Get Ready for QE3

[moore_capital54]

For those that think QE3 is not happening, I am going to go on record today and say that not only is QE3 going to happen but it will make QE2 look like a test run. Mr. Bernanke and the rest of his Keynesian cohorts have an ideology which revolves around maintaining aggregate demand.

 

Along these lines, it is funny to see all the banter about gold topping and how money has been exiting the metal due to perception as a risky asset. Well as of this writing, gold is now positive for the day while indices are at their lows, and I am certain that in the next World Gold Council report on demand you will see substantial central bank purchases occurred these last two days.

 

Gold aside, equities such as BP/CSCO/MT/DELL/BAC/ represent amazing opportunities here.

[Myth465]

Isnt Bernanke a Friedmanite?

 

Keynes was a genius inmo....

QE in my opinion has nothing to do with Keynes.

[libor.plus1]

No matter what Ben says, I think the markets will crater in the coming days. I don't think there's anything Ben can do to instill confidence anymore. Actually, if I were him, I'd do a completely different take. I'd stand up there and say:

 

you know what, I'm not going to do any type of financial easing. I gave the market a promise of low and steady rates for the next two years. That's probably even more than I should have done given the economies overall strength. If investors don't want to invest in an equity market that is clearly undervalued based on all the data and analytics we have, then so be it, but the economy is not at all near a recession to warrant monetary easing. Eventually investors will catch on. Until then, there is plenty of great, solid companies selling at huge discounts.

[moore_capital54]

Isnt Bernanke a Friedmanite?

 

Keynes was a genius inmo....

QE in my opinion has nothing to do with Keynes.

 

Myth, Keynes set the precedent for fiat money, without Keynes doctrine spreading like a virus throughout academia the concept of QE would not even exist in it's present form.

[moore_capital54]

No matter what Ben says, I think the markets will crater in the coming days. I don't think there's anything Ben can do to instill confidence anymore. Actually, if I were him, I'd do a completely different take. I'd stand up there and say:

 

you know what, I'm not going to do any type of financial easing. I gave the market a promise of low and steady rates for the next two years. That's probably even more than I should have done given the economies overall strength. If investors don't want to invest in an equity market that is clearly undervalued based on all the data and analytics we have, then so be it, but the economy is not at all near a recession to warrant monetary easing. Eventually investors will catch on. Until then, there is plenty of great, solid companies selling at huge discounts.

 

Libor I don't think that's going to happen at all. As investors we must learn from history. When facts change we must adjust our methodology and include all the new information we now know. I find it kind of odd that most investors refuse to see the obvious change in financial policy ever since lehman. I remember that before lehman I couldn't imagine in my wildest dreams the Fed or any other Central Bank doing anything along the lines of what they did. I remember discussing this with friends and colleagues. We all thought of QE were to happen, along the lines of what subsequently occurred, the US dollar would collapse right then and there and all foreign buyers would dump treasuries.

 

I have mentioned his name several times on this board, but I think Albert D. Friedberg is one of the most gifted investors in the world. Over the last 10 years he has been spot on on almost every inch of this cycle. I am going to quote from Mr. Friedberg's last commentary to investors:

 

"With the economy weakening, outstanding debt will accelerate due to lower tax revenues and higher support payments under existing

programs. In its already frightening deficit projections, the Congressional Budget Office assumes completely unrealistic rates of

increase for economic growth, revenues and expenses. The most recent CBO budget projections (January, 2011) assume that over the

next five years (2011-2016) U.S. government revenue will grow at a compound annual rate of 11.4%, expenses by 3.9% and real GDP

by an astounding 3.2%...compounded annually. These are the numbers on which both parties negotiated the debt ceiling deal. Those

deficit projections are therefore about to get much more frightening, to the point where they will overwhelm the policy stances of both

parties. In our view, we will either see massive real cuts in both entitlements and defense spending as well as significant increases in

taxes or a much lower dollar with consumer price inflation that will take your breath away. We expect inflation."

[moore_capital54]

Sorry here is the rest of it. Sorry about the length but it's well worth it:

 

"QE as far as the eye can see

U.S. monetary policy will be even more aggressive in the months ahead. QE3 is inevitable. It is notable that within days of the end of

QE2, equity markets fell, just as they did when QE1 came to a close. Since the Federal Reserve has made it clear that it is targeting

equity markets, enough new money will be printed to turn the markets around and ensure a higher level of general price inflation, thus

implementing the next stage of default by debasement. Huge dollar swap lines will likely be reinstated to meet the liquidity

requirements of the world`s financial system and to ensure the safety of America`s money market funds which have much of their

assets in European bank paper. It is curious to imagine how a Tea Party-dominated Congress will respond to the Fed.

Europe, of course, has its own set of problems. The Euro Zone (EZ) has dithered its way into the contradictory policies of forcing

austerity on its weakest member countries (the so-called PIIGS) while simultaneously loading them up with additional debt they

cannot repay from the European Financial Stability Facility (EFSF) to avoid near-term default. The EFSF is an emerging European

Treasury Department, a fiscal authority financed and run by Germany to match the EZ monetary authority which is the European

Central Bank (ECB). The EFSF is expecting to be empowered to issue bonds backed by the 17 economies of the EZ and then lend

these funds to member states at interest rates well below the market rates that these states would otherwise borrow at, if they have

access to markets at all. The borrowers are required to enact specific austerity programs in order to qualify for the loans. Austerity is

meant to bring debt-to-GDP ratios down in the long term but it risks driving these countries into deeper recession which only makes

them more insolvent. Where is the logic in lending more money to insolvent debtors?

This kick-the-can policy may yet be overturned. The EFSF--which is expected to be the bailout fund for the latest Greek rescue--

needs to be approved this September by all the parliaments that participate in the EZ. Opposition to this plan is growing in the north.

Even if it is approved, the EFSF is not of sufficient size to bail out Spain and Italy, should they require it, and the bond and CDS

markets for these countries have suggested that they might indeed be next. The EFSF is essentially a method for conferring Germany`s

credit rating to the indigent southern EZ members. But Germany`s debt-to-GDP ratio is already at 82.3% (98.6% for the U.S.) and its

economy is considerably smaller than Italy and Spain combined. Demands on the EFSF may well be a bridge too far for the

overburdened Germans.

The European Central Bank is equally odd. It has hiked interest rates as growth has slowed in order to project an image of probity but

meanwhile has bought the bonds of the PIIGS and accepted downgraded PIIGS debt at par from commercial banks to save them from

ruin. In early August, to address the seizing up of inter-bank credit markets, the ECB advised that its previously announced suspension

of bond purchases and special lending programs to banks had never really happened and that all-but-free six-month money was

available to banks for the asking. This announcement was then followed quickly by another…to buy Italian and Spanish bonds

aggressively. We do not see these purchases being sterilized. The ECB does not call this QE. We do.

The ECB`s balance sheet is more impaired than that of the U.S. Federal Reserve and its current leverage is estimated to be well above

100 to one (55 to one for the Fed). A small write-down of Greek debt would probably require it to seek fresh capital. Therefore,

defaults and write downs must be avoided. The large European commercial banks which the ECB backstops are extremely

undercapitalized compared to their American counterparts as they rely almost exclusively on short-term funding. The 90 biggest banks in Europe collectively face an estimated Euro5.4 trillion in principal loans coming due over the next 24 months. We believe this debt

can only be rolled over if the ECB backs these banks and there are no sovereign or major commercial bank defaults in the EZ.

Meanwhile, deposits flee PIIGS commercial banks and European bank stocks have collapsed.

We believe that the ultimate decision, perhaps only weeks away, will be to monetize the sovereign debt of the PIIGS on a very large

scale in order to preserve the Euro Zone. We believe the totals will eclipse by far the Fed`s QE 1&2. Formal default for a member

country is not an option under the EZ charter and would give rise to an enormously complex series of problems.

Not the return of 2008

Is this 2008 all over again? Investors are asking this question as markets tumble. Will we once again see the U.S. dollar scream higher

amid fears of deflation and a liquidity crunch while everything else collapses? We do not think so. Confidence in the U.S. dollar has

surely been shaken and there are no comparably deep and liquid currency markets to replace it as a safe haven. In 2008, markets did

not know how the authorities would respond to the crisis (remember Lehman Brothers and the failed TARP vote in Congress) or

whether the means existed to flood the world with liquidity. Now it is known. In 2008, gold recovered its losses and closed up on the

year. This time around, we expect it will continue upward and outperform all alternatives including the dollar as the monetary

authorities predictably respond to panic with massive money creation more quickly and more precisely than three years ago. It has

already begun. There will be no Lehman moment this time. The next challenge will not be deflation but its opposite, and we believe

gold will reach levels that cannot easily be imagined.

Will gold equities finally begin to follow the gold price and separate from other equities? We think this may in fact prove to be an

important inflection point for gold stocks. Institutional investors are hugely underweight gold in their portfolios. We believe that they

may now find undervalued gold shares to be irresistibly attractive."

[libor.plus1]

oh well naturally that's not ever going to happen. But one can dream. The Market is way too cradled since the Lehman collapse. Moral hazard has no meaning.

[zarley]

Isnt Bernanke a Friedmanite?

 

Keynes was a genius inmo....

QE in my opinion has nothing to do with Keynes.

 

Myth, Keynes set the precedent for fiat money, without Keynes doctrine spreading like a virus throughout academia the concept of QE would not even exist in it's present form.

 

LOL so much wrong packed into so few words.

 

Fiat money predates Keynes by several centuries.

 

QE programs (nearly all monetary policy really) is more a result of Monetarists like Milton Friedman, not Keynes.  Quick quiz:  What economists did Ben Bernanke jokingly apologize to on behalf of the Federal Reserve for making the Great Depression worse?

 

Although, more contemporary "New" Keynesians accept the importance of both monetary and fiscal policy as tools for stimulating economic activity.  Monetary policy is not really an important part of Keynes' work.

 

Blame Keynes for the, at best marginally effective, stimulus bill.  But, don't blame him for QE.

 

[moore_capital54]

Zarley, so much circular logic in so many sentences....

 

One of the central tenants of keynes doctrine is reducing the dependence on hard money (Barbarous relic).

 

Moreover, and this is where you are proven to be 100% wrong, under keynes policy governments have been led to believe that it was OK to run fiscal deficits which have been then subsidized by quantitative easing.

 

Hence QE is essentially subsidizing governments lack of discipline which under Keynes is necessary!

 

Don't take my word for it? Watch this video specifically around 9:00

 

http://www.bloomberg.com/video/73591226/

 

Specifically watch the last part where Mr. Mcculley says and I quote " Sovereign Governments that have the ability to run large deficits because they have a fiat currency regime need to DO IT AND DO IT WITH DISPATCH WITHOUT APOLOGY"

 

I don't disagree with you that fiat money is an invention that predates Keynes by centuries, but that is a misleading statement as Keynes was the first economist to "Successfully" rationalize the usage of fiat money in a prospering economy. Until then Fiat Money was only resorted to during despair by governments that had no other alternative.

 

You cannot seperate Keynes Doctrine from Fiat Money or QE for that matter. I will debate this with you all day if I have to but I think this post settles the argument.

[moore_capital54]

More for you:

 

MONETARY CRANKS PROMOTE FIAT MONEY

 

None of the four believed that a free market money system would allow prices, including the interest rate, to allocate capital, apart from government creation of money to assure the clearing of markets. They saw money as a government function. They did not trust the free market to provide a market-clearing monetary system under a legal system that prohibits fraud but does not allow government-created money.

 

None of them accepted the international gold standard. Keynes hated it. It kept government and central banks from inflating. This kept governments from creating policies that would match supply and demand.

[Myth465]

Moore we are wading into politics and ideology which is a battle not worth fighting (minds are more or less made up). I will say this I have never really seen counter cyclical Keynesian policies implemented (outside of say perhaps Chile with copper). Most governments spend in the bad times to save the economy, and spend (or cut revenues / taxes) in the good times due to well good times. That inmo is the source of all of our problems. We are all Keynesians in bad times, and Libertarians in good times......

 

QE3 shouldnt be done because QE2 added no real value outside of increased commodity prices. Zarley has the best advice and Uncle Ben should listen. I have bought stocks yielding 10% and Mr. Market will come around sooner or later. If we get a QE3 then my oil stocks should do quite well.......

 

Thanks for the writing, I read it, but did not catch the video. Bernanke is no Keynesians.

[moore_capital54]

Myth the advice was from Libor+1 not Zarley. I will agree to disagree with you on Bernanke.

 

But Please just read this piece before going to bed tonight thinking Mr. Bernanke is a saint.

 

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8tjEzB.d.kU

[moore_capital54]

The Fed is “running a laboratory experiment” on what drives inflation: the money supply or the output gap, says Laurence Meyer, a former Fed governor and now vice chairman of St. Louis-based Macroeconomic Advisers

 

“How it turns out will do a lot to influence the economic debate,” he says, adding that his money is on Bernanke.

[Myth465]

Myth the advice was from Libor+1 not Zarley. I will agree to disagree with you on Bernanke.

 

But Please just read this piece before going to bed tonight thinking Mr. Bernanke is a saint.

 

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8tjEzB.d.kU

 

Sorry about the wrong person. I dont have particularly good feelings about Bernanke (but do on Keynes lol). I would say he is doing an ok job considering the hand he was dealt. There definitely many better man for the job, but that can be said of most jobs.

 

Will check out the link prior to bed time.

[moore_capital54]

http://www.bloomberg.com/news/2011-08-25/hoenig-says-fed-should-focus-on-fixing-u-s-finances-instead-of-economy.html

 

I don't buy it.

[zarley]

 

You cannot seperate Keynes Doctrine from Fiat Money or QE for that matter.

 

If QE were some mechanism for financing stimulative government deficits, I might go along with it.  But, it's not.  It's an alternative to stimulative fiscal policy because the government cannot or will not run larger deficits.  As a result, I think blaming Keynes for QE is a bit like blaming Wilbur Wright for 9/11.  Sure, you can draw a long circuitous line to get from here to there, but I find it to be quite a stretch.

 

Your definition of keynesian seems to be any policy that attempts to influence the overall economy, that strikes me as way to broad to be useful.

 

With all that said, I don't think an explicit QE3 program is likely or desirable.  I think we've reached the point where it is likely to be ineffective and potentially dangerous in the longer term.

 

 

[moore_capital54]

Huh?

 

If QE were some mechanism for financing stimulative government deficits, I might go along with it. 

 

But, it's not.  It's an alternative to stimulative fiscal policy because the government cannot or will not run larger deficits

 

Zarley with respect, are you a fan of Bob Marley? Because it sounds as though you are smoking something.

 

Your post makes zero sense.

[moore_capital54]

Policymakers are clearly alarmed at the mounting job losses and are concerned that 2009 will see trains, malls and restaurants a lot less busy than they have been in 2008. The question is whether the use of unconventional solutions will amount to over-egging the pudding.

 

On the one hand, there is the risk of delay at a time when deflationary pressures are growing. There is talk of a classic Keynesian liquidity trap, when nominal interest rates fall close to zero and the authorities find it impossible to stimulate demand through lower borrowing costs. Prolonged deflation makes matters worse because real interest rates remain positive no matter how severe the recession becomes.

 

On the other hand, there is the risk that policymakers could be storing up big inflationary problems by hitting the panic button too quickly. In case the current economic pain is being caused by the inevitable time lag between policy being eased and policy becoming effective, then adopting the policy known as quantitative easing may prove reckless.

 

The solution proposed by Keynes in the 1930s was for central banks to buy up long-dated treasury bonds and gilts to drive down long-term interest rates. There are other ways of going about quantitative easing - cranking up the printing presses for one - but if this is to be done, then manipulating the long end of the bond market is the way to do it.

 

 

 

But in addition it is useful to know that Keynes himself approved of this approach. In March of 1930 before the Macmillan Committee in the U.K. of which Keynes was both a member and also a major witness he argued in favour of this policy as follows.

 

''My remedy in the event of the obstinate persistence of a slump would consist, therefore, in the purchase of securities by the Central Bank until the long term market-rate of interest has been brought down to the limiting point....(with respect to the 1930s slump) the Bank of England  and the Federal Reserve Board (should) put pressure on their member banks...to reduce the rate of interest which they allow to depositors to a very low figure, say 1/2 per cent...(and) these two central institutions should pursue bank-rate policy and open market operations à outrance.''

 

(See Report of the Committee on Finance and Industry (Macmillan report), 1931 Vol II, p.386. cited in Benjamin Higgins,'' Keynesian Economics and Public Investment policy'' in  Seymour Harris,ed. The New Economics, Keynes' Influence on theory and public policy, N.Y.:Alfred A.Knopf, 1948, p.470 note 9.See also Peter Clarke, The Keynesian revolution in the making 1924 - 1936, Oxford:the Claredon Press, 1988.pp.150ff )

 

These posts just proved you are dead wrong. Keynes invented QE, the confidence level in your postings is founded on nothing more than hot air (or is that smoke).

[moore_capital54]

Another video for you nitwits that think Keynes didn't invent QE:

 

[zarley]

Monetary policy is not being used to finance fiscal stimulus.  It's being used to prop up the M (and possibly a bit of the V) in the quantity theory identity (MV=PQ).  It's monetarist in the vein of Fisher and Friedman, not Keynsian.

 

Using fiscal policy for stimulus has been effectively removed from the discussion of how to deal with economic weakness.  See the debt ceiling debate.

[eclecticvalue]

Actually QE is an accounting transaction where banks switch assets with the federal reserve. So it gives fresh liquidity to banks. Looking at QE1 banks switched illiquid/subprime mortgages with federal reserve in exchange for capital reserves. QE2, banks switched treasury bills with the fed. In return the federal reserve gave them reserves. The reason why people think QE is printing money is where did the federal reserve get the money and some people think its printing but the fed created the money out of thin air or to be specific the fed created money on the computer. It is a hard concept for most to understand  but that's how its done.

 

BTW I am a believer of the MMT and believe the United states can never go bankrupt unless people do not believe in using the dollar. Some members want to know where am I getting the info well check this post out.

 

  http://pragcap.com/mechanics-qe-transaction

[Rabbitisrich]

 

BTW I am a believer of the MMT and believe the United states can never go bankrupt unless people do not believe in using the dollar. Some members want to know where am I getting the info well check this post out.

 

  http://pragcap.com/mechanics-qe-transaction

 

If money supply keeps increasing at a faster rate than GDP growth, eventually we would have to choose between issuing yet more money to service debt payments and just defaulting. Some MMT proponents, or perhaps misrepresentatives, seem to ignore the possibility of a Weimar Republic cycle.

[Santayana]

Go long wheelbarrows! ;D

[eclecticvalue]

There is a mis-conception with the weimar republic. The weimer republic had foriegn denominated debt issues and also regime changes. So it messed with the confidence of the people. Whereas the United States can issue money in their own currency. No one else can, so in the sense it can't go bankrupt. Dont get me wrong hyperinflation is another form of default but if the citizens do not think the dollar should be used anymore then things will get dicey.

 

Here is another link to check out http://pragcap.com/hyperinflation-its-more-than-just-a-monetary-phenomenon

[moore_capital54]

Zarley you are wrong - QE is being used to to purchase government debt which was incurred as a result of fiscal stimulus.

 

Here is how the world looked before Keynes got his way, and before fiat money ruled the world:

 

http://www.searsarchives.com/homes/1915-1920.htm

 

Actually this is a better link:

 

http://www.searsarchives.com/homes/bydate.htm

 

When the issuance of money is governed by a tangible asset, confidence is instilled in the currency while discipline is instilled in the economy. In this system a house is a home, not a vehicle for speculation/financial asset or atm.