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The Automatic Earth
Let’s start off by repeating once again what I still don’t think everyone acknowledges: in essence, quantitative easing is a measure that is entirely experimental at best.
If there is any proof regarding its effectiveness, that proof is negative.
Japan’s early millennium QE didn’t revive its economy. Far from it.
The Fed’s QE1, initiated in early 2009 and subsequently vastly expanded, never solved the problems it was alleged to be able to solve.
One may argue that it kept the economy from sliding downward even further, but one can claim that, and many of those with skin in the various games do, for a litany of stimulus measures such as TARP and the “Obama stimulus” as well.
The success of all these measures added together surely can’t be seen as anything but ephemeral (re: unemployment and foreclosures), and the claim, if one were indeed made, that QE1 all by itself even just managed to keep the US economy in its present prolonged and drawn-out Wile E. Coyote moment, has no substance at all that is based on actual fact. Or, to put it another way, if QE1 achieved such a thing, which we don’t and can’t know, the TARP and other stimulus measures were even grosser failures than we already recognize them to be.
Still, this week brought another round of QE in the US.
Why is that? Are we to believe that Bernanke et al perhaps can’t read or do simple calculus? Are they desperate enough to throw the nation’s financial future to the sharks, come what may? Has their faith in their particular sect of economics blinded them to such a degree that they can shake off all the evidence to the contrary and goose march ahead believing that even though all they did before has failed, “this will be the one”?
Of course not.
You may think by now that Geithner and Bernanke and Larry Summers and Bob Rubin and all the rest of the pack are miserable failures and two sheets to the wind and all that, but you’d do better to give them a lot more credit than that.
QE2 is here, despite the gigantic failures and behemoth losses of its predecessors, because QE works like a Mother Mary statue in tears’ bleeding charm. Of course these guys all know that no proof of a QE ever reviving an economy exists. But they can pretend it does, and so they do: $900 billion, even for them, is real money.
Thing is, they never meant QE2 to do what they publicly claim they intended it for. This is nothing but another move to bail out lethally wounded banks.
A full additional $900 billion and counting was announced this week. Basically nothing but a swap of long term for short term paper, and therefore necessarily a -very- short term measure. What does it achieve, apart from a knee-jerk market reaction?
Wall Street banks get another injection of short term breathing space. That’s all. And what was that last number on insider selling vs buying again? 3000 to 1?! Look, these people can’t sell all their hygienic paper all at once, there’s silly market regulations that prevent it, they need a time window to do it.
Hey, Bank of America rose 2% today, and Citi was up 3.7%. Now, if all is that rosy, why are William K. Black and L. Randall Wray calling for BofA’s books to be opened and the entire firm to be nationalized? Well, BofA shares are at $12, an 80% loss from 3 years ago, and Citi’s at $4, a well over 90% loss over the same time period.
These are America’s largest financial institutions, and finance over the past 10-20 years has become a disproportionally huge chunk of the US economy. And its politics. And that’s where the crux is.
I don’t know about you, but I have completely lost interest in trying to figure out which candidate in the midterm elections got how much from Wall Street. They all need their campaign contributions from bankrupt institutions such as BofA and Citi if they want to have a shot at being elected. It’s a closed system, it really is. Putting a few guys behind bars wouldn’t change that. And besides, none of them paid that kind of money just to be put behind bars to begin with.
But let’s not try and solve it all in one go. For now, please understand that QE2 was never intended to jump-start the American economy. It was meant to prolong Wile E.’s 15 minutes of fame, to keep banks like BofA and Citi above water long enough to allow anyone who has some skin in it to get the hell out without triggering any alarm bells.
I mean, I see people triumphantly proclaim that stock prices are almost back to where they were. But look at those two banks! They’re barely alive anymore, even in the markets. Citi’s $4 a share is gutter territory, if not penny. Yes, sure, Goldman Sachs and JPMorgan have lost much less, percentage wise. And you know why? Because their links to Main Street are much less pronounced than those of consumer banks like BofA and Citi. That’s the difference. And Main Street is vanishing altogether.
There is money being handed out in QE2, which in the end is awfully simply yours, and which is thrown overboard in a way that makes you believe it’s in your best interest. Some people see it as a hidden tax, but that’s a far too gentle view. Daylight stand-and-deliver robbery or Grand Theft Auto are much more accurate denominations. After all, if this were a tax, it’s clear to anyone and their pet parrot that it will never ever be paid off.
QE1, by the way, was to a large extent about the Fed buying up mortgage backed securities. Which, so it turns out, are based on, to put it mildly, highly disputable underlying “assets”. What was it, $1.7 trillion?! And what would you think that’s worth today? Or rather, what will it be worth once mark-to-miracle accounting can no longer “do the Wile E.”?
Between the Fed and Fannie Mae and Freddie Mac, the American people own very very many trillions of dollars in silly paper. It’s hard to say what its true value is, but once them whips and chips come down, it’ll be safely below double digits. Which will add up to much more than any hidden tax could ever hope to pay back.
Fannie just asked for another $2.5 billion of your cash, and they will get it too, and there’s nothing you can do about it.
And you’re right, what’s $2.5 billion in the grand scheme of things? Then again, what’s 1 in 7 Americans relying on food stamps? What does any of it mean anymore? 17% U6 unemployment? 4 million 2010 foreclosures, many of which are based on at least shaky, and pretty likely illegal, papers?
If that doesn’t have enough meaning to move media attention away from rallies to restore whatever it is that apparently needs restoration, what will? 1 in 3 on food stamps? 40% jobless? Tent cities around every major city? $25 trillion in quantitative easing?
Yeah, the markets had a knee-jerk upward reaction. And that, or so it seems, is all anybody needs. Hyperinflation is sure to follow, or so they say. Then again, they said the same when QE1 occurred. Didn’t happen, though. Will it this time? Will gold rise to the stratosphere? If so, who will buy? Bank of America? With your QE2 billions? Not very likely, they need that free cash to cover up increasing losses.
Is it that hard to understand, simple calculus? That every dollar spent ostensibly “on your behalf” will have to be paid back by you, even if not a penny of this, your own, money, went towards making your life better?
If that is really so, then QE2 works exactly the way it was meant to work. They’re not all that dumb, and they’re not making the grand mistakes some folks claim they do. They’re robbing you blind in plain daylight, and, as they go along, make you believe that’s in your best interest. It’s all nothing but a high-stakes game of pick-pocketing.
Just never even try to tell me again that it’s not successful. And i don’t mean delivering economic growth; the US economy won’t see real growth for more years than you care to know. No, QE2 is very simply successful in fooling you.
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This week, desperation became palpable at the Fed. In both the formulaic statement that accompanied its FOMC policy decision and Chairman Ben Bernanke’s unusual (and clumsy) Washington Post op-ed follow up, the guardians of our currency expressed grave disappointment at the slow pace of US economic recovery and emphasized the continued threat of deflation. The Fed is now pledging to defeat this recession using any monetary means necessary. Unfortunately, their embrace threatens to smother our economy.
Despite its paternalistic rhetoric, the Fed really has just a few simple goals: allow for the perpetual expansion of the federal deficit, push up stock prices to create the illusion of wealth, and stimulate consumer spending. To do this, the Fed will hold interest rates near zero for the foreseeable future, and will buy some $600 billion of US Treasury debt by April of next year. Per capita, the commitment to quantitative easing comes to almost $2,000 per American. What’s more, if this program fails to pull the economy out of recession, the Fed stands ready to up the ante. This amounts to little more than gambling; but instead of using their own accounts, the central bankers are wagering the nation’s savings.
Having already committed $1.7 trillion in the first round of quantitative easing, the Fed is rolling the dice once again – despite ample evidence that their costly remedy won’t work.
According to the Fed’s own analysis, the US economy continues to disappoint, despite the massive QE-1 cash injection. Given the poor fundamentals: rising unemployment, plummeting house prices, and falling stock prices, it should come as no surprise that consumer confidence is low and spending continues to lag.
Now, by monetizing almost the entire federal deficit through QE-2, the Fed hopes to give Congress the breathing room to enact reforms before skyrocketing interest rates bankrupt the Treasury. Meanwhile, the central bank hopes that the expected inflationary consequences will be nullified by a resulting broad-based recovery. But an economist as knowledgeable and experienced as Chairman Bernanke should know by now that any real economic revival will come from private industry, not government. The money printed by the Fed will indeed flow into the economy, where it will push up asset prices in many sectors. Already commodity prices are soaring. But inflation cannot create real growth.
What the Fed is doing, essentially, is forcing consumers to spend their cash hoardings. Until the economic and financial policies of the government change dramatically, those who are tempted to invest their savings within the United States risk increasing regime uncertainty. So, much of our domestic capital is flowing into hard assets and overseas markets.
This will do nothing to help the festering wounds underlying the US economy.
For example, the problems within the real estate market remain toxic. Combined with falling margins, they threaten the banks with a second crisis. The probability of a mortgage-related crisis in the housing market has further increased by the unresolved “robo-signing” scandal, in which legitimate foreclosures have been blocked by sloppy paperwork. Given the truly abysmal state of documentation for foreclosed properties that had been bought with securitized loans, it is hard to imagine that this problem will be resolved anytime soon.
Surveying the landscape in the mortgage market and elsewhere, it becomes apparent that the only bankable asset America has left is a reservoir of confidence in our country’s role as the global economic leader. But confidence can be ephemeral. Usually, even gradual erosion of credibility reaches a latent tipping point. When change comes, it does so with alarming speed.
When international confidence in the US evaporates, those holding dollars will be holding worthless paper. Furthermore, if the US dollar retains its privileged position as the international reserve currency while it spirals downward, the entire structure of international fiat money will be threatened.
In the turmoil that lies ahead, America’s saving grace could have been a reliable currency to brace us up. Yes, our legs are weak, but at least we could have had firm ground on which to walk. The present Governors of Federal Reserve, however, would prefer to prop up the bloated and hobbled bubble-era structures in the hopes that a deus ex machina will save the day. Unfortunately, while they’re waiting for a miracle, we’ll all be left swimming against a tide of new dollars.
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James Howard Kunstler
The poetry of dynamic forces does not lend itself to easy explication. Thought exercise: Imagine the vector of a Chevy Trailblazer and a CSX coal train of four 3000-horsepower diesel engines hauling 88 loaded hopper cars four miles north of Chugwater, Wyoming. The Chevy driver left his meth lab, say, fourteen minutes earlier after piping up and doing three tequila shots. The lead engineer on the coal train, a sturdy fellow, five-feet-ten-inches and 270 pounds, having finished his supper of double deluxe nachos (with two meats and extra cheese) is entering a less than blissful realm of myocardial infarction. Meanwhile, a meteor the size of a basketball has passed into the troposphere on a trajectory to strike the planet Earth at precisely the point where the CSX line crosses state road no. 44. That there would be a snapshot of your US political economy.
Of course, lying and doubletalk don’t help none, either. Such as the widespread falsehood that a “recovery” to the consumer credit nirvana and rising house prices of yesteryear is underway (Krugman, Friedman, et al). Or that a program called quantitative easing represents anything more than a national check-kiting scheme ramping up so many zeros that the goddess of infinity herself would run shrieking from the scene in embarrassment.
I saw a black swan in the botanical garden at Melbourne a week or so ago and it reminded me most poetically of Mr. Taleb’s proposition that nobody really knows what is going on in this republic. And so, appropriately, we held an election in which many candidates who know nothing found themselves elevated to political office well-prepared for careers in lying and doubletalk in the service of knowing nothing. Join me please in cringing for our country’s future.
The unvarnished truth of our predicament is that all pathways now lead to the same destination: a falling US standard of living as measured conventionally. What’s unknown is how swift and severe this decline might be, exactly what all its implications are for the social order and geopolitics, and whether it might present itself in a form that could be called collapse. For the moment, one question is: do we go broke the standard way by having less money, or the trick way by destroying the value of our money so that folks (as President Obama might say) have lots of it, only it isn’t worth anything. There is even at this late date much debate between the inflationistas and the deflationistas – that is, those who think the economy ends in a bang or a whimper.
I am stumped out loud, frankly, though an exogenous ill wind has me leaning just a bit in the “de” direction. The untold tonnage of bad financial paper out there, rotting away like so much herring stuffed in the bilges of a cosmic Flying Dutchman, would tend toward an outcome of wealth vanishing from our system – and money, which represents wealth, with it. Yet, there’s no denying that the prices of everyday things such as food, gasoline, cotton, and steel are shooting up just now. Surely some of this is due to the sheer operations of finance, in which herds of believers in this-or-that stampede one way or another, in this case from bonds to commodities. But herds might get spooked by something (anything!) and suddenly reverse direction, seeking safety in cash and its equivalents. Really anything might happen in the stock markets, too, at this point, they are so detached from their former reality as a price discovery mechanism.
I like the formulation of John Michael Greer that we’re about to see something called hyperstagflation, which would amount to sharply rising prices in an economy going nowhere fast. But if it’s based on anything like the stagflation of the 1970s, that journey also ends in an inflationary fiasco, and logically some hyper version of it, which would kill the US government as we know it. Much as I loiter in the precincts of thought experiment, I don’t really relish that outcome. But, sadly, we seem to be in one of those times when events outrun personalities and their meager abilities to react. It’s been my contention for weeks now that criminal mischief on the mortgage scene – all those lost, doctored, forged, robo-signed documents – will slow foreclosures (and even plain vanilla transactions) to the extent that the real estate market will choke on un-sellable property, leading to suffocation of the big banks and ultimately generalized thrombosis of the system. Hence: Dr. Bernanke appears on the scene with the defibrillation paddles of quantitative easing, hoping to goose the circulation of money through the quivering bodies of BAC, Citi, and their croaking cohorts. They may stagger back into their beds in the intensive care unit, but their fate has only been postponed.
Back in the real world, outside the hospital for ailing banks, it’s harder and harder to get paid by anybody for anything, so the circulation of money slows in the everyday economy. Accounts receivable go unreceived. Payrolls can’t be met. Pink slips are issued. Mortgages won’t get paid. Credit card bills lie unopened on the kitchen table while the late fees, penalties, and other cockamamie charges rack up, and one day some suspicious looking fat men in mullet hair-doos and wife-beater shirts, with flames tattooed on their necks, show up with a tow truck and start hitching your car to it and you wonder for a moment how you managed to park illegally in your own driveway – wait a minute…!
Don’t worry folks, that sound of heavy breathing you hear is the exhalations of the big banks reviving on their IV drip lines of financial liquidity. Pretty soon, the nurses will bring them Kansas City strip steak dinners, with truffled mashed potatoes, asparagus flown in from Chile, and even a nice year-2000 Clos Du Val reserve cabernet. You – you can go down to the food pantry and get yourself some government cheese. Melt it over some ranch-style Doritos and hunker down with Fox News where a dry drunk will explain to you the morbid workings of the Trilateral Commission and how the Rockefellers are scheming to take over the National Football League for the greater glory of Karl Marx while selling your daughter to Albanian white slavers. You’ll think you understand the world. You’ll feel fulfilled and easy in your mind.
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Even as Barack Obama and Ben Bernanke publicly defend the Federal Reserve’s new $600 billion quantitative easing program, top finance officials around the globe are expressing alarm and outrage. But what did Obama and Bernanke expect? “Quantitative easing” is little more than legalized cheating. For a moment, imagine that the global economy is a giant game of Monopoly. Essentially what Bernanke has done is that he has just reached under the table and has slipped another $600 billion on to his pile of money, hoping that the rest of the players will not call him out on it. The rest of the world has heavily invested in the U.S. dollar and in U.S. Treasuries, and this new quantitative easing program is going to devalue all of those holdings. If the Federal Reserve continues to go down the road of monetizing U.S. government debt, other nations are rapidly going to get spooked and will soon refuse to invest in U.S. dollars and U.S. Treasuries. When that day arrives, it is going to cause mass panic in the world financial system.
Already, investors across the globe are flocking out of the U.S. dollar and into safe investments such as gold and silver. On Monday, gold closed at an all-time record high of $1,403.20 an ounce on the New York Mercantile Exchange, and silver closed at a 30-year high of $27.43 an ounce.
Unfortunately, our leaders seem absolutely clueless about what is really going on. In fact, Barack Obama is very much in Bernanke’s corner. During his trip to India, Barack Obama made it clear that he very much supports this new round of quantitative easing by the Federal Reserve….
“I will say that the Fed’s mandate, my mandate, is to grow our economy. And that’s not just good for the United States, that’s good for the world as a whole.”
This is the exact opposite of what Barack Obama should be doing. He should be demanding accountability from Ben Bernanke and the Federal Reserve. He should be trying to get the U.S. financial system back on some kind of solid footing.
But we all know that is not going to happen. Obama had no problem renominating Bernanke to another term, and Obama has publicly supported him at every opportunity.
Well, if Obama isn’t going to do it, shouldn’t some of our other representatives in Washington D.C. be calling for the resignation of Bernanke? After all, how many chances does one guy get? Bernanke’s record is littered with so much gross incompetence that it makes Wade Phillips of the Dallas Cowboys look like Coach of the Year. The video posted below shows Bernanke reassuring the public over and over and over between 2005 and 2007 that the U.S. economy was in great shape and that we would continue to experience solid growth….
How long is it going to be until everyone wakes up and starts acknowledging that “the emperor has no clothes” and Bernanke is running the U.S. economy into the ground?
At this point, Bernanke has lost virtually all credibility. In 2009, he promised the U.S. Congress that the Federal Reserve would not monetize U.S. government debt, but now that is exactly what is happening.
Most of the top finance officials in other countries realize what is going on, and they are really starting to make their displeasure known. The following are just a few examples of the global outrage that has been expressed about the Fed’s new quantitative easing program over the past few days….
*Xia Bin, an important member of the monetary policy committee of China’s central bank has called the Fed’s new quantitative easing plan “abusive” and is warning that it could set off a global economic meltdown.
*On Monday, Chinese Finance Vice Minister Zhu Guangyao expressed his extreme dismay regarding the Fed’s new quantitative easing scheme….
“As a major reserve currency issuer, for the United States to launch a second round of quantitative easing at this time, we feel that it did not recognize its responsibility to stabilize global markets and did not think about the impact of excessive liquidity on emerging markets.”
“They have already pumped an endless amount of money into the economy via taking on extremely high public debt and through a Fed policy that has already pumped a lot of money into the economy. The results are horrendous.”
*Luiz Inácio Lula da Silva, the President of Brazil, says that he is incredibly upset about QE2 and that he is going to arrive for the G20 meetings in Seoul ready “to fight”.
*Bloomberg is reporting that at the upcoming G20 meetings, Russian President Dmitry Medvedev is going to “insist” that any future quantitative easing measures be globally coordinated.
*Even some top Fed officials are speaking out publicly against this new round of quantitative easing. For example, Kansas City Fed President Thomas Hoenig recently made the following statement about the new direction the Fed is taking….
“I worry that by pumping in significant amounts of dollars we then build the inflationary pressures for the future, and we do encourage then an easier credit environment that helped create this problem in the first place.”
The Federal Reserve had better hope that the rest of the world does not get scared off from buying U.S. government debt. According to the Wall Street Journal, in order to repay maturing bonds and finance the budget deficit, the U.S. government will have to come up with 4.2 trillion dollars over the next year.
If the rest of the world cuts back on buying U.S. Treasuries, the Federal Reserve is going to find itself with a gigantic mountain of debt that it will be forced to monetize.
So what happens someday when China, Japan, Russia and the major oil producers in the Middle East decide that enough is enough and they are not going to buy any more U.S. debt?
Don’t think it can’t happen – these nations are not stupid and if they realize that the U.S. dollar is going to continually keep falling in value there could be a dramatic move away from U.S. debt.
If the rest of the world quits lending massive amounts of money to the U.S. government, our leaders will be faced with three options. The U.S. government could start trying to operate within a balanced budget (which would crash the economy), interest rates on U.S. government debt could be raised until people would be willing to invest in Treasuries again (which would probably crash U.S. government finances and the economy), or the Federal Reserve could just start monetizing most of the debt on a regular basis (which would likely eventually crash the entire world financial system).
In order for the current world financial system to maintain stability, it is essential for there to be faith in the U.S. dollar and for there to be faith in U.S. Treasuries. Once faith in them is lost, it will only be a matter of time until the world financial system totally crumbles.
This new round of quantitative easing could be the “tipping point” that opens the door to the eventual complete and total collapse of the U.S. dollar. Let us hope that the dollar does not completely fail any time soon, but with jokers like Bernanke and Obama running the show, there is not much reason for optimism.
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