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txlaw
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BB - A lot of that junk bond issuance is refinancing.

 

That is exactly what you need refinancing is part of the amount of credit in circulation. I'm just trying to get a feeling of Koo's statement about the de-leveraging of the private sector.

 

Ideally, one would  the last 5 years of the following and add them:

-Top 10 Banks Load Book

-Junk+Corporate Bonds

 

This would give a fairly good picture of the lending environment. The problem with this approach is that 2008-09 were full of bankruptcies and governments interventions which would make the banks data unreliable.

 

Anybody has other tools to evaluate if the credit is contracting  for the private sector?

 

BeerBaron

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Thanks for posting this well written paper.  For anyone who has an interest in the thesis behind FFH's deflation bet, read this.

 

Great paper.  However, there is one mischaracterization by Koo.  He says early in the paper that M2 has been basically flat since the 2008 crisis.  Then, later he says M2 is up 15% since the crisis.  In fact, M2 was up very little until spring of last year.  Since then M2 has risen at almost a 6% annual rate.  Forget the thought of a balance sheet recession if M2 continues this rate of expansion.

 

If The Fed, however, pulls back, run for cover because Koo is right about everything being propped up by the Fed.

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QE2 pumps up asset prices... I thought everyone is aware of that. It also create wealth effect for some as weak. What's new from his paper?

 

For me the how and why. Also Bernanke's thinking written in plan English. Also I need to hear things 4-5 times before they really click. I found the paper profound. Congress is focused on cutting because of early indicators / data, and Bernanke's hands are tied. That tells me something, something significant. Also his thesis on DCF matches what I see, when there is a minor blip in the data we get a pullback.....

 

 

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QE2 pumps up asset prices... I thought everyone is aware of that. It also create wealth effect for some as weak. What's new from his paper?

 

For me the how and why. Also Bernanke's thinking written in plan English. Also I need to hear things 4-5 times before they really click.

 

 

^ this, except sometimes I need more than 4-5 times.  :)

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Since then M2 has risen at almost a 6% annual rate.  Forget the thought of a balance sheet recession if M2 continues this rate of expansion.

 

If I understand his point correctly, he attributes the growth in M2 to government spending where banks lend to the government (not the Fed) by buying their bonds.  The government spends that money somewhere, leading to an increase in money supply.  As long as the government keeps spending, M2 can grow even in the face of pritave sector contraction.  The M2 growth is unsustainable though, as (in my view) the government will probably embark on some degree of fiscal consolidation.  Even if the government doesn't consolidate, can we really expect to get out of a balance sheet recession without private-sector credit expansion?

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wasn t his point that we will get a collapse in asset prices that are supported by QE2, once QE2 funding is withdrawn if we don t have private expansion credit + or public spending money?

 

should we look at our holdings and ask ourselves how much of their economics are supported by QE?

 

and/or just  stick with very high quality companies selling products that we cannot do without?

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Thanks for posting this well written paper.  For anyone who has an interest in the thesis behind FFH's deflation bet, read this.

 

..  Since then M2 has risen at almost a 6% annual rate.  Forget the thought of a balance sheet recession if M2 continues this rate of expansion.

 

If The Fed, however, pulls back, run for cover because Koo is right about everything being propped up by the Fed.

 

twa, i thought you were more focused on growth in the monetary base (m3?) than m2. in your estimation will the monetary base follow m2 down if the fed pulls back & withdraws qe2 liquidity?

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here's another take re the end of qe2, asset prices, & the effect on the real economy:

 

Effect of QE2's End May Be Greatly Exaggerated

Like news of Mark Twain's death, QE2's impact on the economy, has been greatly exaggerated, contends David A. Levy, chairman of the Jerome Levy Forecasting Center.

 

The economy's acceleration was well under way when Fed Chairman floated the idea of QE2 in late August, he points out. Moreover, no serious economist doubts the dictum that monetary policy works with long and variable lags. Indeed, gross-domestic product growth slowed to a 1.8% annual rate in the first quarter, from 3.1% in the fourth quarter of 2010.

 

Treasury yields actually rose after the Fed began purchasing notes in early November. While prices of risk assets such as stocks and junk bonds increased, the value of homes, investment-grade corporate and municipal bonds and government securities fell in the fourth quarter, leaving households less well off, Levy says. That undercuts the so-called wealth effect, the presumed positive effect of QE2.

 

Inflation expectations did rise, as the Fed desired, but bank lending didn't, he adds. All in all, Levy likens QE2 to chicken soup — "it couldn't hurt."

 

The most important impact may have been psychological; because the market participants thought QE2 was affecting prices, they did. And so the dollar fell in response to the Fed's securities purchases, mainly because that's what traders, expected, he concludes.

 

the rest here:

 

http://finance.yahoo.com/banking-budgeting/article/112772/QE2-effects-barrons?mod=bb-budgeting&sec=topStories&pos=4&asset=&ccode=&sec=topStories&pos=6&asset=&ccode=

 

 

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Thanks for posting this well written paper.  For anyone who has an interest in the thesis behind FFH's deflation bet, read this.

 

..  Since then M2 has risen at almost a 6% annual rate.  Forget the thought of a balance sheet recession if M2 continues this rate of expansion.

 

If The Fed, however, pulls back, run for cover because Koo is right about everything being propped up by the Fed.

 

twa, i thought you were more focused on growth in the monetary base (m3?) than m2. in your estimation will the monetary base follow m2 down if the fed pulls back & withdraws qe2 liquidity?

 

Yes and no.  The Fed can cause changes in the monetary base with the stroke of a pen, so to speak, by injecting reserves into the banking system.  This will support the extension of credit, into the productive economy if demand from business and consumers is brisk, otherwise into credit and stock markets and commodities.  The inflationary effect on markets was mostly the case until last spring when M2 picked up as the economy is finally starting to use the extra liquidity that has been on the sidelines far too long.

 

It is much more the case that the monetary base eventually tends to work its way through the banking system into M2 and then economic activity than vice versa.

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