QE To Infinity: Not?

Bloomberg.com surprised me this AM with its lead story, as follows:

Fed Policy Makers Signal Abrupt End to Bond Purchases in June

Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.

“I don’t see a lot of gain to reverting to a tapering approach,” Atlanta Fed President Dennis Lockhart told reporters yesterday. “I don’t think that is necessary,” Philadelphia Fed President Charles Plosser said last month.

Central bankers, who next meet March 15, are about half way through their second round of bond purchases. To bring the program to a full stop in June, they must be confident that the economy is strong enough to endure higher long-term interest rates and rising expectations of an exit from the most expansive monetary policy in Fed history, said Dan Greenhaus at Miller Tabak & Co. LLC in New York.

“If this is a self-sustaining recovery that can withstand higher interest rates, then why not get the hell out?” said Greenhaus, Miller Tabak’s chief economic strategist. “Still, I am nervous about their ability to withdraw from this policy without broader disruptions.”

The Fed announced in November that it would buy $600 billion of Treasuries through June in a bid to boost the recovery and reduce an unemployment rate lingering near a 26- year high. The program, known as QE2 for the second round of so- called quantitative easing, followed $1.7 trillion of asset purchases that ended in March 2010.

Stock Versus Flow

Fed staff members, such as Brian Sack, the New York Fed official in charge of carrying out the bond buying, have argued the total amount, or stock, of securities the Fed has announced it will make has more impact on longer-term interest rates than the timing of those purchases. That’s a view now held by several members on the Federal Open Market Committee, including the chairman.

“We learned in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately, and we didn’t see any major impact on interest rates,” Fed Chairman Ben S. Bernanke told the Senate Banking Committee during his March 1 semiannual monetary-policy testimony. “It’s really the total amount of holdings, rather than the flow of new purchases, that affects the level of interest rates.”

Fed Vice Chairman Janet Yellen supported that perspective, saying at a monetary policy forum in New York last week that “the stock view won out over the flow view.”

The bolded paragraphs (my doing) above are key. We can hope that this signals that the parties in Washington have agreed, at least in principle, on significant deficit reduction, so that ordinary debt market mechanisms can finance the Federal deficit without the central bank adding to the money supply as it has been doing with quantitative easing. Presumably, it is a show of confidence in the economy. Of course, a year ago a similar show of confidence gave way to the summer slowdown and QE2. Will past be prologue?

I don't know the answer to that, but we can hope this is a return to prudence, and that in turn there could be reason to abruptly rethink the entire weak dollar investment theme. After all, the markets sometimes are a lot smarter than any individual. "Rethink" does not necessarily mean "alter" or "abandon", however. In the prior economic cycle, the Fed did not overtly monetize the deficits, which of course were much smaller, but the private sector went wild with credit creation. Soaring commodities prices and a weak dollar were the speculative result; then the Fed began withdrawing liquidity, and the whole shebang came tumbling down. For now, leaving the important Mideast disturbance and all the known other issues aside, the cards look increasingly aligned for a traditional "sweet spot" year for economic activity. Low interest rates, lots of labor slack, a good deal of unused manufacturing capacity, and tons of fiscal stimulus. Plus lots of skepticism.

Interesting times.

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When Does QE2 Leave Port?

In the hilariously titled post, Let's Start Spending, Dr. Robert Frank argues for more road paving to get the economy moving again. Writing in doubletalk, he says:

The deficit hawks are killing us. No, wait! I’m a deficit hawk. So let me rephrase that: Some of the deficit hawks are killing us. Like other deficit hawks, I believe we need to start paying down the mountain of debt the federal government has been running up. But not now, not as we continue to struggle to emerge from the deepest downturn since the Great Depression. Cutting spending now is the very last thing we should do.

The only reason we’re in a downturn is that there’s not nearly enough total spending to put everyone to work. The $787 billion economic stimulus bill passed in 2009, which many economists at the time warned was too small, is running out. Its effects are being offset increasingly by massive cutbacks in state and local government spending. And now many deficit hawks want us to cut spending further.

This is lunacy. The right kinds of deficit spending not only would help speed economic recovery, they would help bolster the nation’s long-term balance sheet.

He goes on to tout the supposed economic wonders that fixing roadways can do.

Wasn't that was ARRA (last year's "stimulus" bill) was all about?

What's especially important about Dr. Frank's views is that his co-author of an economics text was Dr. Ben Shalom Bernanke. Who just spoke today about mounting signs of economic weakness.

OK. Enough hilarity. Dr. Frank wants us to start spending. As if spending $3.5 T isn't enough this year.

On another front, first it was the sainted Jeremy Grantham with a self-serving alleged switch to fearing deflation as the greater worry than inflation. Now it is the allegedly conservative Weekly Standard that is hyperventilating about the same subject in its blog today, with a post titled Deflation: A primer. Here's one quote from that post:

As awful as double-digit inflation was, single-digit deflation is worse. As triumphant as the victory over inflation was, we can't always be re-fighting the last war.

This is a country deeply in debt. Inflation reduces the burden of debt -- anonymously, impersonally, and across the board. I hope I don't sound too nationalistic when I note that a lot of that debt is held by our Chinese friends. They ran huge trade surpluses with the United States when times were good. Time now for them to contribute a little back.

Sorry. I'm not with that program. There's good deflation and bad, but the blog doesn't differentiate. Most of the 19th century was deflationary in the U. S., and the country was probably the greatest growth story for a whole century in world history. Or close to it. Falling prices due to technologic advances and opening up of inexpensive raw materials are good things. Otherwise scarcity of food would be good, because it means rising prices.

The real problem is that deflation punishes poor borrowing and lending decisions. It is tough on borrowers, but that's a private matter between them and the lenders. If the lenders need to take a haircut, so be it. If deflation were allowed to occur naturally across the entire economy the way it used it be allowed, then both borrowers and lenders would be more prudent. They couldn't count on helicopter drops of money and ZIRP to bail them out.

About stiffing the Chinese with inflation, how spoiled can you get. First the West hires the Chinese to do the tough, polluting manual labor it doesn't want to do, at rock-bottom wages to enrich the owners and managers of the outsourcing companies, and refuses to pay them in kind with an equal amount of manufactured goods; we send them promises to pay. And now we keep up our bargain after receiving the fruits of their labor for our benefit by welching on our paper.
Honorable? No. Wise? Also not.

More and more, the Establishment is laying the groundwork to persuade the sheeple that the cure for excessive borrowing and lending and attendant money creation is more of the same.

QE2, in other words: Quantitative easing 2.0.

This can only continue with declining borrowing costs if private borrowing is crowded out; in other words, if the economy continues to be anemic. The Japan scenario, in other words.

And this may be. But as per Nassim Taleb's story of the turkey, the Black Swan event from the turkey's standpoint was sudden death after a happy, easy life. The economic equivalent of that is either hyperinflation or cessation of credit being supplied by creditors, in a Greek-like scenario with true austerity being imposed from outside. So we can go Japanecian (or, Grecianese), or the hyperinflation scenario such as Argentina and Brazil did in the relatively recent past.

What we can't do is "stimulate" the economy endlessly by printing money under the pretense that we are going to repave our way to prosperity.

The laws of economics trump hopium and hokum.

Copyright (C) Long Lake LLC 2010

Bank of England Loves Inflation

This is a bit scary from the Bank of England today:

In the light of the Committee’s latest Inflation Report projections and in order to keep inflation on track to meet the 2% inflation target over the medium term, the Committee judged that maintaining Bank Rate at 0.5% was appropriate. In the light of that outlook, the Committee also agreed that it should extend its programme of purchases of government and corporate debt to a total of £175 billion, financed by the issuance of central bank reserves. The Committee expects the announced programme to take another three months to complete. The scale of the programme will be kept under review.

The Committee noted that the increase in the scale of the programme would necessitate an increase in the range of maturities of government debt that the Bank was willing to purchase. That is explained in an accompanying market notice.

It's news to me that the BofE, and therefore likely the Fed, is so committed to non-deflation that it will print money--debasing the currency-- at a time when inflation was 1.8% (per the statement). Does anyone really think that in a large complex economy such as Britain's, it is possible to measure the inflation rate with such great precision? Worse, what's wrong with letting savers actually have a positive return on their savings?

The Bank of England should stop manipulating interest rates to pump up the credit bubble again, and so should the Fed.

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Geithner Going?

It is now all over the Internet that with the posturing of Congress and the President on the AIG bailouts, Timothy Geithner may resign given the revelation that he approved the bonus payments. Of course, the bigger news is the once-secret, tens of billions of dollars worth of payments to the counterparties that gambled with AIG on the credit default swaps that you and I have made through the Federal Reserve and the Federal Government, which is part of the reason that the Fed overtly announced quantitative easing (i.e., money-printing) today, as predicted here as soon as the Bank of England did the same thing recently. However, we should at least be grateful that the intelligentsia such as you and me understand the extent of the real scandal, and that for public consumption, a simple story can crystallize justifiable outrage but that stems from a more complex story.

In any case, EBR takes pride in joining with a few others in the media in opposing the Geithner nomination from the start. Here is our (brief) follow-up post from January 14 in "Geithner Must Go (Not Arrive):

The New York Times continues to push to make the appointment of Mr. Timothy Geithner appear inevitable. Its latest writeup is titled, "Geithner's Skill May Trump Tax Issue".

There is something wrong with this title. What is wrong is that everything important that Mr. Geithner has been involved with in the past year has failed. So where is the skill?

There is a howler in the Times article. What do you make of this part of it?

"On Oct. 17, at a New York hotel, Mr. Obama and Mr. Geithner met for an hour and talked about policy and personal matters, according to accounts of the session. . .""Obama advisers say the candidate “fell in love” with Mr. Geithner, in the words of one, while a Geithner associate said Mr. Geithner reported being “smitten” with Mr. Obama. “They both have that kind of quiet confidence in their demeanor,” the associate said."

DoctoRx here. "Fell in love" and "smitten"? Is this Brokeback Mountain come to the Potomac?

In any case, Mr. Geithner is a failure at his current job and a tax cheat. For him to become Treasury Secretary would be bad for the economy. It doesn't matter whether Mr. Obama loves him or how many Senators rally round him.

Mr. Geithner is now a failure in his current job, which includes preventing embarrassment to his boss and to the US of A. To paraphrase Senator Grassley, he should fall on his metaphorical sword and either work at State or find work at a large complex financial institution.


Copyright (C) Long Lake LLC 2009