6-Nov-10 News -- International fury at quantitative easing

[arrowrod]

How much money was destroyed during the mortgage debacle?

I see a lot of pontificating as if Bernanke is trying to destroy the U.S. Do any of you believe that?
I'm guessing 8-11 trillion dollars was destroyed in the past 4 years. Am I wrong? Injecting 2 or 3 trillion dollars is not enough.

I see some of you guessing $1000 bills will soon be in circulation. Why? Does anybody still use currency?

Do any of you have jobs that actually produce something tangible? I know that the Goldman Sachs boys think they are very clever, but are they really? I believe they are cheaters, protected by their revolving door relationship with the Feds.

Anyway, nothing to report here, go on about your business.

Oh, yeah.. robots are coming.

[vincecate]

My thought was the reporter didn't hear what he said, but if that's what he really said in the last line I quoted, God help us all.

God help us all.

Bernanke explained that the money to buy the bonds comes from deposits that banks place in reserve at the Fed.

I have no idea what this means, not a clue. If anyone can explain it, feel free.

The intent was that you not understand. The truth, that they are just making new fiat money out of thin air, is revolting and scary. People instinctively know you can not really get something for nothing. There must be a dark side to this trick. When people really understand is when the hyperinflation will start.

What he must mean is the Fed is crediting the banks reserve account at the Fed to pay for the bonds. It is just adding number to an account on a computer.

PS: I will reword Bernanke's statement to reflect what I understand to be the reality. "Higgie explained that the money to buy the bonds (comes from deposits) is created out of thin air by the Fed and credited as a deposit that banks place in reserve at the Fed." That's the closest I can come to making a true statement while at the same time making minimal changes to the wording of the statement from the news story.

Yes, that is it.

[vincecate]

How much money was destroyed during the mortgage debacle?

It is really hard to say. For example, the government has suspended "mark to market" and implemented a "mark to fantasy" so the books the banks keep are mostly fantasy. Another problem is that the Fed bought up $1.7 trillion of mostly toxic assets for full value. This sort of un-destroyed some of the destroyed credit.

I see a lot of pontificating as if Bernanke is trying to destroy the U.S. Do any of you believe that?

I don't think anyone thinks he is destroying the U.S. on purpose. Like many central bankers before him he is walking down the path to hyperinflation with the best of intentions. Events push this way and that. I think there have been about 100 cases of hyperinflation (using a 5% per month or 80% per year threshold) and I don't think in any case was there ever a meeting where they took a vote and said, "raise your hand if you are in favor of hyperinflation" and decided to have hyperinflation. It does not work that way. Hyperinflation is where the powers that be lose control of circumstances.

I'm guessing 8-11 trillion dollars was destroyed in the past 4 years. Am I wrong? Injecting 2 or 3 trillion dollars is not enough.

My guess is like $1 to $3 trillion. I think Higgenbotham, John, Krugman, Mish, and others are thinking $6 trillion or more. But it is really hard for anyone to say.

I see some of you guessing $1000 bills will soon be in circulation. Why?

I think we are headed for hyperinflation and a $100 bill will just not be big enough. Armored cars will have trouble moving enough money and vaults will have trouble holding enough. They will need a larger bill. This URL gets to my stuff on hyperinflation. I might be the only one in this forum that expects hyperinflation though.
http://pair.offshore.ai/38yearcycle/#hyperinflation

[Higgenbotham]

Bernanke explained that the money to buy the bonds comes from deposits that banks place in reserve at the Fed.

I have no idea what this means, not a clue. If anyone can explain it, feel free.

The intent was that you not understand. The truth, that they are just making new fiat money out of thin air, is revolting and scary. People instinctively know you can not really get something for nothing. There must be a dark side to this trick. When people really understand is when the hyperinflation will start.

What he must mean is the Fed is crediting the banks reserve account at the Fed to pay for the bonds. It is just adding number to an account on a computer.

PS: I will reword Bernanke's statement to reflect what I understand to be the reality. "Higgie explained that the money to buy the bonds (comes from deposits) is created out of thin air by the Fed and credited as a deposit that banks place in reserve at the Fed." That's the closest I can come to making a true statement while at the same time making minimal changes to the wording of the statement from the news story.

Yes, that is it.

I googled for the phrase I quoted from the news story. Found 4 results. All were regurgitations of the news story. Not one discussion on the Internet regarding the veracity of this quote. Three decades ago I used to read books about abusive Central Bankers and remember one author describing a situation as, "The sheep were given another round of shearing."

At the moment, I see the effect of the $600 billion as a backdoor bailout tax. It amounts to $2000 per person in the US. It's not insignificant and will be paid in higher prices than ordinarily would have occurred. It doesn't even mean prices have to go up. Instead of calling it Quantitative Easing 2, I kind of like calling it Sheep Shearing 2.

[Higgenbotham]

Do any of you have jobs that actually produce something tangible?

I used to, but don't anymore. For about 10 years, I've spent all my time shifting money around to try to stay one step ahead of the Central Banker pirates and the Wall Street pirates. I guess it depends on how much savings you have to protect as to whether that is worthwhile. I've managed to avoid the real estate and stock market losses and make a few percent per year on top of it. But when the time comes, if it ever does, that having good job skills pays better than money shifting, then I won't have them. So all that has to be weighed carefully by every individual. And of course, if someone chooses the money shifting route because they are close to retirement anyway, then they cannot afford to make any errors at all. It's not like people who do this get something for nothing. There's a lot of stress involved because you MUST be right. Your pension fund or whatever may be bailed out but I won't. In a Depression, everyone loses and he who loses the least is the winner. In my case, I'm making the tradeoff of job skills for preservation of capital. I didn't want to do that, but didn't have time to do both. Staying ahead of Greenspan, Goldman etc. is a full time job.

[Higgenbotham]

http://www.minneapolisfed.org/news_even ... fm?id=4555

So, the FOMC can influence the economy through various forms of forward guidance about how long it plans for the fed funds rate to be so low. However, the FOMC has another tool at its disposal: what is often termed quantitative easing—QE for short. Under quantitative easing, the FOMC buys long-term securities in the open market. In exchange for those securities, it credits the sellers’ accounts at the Fed with more reserves. The upshot is that there are fewer long-term securities being held by private investors, and banks hold more reserves.

The Minneapolis Fed President is playing it straight as far as the process.

Second, QE creates more reserves in banks’ accounts with the Fed. The standard intuition is that this kind of reserve creation is inflationary. Banks can only offer checkable deposits in proportion to their reserves. Economists view checkable deposits as a form of money because, like cash, checkable deposits make many transactions easier. In this sense, bank reserves held with the Fed are licenses for banks to create a certain amount of money. By giving out more licenses, the FOMC is allowing banks to create more money. More money chasing the same amount of goods—voila, inflation.

This basic logic isn’t valid in current circumstances, because reserves are paying interest equal to comparable market interest rates. Banks have nearly $1 trillion of excess reserves. This means that they are not using a lot of their existing licenses to create money. QE gives them new licenses to create money, but I do not see why they would suddenly start to use the new ones if they weren’t using the old ones. With that said, I have indicated in earlier speeches that $1 trillion of excess reserves does create a potential for high inflation at some point in the future if the FOMC does not react sufficiently fast when it starts to see inflationary pressures. But I do not see this risk as being heightened in any meaningful way by banks holding even more excess reserves than what they are holding today.

OK, fair enough, though that much is obvious. He doesn't need to speculate about when or how that will change. That's our job. But that leads back to the question of why, then, are they doing this. My guess is still that it is to get around Congress and do a second round of bailouts, as the real estate market has started to decline again.

I read another Fed piece that basically said, "Don't focus on the reserves, focus on the asset side of the balance sheet." Well, since the NY Fed and the REMICS filed a lawsuit against B of A, and if B of A has to take back their fraudulent mortages I would think that is going to come out of their reserve account.

Banks’ costs from repurchasing mortgages in securities without government backing may total as much as $179.2 billion, Compass Point Research and Trading LLC analyst Chris Gamaitoni estimated in August, including expenses related to lawsuits against bond underwriters.

It's going to be a lot more if real estate prices keep falling. How does closer to $600 billion sound?

“The Fed does have this authority to work with confidential consumer data,” he said. “But I think to use that authority to then bring suit while wearing their other hat here as a lender of last resort and bailout authority would be untoward at best.”

http://www.businessweek.com/news/2010-1 ... elief.html

In Step 4 below, substitute 2011 for February 11, 2010, substitute "Banks" as in "Bank of America" for Fannie Mae and Freddie Mac, and substitute "Blackrock" or "Pimco" for investors. Of course, they are still investors, but just to be a bit more specific. The banks will still take a hit, so that's why they will fight this instead of doing it voluntarily. I suppose it's possible the banks will be put into receivership. I don't know anything about how that would work. In Step 5, add another $600 billion. Step 6 depends on how it's structured, I guess.

Step 4: On February 11, 2010, with Treasury backing in place, Fannie Mae and Freddie Mac (whose delinquency rates have more than doubled over the past year) announce the purchase of $200 billion in delinquent mortgages that they had previously guaranteed. The entire remaining principal balance will be paid to investors at face value. This action provides a glimpse into the future: Fannie and Freddie take bad mortgages onto their balance sheets, extinguish the MBS securities at face value, and rely on Treasury funding to fill the gap.

Step 5: In the next few years, the U.S. Treasury can be expected to issue up to $1.5 trillion in new Treasury debt to the public, taking in much of the $1.5 trillion in base money created by the Fed in Step 1.

Step 6: Proceeds (base money) received from new Treasury debt issuance are periodically transferred to Fannie Mae and Freddie Mac in order to cover cumulative balance sheet losses.

http://www.hussman.net/wmc/wmc100216.htm

Something like that anyway is my guess as to what is really going down.