A usefull thing to have is farm land (or a backyard if UR lucky or participate in a community garden, so you can grow food and sustain yourself when the shit hits the fan. My friend’s parents lived through banking and currency collapses and it was the backyard garden, a handful of livestock, or fishing, that kept them from starving. People who lived in the city, could not do that and starved to death. Sure gold could keep you going in the short term and as a hedge against inflation. But only when things are relatively stable (like now). When it is all OVER, and I mean OVER, they will raid your Perth Mint account the same way they are raiding your savings account (via inflation/currency collapse). They will order you to hand the gold over. And if you keep your gold buried in the backyard, well better, but when people are desperate, you may find it will be dug up. The Nazis were pillaging in WW2, stealing people’s gold. If we have another WW, then doesnt matter how well you “prepare”. Survival skills and adapting to the madness and keeping it together is the key. – The refugee story. But look at how we treat them. They understand corruption/banking collapses better then anyone in the MB forum, or any dickhead with an business/economics degree. (Shit, that’s me)
I’d not necessarily disagree with that BB, but i do feel there is maybe a bit more challenge yet in the bet.
There is still a pretty big risk that even the central banks will not be able to catch up with the speed and rate of debt production and hence asset price inflation over the last 20 or so years. Deleveraging may flower into fully fledged deflation yet regardless of how much liquidity is slooshing around the globe.
(The determination of the central banks is looking pretty convincing however, so it is getting harder to see a result that doesn’t result in monetising debt and back-stopping asset prices… and inflation)
I agree aj., think there is still several ways the situation could play out over the longer term, but short term (1-2 years) I think the recently announced programs from ECB & Fed should patch things up enough to allow Gold/Silver to continue their run higher. A possible scenario is that the metals play out their speculative runaway move during this period and then drop with everything else as deflation eventually has it’s way.
If and once deflation has its way, there may be great advantages in holding physical PMs to avoid the counterparty risk. I see PMs as a hedge against inflation and dishonesty/bankruptcy.
Don’t you think silver will remain the pet whack the mole game of the big players, eating up Mums and Dads for breakfast?
Silver is a lot more volatile than Gold, but often does and IMO will continue to outperform Gold during times of increased interest in the metals. e.g. we can see the GSR (Gold:Silver Ratio) falling over August:
http://goldprice.org/gold-silver-ratio.html
This ratio fell to low 30′s in early 2011 when Silver peaked near US$50. I think it will get back there and probably even lower. If we got to a ratio of 25 that would mean Silver has outperformed Gold by double.
Silver being a cheaper metal attracts a lot of “retail money” or Mums and Dads… I’m sure many will continue to be burned by Silver and many other investments, but Silver is currently $15 lower than a high set 30 years ago, it’s a bargain at current prices IMO.
18% fall in one day last year -volatility indeed! It would not surprise me if that happened again. Easy way to keep the sheep away from PMs to whack’em well and truly once in a while and silver seems to be the tool of choice.
QE3 demonstrates yet again the dangers of including “employment” within the mandate of a Central Bank.
Nothing wrong with policies directed to full employment but they should be the sole responsibility of the executive and the parliament who can use fiscal and legislative/regulatory reform to improve the environment for employment.
Allowing and encouraging Central Banks to do the job of the executive by manipulating interest rates is what got us into this mess.
A small edit is all that is required for the RBA
Remove the following from the RBA Charter
(b) the maintenance of full employment in Australia;
Central Banks should have only 3 objectives:
1. The stability of the currency
2. Risk/stability in the financial system
3. Efficiency of the payments system
That’s a recipe for all spending all of the time.
At least we can throw the bums out every 3 years.
Exactly right.
That’s an interesting one isn’t it. The rise of the ‘independence’ of the central banks was kinda like politicians almost admitting they could not be trusted with that much power.
I’m not sure we’d be in a better place if we had the parties trying to out bid each other on how much money they’re going to throw into the economy.
(although that would hasten the reversion to gold as the only currency)
Not sure I understand why that would be the case.
Govt already has responsibility for pursuing employment and thus they could be spending all the time if they considered employment to be their sole objective.
All I am suggesting is that it be removed from the mandate for the Central Bank as:
* monetary policy (ie interest rate manipulation) is a clumsy and ineffective tool for managing employment
* pollies hide behind the RBA for things like employment that they should take responsiblity for
The only reason it seems like a a big call is the entrenched view that ‘goosing’ interest rates is a legitimate tool of day to day economic management and to ‘stimulate’ activity that would not otherwise take place – which usually means debt creation.
If goosing interest rates is a legitimate tool for day to day economic management then it should be returned to the government and we should end the farce of RBA independence. Day to day economic management is political.
Employment mandate is a fig leaf for CBs to hand over free cash to banksters..
QE1 and QE2 did nothing for employment.. Even if it did, where are all those people who loudly complained that Obama stimulus costed $ million to create each new job?
The stimulus was not the same as QE.
Doh.. I knew that. I am just asking where have all the stimulus critics from Tea party gone now? Poor Ron Paul is the only one screaming “End the Fed” and nobody is listening to him.
Thank God they aren’t. The lunatic wants to go back to a gold standard.
While a central bank might not be the best way to manage the money supply I would pick a panel of economic experts every time over the collective efforts of gold miners in expanding the money supply…
They should have one mandate – resign.
Yeah because a single mandate is working so well for Europe isn’t it?
It’s going to be every man and country for themselves now. Witness a comment from France last night “France’s industry ministry is pressing the country’s leading carmaker to limit the impact of a domestic restructuring set to claim 8,000 jobs – by shifting part of the cuts burden to Spain.” Yep. That’s the answer to a common European problem, France! Outsource the job losses to another European country!
When has it not been every man and country for themselves? The only difference is whether the players find it more beneficial to co-operate or to compete.
By doing so the Fed hopes to keep the return (interest rates) on MBS lower than they’d otherwise be and close the yield spread between them and the 30 year government bond.
More supporting evidence for the argument to ban usury. Again. No need nor excuse for actions to manipulate usury rates, if usury itself is banned.
Funny to reflect on how far we [i]haven’t[/i] progressed in 2000 years. I suppose the material profit to be made, and power to be wielded, by exploiting the labour of others via debt bondage is too great a temptation for most to resist.
Indeed. Good comment. Furthermore, usury has always been an easy sell (con), when the purveyors of debt bondage offer the (monetarily-uneducated) masses the incentive of gains on their savings. Few click to the reality that any gains made on savings under a usurious monetary system are, in the Big Picture, a double-edged sword, since the usurer is charging higher rates of usury to others seeking loans than they are offering to the saver. By their very nature, usury-based monetary systems are parasitic, and destructive of the common good, as has been known and railed against since at least the time of Aristotle –
Aristotle (384-322 Bc) formulated The Classical View Against Usury. Aristotle understood that money is sterile; it doesn’t beget more money the way cows beget more cows. He knew that “Money exists not by nature but by law”:
“The most hated sort (of wealth getting) and with the greatest reason, is usury, which makes a gain out of money itself and not from the natural object of it. For money was intended to be used in exchange but not to increase at interest. And this term interest (tokos), which means the birth of money from money is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth, this is the most unnatural.” (1258b, POLITICS)
[i]haven’t[/i]
rather than [ ] will achieve what you want
Oops. Take 2 -
You need to use the “” keys rather than “[" and "]” keys.
Arrrggh. All hail me, html genius. Take 3 – you need to use the “less than” symbol and “greater than” symbol.
<em>text here</em>
lol?
thanks!
The ECB says they’re going to print, and the US Fed fired up their printing press in response. Nevertheless, 40 billion dollars a month is not a huge amount. QE1 was almost 1.5 Trillion, QE2 is 600 billion, Operation Twist was 267 billion, so ‘QE3′ is on a very small scale compared to before.
The issue Ronin is that the $40 billion a month is not capped or limited……no end in sight. Thats what the Market wants and it can only end in disaster!
its a disaster for the the permabears alright..
It’s a friday, the algo’s have finished doing the obvious, and the world is about to realise that the FED and the ECB are just about out of bullets and not much has changed.
I’d say the bears are not short of reasons to feel a little confident.
FYI GB I am not a perma bear, but a realist. I think if the Market is allowed to let nature take it’s course, then by 2020 we will be seeing boom times for the whole planet……this mess has to be sorted first!
Ni, with all due respect, if you want to see nature take its course, plant a daffodil bulb. Becuase you wont see nature “take its course” in financial markets. As we just saw last night from the FED or ECB the other week… Humans dictate the terms when it comes to economics and financial markets, not nature. Becuase money, finacial markets and economics are human creations. They are not creations of nature so they dont conform to natures laws. The sooner people work this out the sooner the discussion on economics can progress to something more meaninglful. have a good weekend
I have eaten my words on there being no QE3 and trust me it was not needed. The losers in QE3 THE AMERICAN PEOPLE. I cant believe they have unlimited this. I am about done with the US and the liberals, Obama, Obamacare etc..they can have this place… Not that Australia is going to be a whole lot better shape but it soon might be Australia or Bust.
Umm.. Only problem is Obama isn’t a liberal by any stretch of the definition. In fact he is a little to the right of Saint Reagan.
Mav in the US he is a liberal which is different from a liberal there.
In the US Obama is a liberal which different from liberal in Australia.
He’s only a liberal there in the fevered dreams of hardcore right-wingers.
Liberal Smibberable – tomato or tom-ato – both the big parties are being heavily influenced by Wall St and Cabal of Elite…..not much we can do except whine (& dine!).
+10
neil innes you are spot on. I wished they would jsut get rid of congress and senate and Obama. Start over
Obama is an empty suit….BELIEVE IT!!! The biggest losers of QE 1, 2 and 3? That’s the savers, you know the poor schmucks who go to work from 9-5 and put their money in the bank. Same schmuks who haven’t had a real wage increse in 20 years. America the land of the free, home of the brave, land of opportunity….blah blah blah.
The Fed not only serves it banking owners. It also serves the government of the day so it can have free passage to conduct it’s wicked ways. The most recent announcement of QE is a prime example of the alignment of the Fed to the Obama administration.
David- So much for your prediction of a falling $A (mind you I agreed with you). It did fall from 0.86 euro to 0.81. Currency devaluation or currency wars is the new protection. Shows you how stupid Australia has been to be an open, unprotected economy(by either currency or tariffs) in this new environment.
The crash in Australia caused by
high dollar,
very low M1 money supply,
high interest rates compared to comparable countries,
savage pull back in government spending and increased taxation
when the participants are significantly leveraged is under way. Note the share price action in Fortescue, Arrium etc and the huge dollar numbers in wealth lost. This is spreading to the banks and if real estate really cracks here it is a downward spiral in place.
Currency devaluation or currency wars is the new protection. Shows you how stupid Australia has been to be an open, unprotected economy(by either currency or tariffs) in this new environment.
My raucous applause for your comment, Douglas.
Let us be done with the knee-jerk ridicule of “protectionists” and/or “protectionist” policies.
+100 to both of you.
Exactly. It also shows how foolish Treasury have been in thinking the currency reflected the ToT.
Yes. Take away all the noise and the US really wants to devalue the currency and get back to being an industrial power-house.
They have very high productivity in the US so they don’t need to get back to China salaries just more competitive. This feels very strategic.
(and don’t they have the worlds biggest gold reserves anyway? – so just shifting things around on the balance sheet)
“Currency devaluation or currency wars is the new protection. Shows you how stupid Australia has been to be an open, unprotected economy(by either currency or tariffs) in this new environment.”
+1,000,000,000,000….where is the infinity symbol?
We roared about this last year in this space its partly why we seem bearish often on the AUD – we want it to go down because on balance the country needs it to go down.
We are travelling over rocky ground and the shock absorbers dont work – aaarrrggghhh bumby bloody ride ahead
we want it to go down because on balance
Key point right there. I find it frustrating that some have misconstrued (twisted?) the expressed position of MB (and agreeing commenters) on this topic, apparently failing to acknowledge the position as one that recognises there are both positive and negative consequences of a lower AUD, but nevertheless on balance sees the positive effects outweighing the negative.
It’s not a binary world. Nuance is the spice (and reality) of life.
Another winner is the US congress; who can remain in la la land, accepting no responsibility for the economy and promising the world a fiscal cliff, knowing that Uncle Ben will take the political heat and do the heavy lifting.
Does anyone know the size of the agency MBS market?
According to this Bloomberg quote of the Fed FAQ, $40 billion will be initially directed at NEW agency MBS issues. Yep, US mega mortgage mugs are now directly financed by Uncle Ben.
I wonder what happens if there is large-scale defaults on The Bernanke owned mortgages? Does he then wipe the bad loans off the Fed books into thin air?
Mav you are talking about balance sheet issues, the Fed and ECB are only worried about flows, as long as they can keep the game going it does not really matter about write-offs. I think I read that the ECB has only $13bn of capital versus $4 trillion of exposure which is an insane leverage ratio.
Note I am no fan of QE it does nothing to solve the underlying problem of too much debt.
I was just trying to gauge the size of the “unlimited” QE3 before they run out of households to lend money to.
The Fed can’t keep the game going on forever because the household balance sheet isn’t unlimited. There is a limit on how much the mega mortgage mug households will borrow to buy houses off each other.
From HSBC:
At a first approximation, the MBS purchase program, if it continues for a year, would remove about 10% of the outstanding amount of agency MBS from the market. The three mortgage GSEs (FNMA, FHLMC and GNMA) have guaranteed about USD 5.6trn in outstanding MBS. The Fed already holds about USD 0.9trn of agency MBS, leaving USD 4.7trn in the hands of private investors. Meanwhile, there has been virtually no new net issuance of MBS from the GSEs for the past year. It is also likely that there will be no new net issuance in the coming year as households, in the aggregate, continue to pay down their mortgage debt.
Or theoretically, the Fed can backstop over 10% expansion in agency mortgages in the first year!!
Wow, lender of last resort has a new meaning! Though I wonder if US borrowers will bite, restart using their homes as ATM machines and go on a debt fuelled consumption binge.
Mav, I doubt it. I think the likes of Bernanke and all those in finance completely underestimate the long lasting impact of being in an acute or chronic debt squeeze on consumer psyche.
Few will be fooled twice by the hopes of perpetual growth and elusory wealth.
I think this smacks of Fed panic.
4D,
“I think this smacks of Fed panic”.
I don’t think the Fed panics. But, I think it’s worse than that. To me it signals that the Fed is retreating to it’s bunker protecting it’s owners and preparing to release the nuclear deterrent. Measured at first but deployed nonetheless.
Prof Keens Debt Jubilee by default.
Yeah, but with Helicopter Ben’s jubilee, banksters make money hand over fist siphoning off a part of the money as interest and ends with defaulters losing their homes (and then some).
+1
http://www.zerohedge.com/news/punchline-his-own-words-bernanke-advocates-blowing-asset-bubbles-antidote-depression
From The Bernanke’s mouth:
There are a number of different channels — mortgage rates, I mentioned other interest rates, corporate bond rates, but also the prices of various assets, like, for example, the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more — more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they’ll, you know, make a better return on that purchase. So house prices is one vehicle.
There you have it – the same old “Houses as ATMs” approach. It is almost like this guy slept through the GFC!!
Oh dear.
Oh f****** dear.
There there now. Good debt slave. Go back to sleep now. Go on. Off you go. Nighty night. You’ll feel wealthier in the morning.
That is funny…and more importantly it’s right. Like shooting fish in a barrel.
The new debt feudalism is not going away any time soon.
A higher dollar will also choke off any benefit we might have seen as the ASX rallied in sympathy with Wall Street.
true but thats why despite the stronger than expected domestic data the RBA will be forced to cut. And that will give the ASX a big boost.
note to self- warm-up in reaction like a master on ‘human creations,activities and lectures’..n,when our local resident David Atten-bo-rough of such likely ‘GB’, suspects a strap to the rates somewhere between the horses and reindeer…be-prepared,
apparently he’s expecting a big ride..end-note-n sounds like a good time to drop-in..if not paddle,n at least that way he’ll know whats at the end of his wave….me JR
Look on the bright side. With unemployment being seen as the catalyst for ‘all’s well’, perhaps we will get an honest assessment of the US labour market from now on.
Janet,
Surely you are not inferring that US labour stats are dishonest?
What a brilliant article, David! I am glad you included the effect of money-printing inflation on the yuan peg which is not discussed enough, but is the elephant in the room.
Seems America is playing a brilliant game of chess in this deflationary environment. Print money. Create inflation in food. Fat yanks can’t supersize their Big Mac meals. Poor Chinese peasants can’t afford basics like rice. Starving peasants rise up against Chinese govt.
China’s only option? Relax yuan peg to contain inflation in food. Yuan rises. Exports become more expensive. China loses market share. China’s growth rate slows. Unemployed peasants without welfare rise up against Chinese govt.
China’s greatest strength is its vast population. China’s greatest weakness is its vast population.
Its called a rock and a hard place, and is a win-win for the US to print money, with the added advantage of enriching Bernanke and all his rich bankster mates. Your move, China…
But who will blink first? I think the US. Chinese are used to hardships and have a ruthless oppression system in the PLA as well as a chest full of cash at their command. The US, while dynamic and hugely versatile, is broke and will not remain docile in the face of runaway food and energy prices.
No doubt, a high stakes game.
America is playing a brilliant game of chess
Major wars have started over less. Not a brilliant game at all.
The key piece that stands out for me is
“The FED is going to just keep buying until the jobs market recovers.”
The thing is, I just don’t see the job market ever really recovering. Technological unemployment is accelerating and will continue to do so. As just one example, Boston-based Rethink Robotics is expected to release a new robot by January 2013 – something basic like a human sized torso with two arms possessing more degrees of freedom than a human and a head with sensors for example – that will be competitively priced and targeted at SMEs, and based on hints given by legendary founder Rodney Brooks is expected to be incredibly easy to program to do repetitive labour-intensive tasks simply by physically manipulating the robot oneself. Expect demonstrations and promotion all through 2013 with sales in 2014 and version 2 and more sales in 2015.
This is just one tiny example of smarter software and smarter machines that are being developed and which – by empowering individuals and producers to be so much more productive – will actively hamper and hinder any such thing as a recovery in the job market. In most cases those displaced will not be able to re-skill fast enough to get back in. While high end policy and strategy may achieve some successes here and there in creating more jobs, accelerating technological unemployment looks to me like a looming juggernaut that will destroy more jobs than can ever be created.
As such that key quote just reads to me as:
“The FED is going to just keep buying until . . . ?”
A great article, thanks. I feel very worried about the financial wrestling match between the USA and China. I wonder if one reason to go unlimited Draghi style was to avoid the market hopium rallies fading towards anticipated cliffs at the end of stimulus cycles. Now with less information the markets are left wondering? The rest of the world will not be pleased with Fed exporting inflation unless the open mouth operation part proves to be larger than the real actions taking place.
Here is a nice piece discussing the QE ad infinity and how the ECRI recession call which still stands, in case anyone is interested.
http://www.forexpros.com/analysis/analyzing-the-ecri-recession-call-136376
Funny enough, one of the best writers who cuts through the complexities of things like financial instruments and monetary policy, is Matt Taibbi at Rolling Stone Magazine.
Here is a beauty on one bunch of people who are winning BIG from QE: the housewives of Wall Street:
http://www.rollingstone.com/politics/news/the-real-housewives-of-wall-street-look-whos-cashing-in-on-the-bailout-20110411
As has often been pointed out, the winners are those who get the newly-created money FIRST. It is everyone else down the chain who gets the value of everything eroded.
A successful man is one who makes more money than his wife can spend; a successful woman is one who finds such a man.
(Apologies for the somewhat sexist nature of this quip. It is, of course, tongue in cheek.)