Have nothing to do with the [evil] things that people do, things that belong to the darkness. Instead, bring them out to the light... [For] when all things are brought out into the light, then their true nature is clearly revealed...

-Ephesians 5:11-13

Tag Archives: Quantitative Easing

Trump’s Establishment Pick for Fed Chair, Jerome Powell, Won’t Rock the Boat

This article appeared online at TheNewAmerican.com on Friday, November 3, 2017: 

Nothing will change with Trump’s nomination of Powell to head the Fed. He has a strong establishment background and opposed former Congressman Ron Paul’s effort to “Audit the Fed.”

In announcing his pick to replace Federal Reserve Board chair Janet Yellen, President Trump was generous in his praise for Jerome Powell, a present Fed board member:

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Impact of Fed’s Plan to Do a “QE Unwind”

This article appeared online at TheNewAmerican.com on Tuesday, September 19, 2017: 

English: Official picture of Janet Yellen from...

Janet Yellen

What makes tomorrow’s [today’s – Wednesday, September 20] meeting at the Federal Reserve so interesting to market watchers and bond investors is the likelihood that Fed Chair Janet Yellen will provide more details on her plans to begin unwinding the Fed’s balance sheet: how much, how fast, how soon, and what does it all mean? In addition, she is hoping to placate conservatives in Congress who remain unhappy over the Fed’s intervention in the markets in the aftermath of the real estate collapse that triggered the Great Recession.

In June, Yellen outlined some possible scenarios, which included letting some of the bonds on the central bank’s enormous $4.2 trillion balance sheet simply mature without reinvesting the funds in new issues. She suggested the Fed would also start selling off some $10 billion a month of existing securities, and then raise that amount every quarter until it reaches $50 billion a month. This way, by expanding on her plans, and by slowly — very slowly — shrinking the Fed massive balance sheet, she hopes to avoid another “taper tantrum” that bond investors experienced back in 2013 when then-chairman Ben Bernanke first said the Fed should start reducing some of its holdings of U.S. Treasuries and mortgage-backed securities.

If she provides sufficient clarity, and sufficient caution, Yellen might not only start the process without disrupting the market, but also avoid further criticism from congressional critics who think the Fed stepped way out of bounds in starting the whole “quantitative easing” (QE) program in the first place. In that way — again, if she is successful — she will not only cement into place the Fed as a necessary element in the American economy, but show that further “QE” expansions to meet future recessions are a legitimate tool.

Whether she can pull it off is an open question. Keynesian economist Austan Goolsbee, who headed Obama’s Council of Economic Advisors in 2010 and 2011, said, “The final exam, with the grade yet to be determined, is: can the Fed actually get out of this stuff?”

The Fed has been essentially flying blind for years, moving outside not only its mandate (to maximize labor force participation while keeping inflation under control) but its past experience. Said David Blanchflower, a Dartmouth College economist (read: Keynesian) who was on the monetary policy committee of the Bank of England from 2006 to 2009, expressed it perfectly: “We had no idea what we should buy, how much, for how long … [and] there is no idea on the way going out.”

It was all a grand experiment: expand the money supply to keep interest rates so far below market rates that people seeking income would take higher risks — i.e., dividend-paying stocks, real estate ventures, etc. — and home owners would find it easier to buy houses. This was the Keynesian antidote to the economic collapse. Rather than let the economy right itself by itself (see America’s recession and recovery in 1920-1921), Keynesians suffer the hubris to think they know better than the market, and intervened, resulting in the longest, slowest recovery from a recession in American history.

Once the Fed began to embark on its plan to bail out banks and other financial institutions in the wake of the real estate collapse, there was no going back. When the federal government took over Fannie Mae and Freddie Mac — mortgage insurers that were approaching bankruptcy — it found that it needed to buy up billions of their failing mortgages. That explains why $1.7 billion of the Fed’s balance sheet consists of mortgages and mortgage-backed securities.

But when that didn’t work the Fed adopted the strategy of “quantitative easing” (QE) — creating money to spur spending across the economy — which some observers thought would never end.

But it did end, in 2014, and the Fed has been sitting on its massive pile of government and mortgage debt, waiting for the economy to revive enough so it could be offloaded without major economic disruptions.

The Fed won’t be unwinding its entire portfolio. Instead it expects to reduce it by between $800 billion and $1 trillion over the next few years, leaving in place a balance sheet of between $2.5 and $3.2 trillion. This means that the Fed will never again see days when its balance sheet shrinks all the way back to the $900 billion it had prior to the Great Recession.

Its plan should have little impact on short-term rates. Using the 10-year Treasury as the standard, when Yellen’s plan (assuming it begins in October) kicks in, it might boost its yield by perhaps a quarter of a percentage point. This would be the natural result of increasing supply in a market with a fixed demand. When more is supplied, prices will go down. In the bond market that translates into a mini-interest rate hike.

But demand from abroad for U.S. bonds continues to be strong. Yields on 10-year bonds issued by foreign governments such as Japan’s and Germany’s remain far below U.S. 10-year bonds and so any increase in rates here will only make them more attractive to foreign buyers.

In fact, once Yellen has filled in the details, as she is expected to do on Wednesday, investors and market watchers are likely to express a sigh of relief, and continue the Fed-fueled rally in stocks that began in 2009 and that shows little sign of stopping. Diane Swonk, chief economist at DS Economics, agrees: “The start to reducing the Fed’s balance sheet is an action the markets are ready for. The Fed has laid out a roadmap and there is really a sense of relief to finally get it started.”

Evidence Mounts for U.S. Recession in 2016

This article appeared online at TheNewAmerican.com on Monday, March 14, 2016:  

Nearly everyone with an opinion is warning about the increasing probability of the United States entering a recession — two quarters of negative growth — before the end of the year.

Cabinet - Class Photo, 1984: Front row: David ...

President Ronald Reagan’s former budget director David Stockman (middle, left) has been negative on the economy for months, noting in early February that

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Do Negative Interest Rates Portend a Negative Economy?

This article first appeared online at TheNewAmerican.com on Monday, May 4, 2015:

Last Thursday the London Daily Telegraph’s assistant editor, Jeremy Warner, reported an astonishing statistic: Almost a third of all government debt in the eurozone is paying negative interest rates. That’s more than $2 trillion in government bonds, and, it appears, investors are happy that they aren’t paying even more.

Fifty percent of French bonds now trade with a negative yield, while 70 percent of Germany’s bonds trade at a negative yield. More remarkably, in Spain, which was on the verge of insolvency just a few years ago, 17 percent of its government bonds now trade with a negative yield.

This is counterintuitive, which explains why Keynesians, those who believe that “demand” in an economy can be artificially increased by manipulating taxes and the money supply, have no explanation for it. In theory,

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Foreign Affairs: Give Away Free Money!

This article first appeared at the McAlvany Intelligence Advisor on Friday, August 29, 2014:

Foreign Affairs

Foreign Affairs

What happens when a college professor meets up with a graduate student from Oxford University, intending to solve the world’s economic problems? What happens when they consider that the previous attempts to revive the economy have failed and their recommendation is to do more of the same?

The title of their resultant article in Foreign Affairs – the premier publication of the Council on Foreign Relations – explains it all:

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Article in CFR Magazine: Give Away Money to Stimulate Economy

This article first appeared at TheNewAmerican.com on Thursday, August 28, 2014:

 

Los Angeles Police Department (LAPD) Bell 206 ...

Mark Blythe, a professor at Brown University, and Eric Lonergan, a hedge fund manager living in London, have conjured the ultimate solution to a stagnant economy: Central banks should give away free money.

These two authors of a lengthy and allegedly erudite article in the September/October 2014 issue of Foreign Affairs, published by the Council on Foreign Relations (CFR), appear to be living in an alternate universe, as their suggestion, if it were fully implemented, would push the world’s economy back to the Dark Ages.

The article, entitled “Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People,” rests on the false assumption that

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House Bill Offered to Study “Real World” Effects of Fed Policy

In anticipation of the upcoming 100th anniversary of the Federal Reserve on December 23rd, House member Kevin Brady (R-Texas) and Chairman of the House’s Joint Economic Committee, decided back in March to offer a bill to create a commission to

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More brain damage from Maxine

This girl’s in serious trouble. Maxine Waters (D-Calif.)  just attended a meeting with Fed chairman Ben Bernanke who gave her the inside scoop on the impact of the sequester and she was only too happy to tell us all about it:

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Latest Move by the Federal Reserve Raises Important Questions

With Federal Reserve Chairman Ben Bernanke’s latest announcement of a new bond-buying program linked to unemployment data instead of the calendar, commentators called it an “historic move,” “another innovation,” and a “surprise” that amounts to a “complete reversal” from the Fed’s days of using Fedspeak to disguise and obfuscate its moves.

After reviewing how the economy looks from the Fed’s point of view, Bernanke announced that his Federal Open Market Committee (FOMC) will

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“Tax the Rich” and Other Meaningless Catchwords

Government spending

Government spending (Photo credit: 401(K) 2012)

Thomas Sowell has done it again: he has punctured the helium-filled balloons filled with politician’s promises, using words without meaning. Who controls the meaning of words controls the conversation.

First are the words “fiscal cliff.” Peter Schiff had the best explanation: the fiscal cliff is a combination of spending cuts and tax increases which, taken in the aggregate, would cut the annual deficit by $500 billion. Period.

The “tax holiday” is the temporary reduction in payroll taxes funding primarily Social Security. And the debt ceiling is the imaginary limit to government spending that gives politicians the opportunity to promote themselves on TV before voting to raise it.

Sowell first wants to talk about the phrase “tax the rich.” The problem is that it’s all for show:

 Despite all the melodrama about raising taxes on “the rich,” even if that is done it will scarcely make a dent in the government’s financial problems.  Raising the tax rates on everybody in the top two percent will not get enough additional tax revenue to run the government for ten days. (my emphasis)

It’s not about raising revenue at all. It’s about

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The Trouble with Outright Monetary Transactions

Mario Draghi presents his credentials as candi...

Mario Draghi presents his credentials as candidate ECB president (Photo credit: European Parliament)

Mario Draghi, President of the European Central Bank (ECB), spoke before Germany’s Parliament on Wednesday, defending his decision to purchase government bonds from member states needing financial assistance but without unleashing inflation. Similar to the Federal Reserve’s continuing attempts to stimulate the economy through the purchase of government securities, called Quantitative Easing, or QE, Draghi’s Outright Monetary Transactions, or OMT, “will not lead to inflation,” he claimed in the closed-door session. He said:

In our assessment, the greater risk to price stability is currently falling prices in some euro-area countries. In this sense, OMTs are not in contradiction to our mandate; in fact, they are essential for ensuring we can continue to achieve it.

This is utter nonsense, wrote Mish Shedlock, in his blog Global Economic Analysis. Since Draghi’s “mandate” is similar to that of the Federal Reserve — that is, to maintain price stability along with low unemployment — it’s impossible to increase the supply of money by buying government bonds with credits created out of thin air without eventually unleashing price inflation at the consumer level in the economy. Shedlock wrote:

The problem with such nonsense is you cannot break the law while screaming you are upholding it. Draghi now sounds and acts like hypocr[itical] US presidents of both political parties.

Both President Bush and President Obama (as well as the treasury departments under each administration) have shown little concern for the law. Increasingly presidents are of the mind [that] “we have to destroy capitalism [in order] to save it” or as President Bush stated and Obama practices: “ I’ve abandoned free-market principles to save the free-market system.”

What the members of the German Parliament wanted to hear was that Draghi would not be

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Is QE3 a Myth?

English: President Barack Obama confers with F...

President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)

Graham Summers, writing for ZeroHedge, has pointed out that Fed head Ben Bernanke hasn’t done any new buying of securities despite his promise to do so back in September. The Fed publishes its balance sheet. You can see it here, in graphical form. As Summers said, if Bernanke was buying, how come the measure of money – the adjusted monetary base – is declining?

Would Bernanke lie? Oh, no!

The stock market jumped up nicely at the news, but has retraced most of those paper gains. Maybe the market has figured it out: it was

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Bernanke Defends the Indefensible

Federal Reserve Board Chairman Ben Bernanke attempted Monday to answer some of the fierce criticism and public unease facing the Fed’s third round of bond purchases, known as quantitative easing or QE3.

Ben Bernanke

Ben Bernanke (Photo credit: osipovva)

This article from MarketWatch is one of the more incredible expositories on the Fed’s negligence and back-pedaling that I’ve seen. Bernanke is, to put it simply, in panic mode. The crowd is seeing that the king is naked and he has to cover his nakedness with words and reassurances. Which makes the crowd more nervous and more skeptical and noisy. It’s an amazing show.

What is his strategy? To do more of the same – do more of what hasn’t worked! That’s the ticket! If he can just get interest rates lower, people will start to

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Ron Paul, QE3, and Unintended Consequences

Ron Paul

Ron Paul (Photo credit: Gage Skidmore)

On Friday, Congressman Ron Paul, chairman of the House Subcommittee on Domestic Monetary Policy, invited James Grant and Lewis Lehrman to explore the unintended consequences of the Federal Reserve’s latest plan to install Quantitative Easing Number Three (QE3). The Fed’s announcement on September 13 that it would embark on an “open-ended” program to purchase mortgage-backed securities raised concerns about the long-term impact such a program would have on consumers, savers, and investors.

Grant, editor of Grant’s Interest Rate Observer, noted that “prices are the mechanism by which the economy operates” and when the Fed manipulates interest rates, it interferes with prices. In other words, the Fed, by its actions, is engaging in “financial price control” with predictable outcomes, distortions, and consequences:

  1. First, such activity subsidizes speculative activities, as investors seeking higher returns on their capital are forced into making higher risk investments, increasing the chances that they will lose some or all of their capital.
  2. Second, the Fed’s program raises the prices of commodities, as speculators and investors seek a “safe haven” in investments that can’t be inflated or expanded at the wish of a governing board.
  3. Third, this action by the Fed punishes savers and wage earners. Savers receive lower and lower rates of interest on their savings, disrupting plans for home buying and retirement. Wage earners have less incentive to save as the value of their savings becomes more questionable as the dollar loses value.
  4. Fourth, Grant pointed out that the Fed’s plan interferes with international trade, which depends on price predictability over time.

But most importantly, according to Grant, the Fed’s willingness to continue to purchase government securities allows Congress to put off the “day of reckoning” — dealing with the inevitable consequences of

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When the Fed Expands, Businesses Die

Mises Daily – Why QE3 Will Fail

What happens when banks print new money…and lend it to business? The new money pours forth on the loan market and lowers the loan rate of interest.

It looks as if the supply of saved funds for investment has increased, for the effect is the same: the supply of funds for investment apparently increases, and the interest rate is lowered.

Businessmen…are misled by the bank inflation into believing that the supply of saved funds is greater than it really is…

Soon the new money percolates downward from the business borrowers to the factors of production: in wages, rents, interest…

Capital goods industries will find that their investments have been in error: that what they thought profitable really fails for lack of demand by their entrepreneurial customers…the malinvestment must be liquidated.

English: Murray Rothbard in the 90's

English: Murray Rothbard in the 90’s (Photo credit: Wikipedia)

Murray Rothbard wrote these words back in 1963 in his landmark study, America’s Great Depression. And he’s just as accurate and perceptive and incisive today as he was back then: when the Fed expands the money supply, it winds up destroying capital, which slows the economy and increases unemployment! These are counter-intuitive and against all that the Fed has been feeding us: “We must stimulate the economy by lowering interest rates!”

Actually, no. Gary North points out that the Fed’s attempts to lower interest rates have little effect on short term rates, at least at the moment. Interest rates are low because no one is borrowing and the banks aren’t lending. Everyone is in the “wait and see” mode.

But in the long run, Rothbard nails it: The Fed destroys capital and consequently increases unemployment. Here he is:

Unemployment will be aggravated by the numerous bankruptcies, and the large errors revealed…

Unemployment will…become really severe and lasting only if wage rates are kept artificially high and are prevented from falling. If wage rates are kept above the free-market level that clears the demand for and supply of labor, laborers will remain permanently unemployed.

Thanks, Obi-Wan Bernanke!

Impact of QE3 is Doubtful

Robert J. Samuelson – Bernanke on the Brink

Even before [last week’s announcement by the Fed that it would initiate Quantitative Easing Strategy Number Three, or QE3], there was skepticism that it would do much to lower the unemployment rate, which has exceeded 8 percent for 43 months. The average response of 47 economists surveyed by The Wall Street Journal was that a similar program might cut the jobless rate 0.1 percentage point over a year.

Paper Tiger

Paper Tiger (Photo credit: cucchiaio)

Oh, boy! One tenth of one percent! Over an entire year! That’s worth debauching the currency over, isn’t it?

Samuelson has captured the entire fraudulent Keynesian insanity in one pithy paragraph:

At a news conference, Fed Chairman Ben Bernanke explained what the Fed hopes will happen:

By buying mortgages, the Fed would push interest rates down. They’re already low (3.6 percent in August for a 30-year fixed-rate mortgage) and would fall further. Lower rates would stimulate more home buying and construction. Greater housing demand would raise home prices. Fewer homeowners would be “underwater” (homes worth less than mortgages). Banks would refinance more existing mortgages at lower rates because the collateral — the homes — would be worth more.

Feeling wealthier, homeowners would spend more and cause businesses to hire more.

This is the mantra of Keynesianism. It’s also provably false. But that doesn’t matter. Part of the mantra is: If something doesn’t work, do more of it. That proves that it’s insane.

Samuelson is a Keynesian, Harvard-trained, with years of writing for establishment outlets like Newsweek and the Washington Post. So he isn’t allowed, by training, education or experience, to stray too far off the reservation. But he comes close to heresy here:

Explanations [as to why these Keynesian strategies aren’t working] abound. One is that the stimulus programs were still too timid…

Another…is that the trauma of the financial crisis and recession made households and businesses deeply cautious…

To these might be added a perverse possibility: the stimulus programs themselves. Intended to inspire optimism by demonstrating government’s commitment to recovery, they could do the opposite. If consumers and companies interpret them as signaling that the economy is in worse shape than they thought, they might retrench even more…

Close, Mr. Samuelson, but no cigar! I think people have figured out that the Fed is a toothless, paper tiger, all bluster and no power. Or my favorite: All hat and no cattle.

As Samuelson said, “There is a desperate air to Bernanke’s latest move…the Fed is on the brink of moving beyond what it understands and can control.”

Bernanke Befuddled

Ben Bernanke

In a moment of unexpected and unsettling candor, Federal Reserve chairman Ben Bernanke, in his testimony on Tuesday before the House Financial Services Committee, said that he really doesn’t know what’s happening to the economy. In his best professorial manner and without blinking an eye, the chairman said, “In light of somewhat different signals received recently from the labor market than from indicators of final demand and production…it will be especially important to evaluate incoming information to assess the underlying pace of the economic recovery.”

Admitting that the labor market is “far from normal” made it clear that he was uncertain about what “normal” actually means. With the same number of people working (about 130 million) today as were working 10 years ago (with a much smaller population) the new normal may be different from whatever the chairman might perceive it to be. Part of the problem is in the counting and part is in the vast technological improvements that have permanently replaced low-level workers.

When it comes to counting, the Bureau of Labor Statistics has difficulty in keeping score, noting two primary indicators of unemployment: U3 and U6. U3 is more politically palatable as it is lower than U6. U6 may be more realistic, however, as it counts not only people out of work but also those working part-time who would rather be working fulltime, along with those discouraged and not looking at all.

Despite being unsure of what all the “somewhat different signals” really mean, Bernanke was ready to predict the future: “With output growth in 2012 projected to remain close to its longer-run trend [a weak 2.3- to 2.6-percent annual growth in the economy], FOMC (Federal Open Market Committee which Bernanke chairs and rules] does not anticipate further substantial declines in the unemployment rate over the course of the year.”

He also predicted that despite the enormous bout of monetary stimulus employed allegedly to reinvigorate the moribund economy, inflation would

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Printing Money Doesn’t Work in Britain Either

United Kingdom's Flag Looking Like Canvas

The long-awaited announcement of another bout of money printing in England on this Thursday will prove once again that experience doesn’t modify behavior on the other side of the pond either. The initial round of money expansion, called Quantitative Easing (QE) in the States, of some $320 billion last year in the United Kingdom had little measurable effect.

And so another boost of $80 billion is expected in Thursday’s announcement. This round, according to George Buckley, a UK economist at Deutsche Bank, might not be the last: “If sentiment and activity hold up this could…be the last round of QU, although the fragile nature of the recovery and the situation in Europe could mean [that] the programme continues after May.”

The trouble is that “sentiment and activity” is slowing, pushing England’s GDP into negative territory with downward revisions for the balance of the year expected. The British Office for National Statistics reported “negative growth” (American translation: decline) of 0.2% in the last three months of 2011, and there is little hope for any change in direction for at least the next two years.

Roger Bootle, writing for the British paper The Telegraph, wondered out loud what good additional printing would do. He asked rhetorically three weeks ago, “Once it has completed the current authorized dollop, the Bank of England (BoE) may soon conduct yet more QE. But

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Yglesias, Brown: Free Money Will Solve Everything!

Day 3 Occupy Wall Street 2011 Shankbone 8

Image by david_shankbone via Flickr

Writing for the left-wing blog ThinkProgressMatthew Yglesias noted his difficulty in coming up with a suitable slogan representing what the “Occupy Wall Street” demonstrators really wanted. He explained:

My view is that the best demand of all…is “free money for the rest of us.” There are a lot of different specific ways this can be implemented, but the…Powers That Be…have been willing to provide all manner of free money to players in the banking system. Debt cancellation is a form of free money for the indebted. But why give free money only to banks? And why give free money only to the indebted? Why not free money for everyone? “Everyone,” of course, includes the indebted. But it also includes ordinary people who didn’t happen to avail themselves of the credit binge. It’s an idea so good that it sounds almost silly.

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Bernanke’s Invisible QE3 and the Austrian School

Wall Street

Image via Wikipedia

Wall Street professionals’ expectations are modest over Federal Reserve Chairman Ben Bernanke’s highly anticipated remarks at the Jackson Hole symposium this Friday. Unlike last year when the chairman announced the start of his program to purchase government securities in order to keep the economy from slipping into a recession and possibly deflation, known as Quantitative Easing II (QE2), his options now are much more limited. The anticipated bounce in the economy has fizzled, inflation is increasing, the banks are stuffed full of reserves but few are borrowing, and interest rates

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Many of the articles on Light from the Right first appeared on either The New American or the McAlvany Intelligence Advisor.
Copyright © 2018 Bob Adelmann