QE2 big topic for upcoming G20

[hoyawatcher]

I am curious what the Hoya financial wizards think of the major easing policy announced by the Fed. IMHO unless there was a significantly higher risk of deflation than has been disclosed by the Fed so far in their pronouncements, I don't understand this from a Fed perspective as they continue to say their primary focus is moderate growth without significant inflation (or WTTE) and this has the real potential of igniting very significant inflation if we are not staring at deflation. I do from a political perspective but thought they were supposed to be different.

Politically, it does hit the issues that Obama wants to push right now (and some do overlap with Fed thoughts):

It is devaluing the US currency as an attack on the perceived undervaluing of the Chinese Yuan

Will hopefully drive exports and retain/create US jobs

Will increase the price of oil and act as a backdoor tax to reduce consumption

But whatever you think of it, the Fed's execution of it has managed to unite China, Russia and the central bank of the EU in their condemnation of it. That is a pretty impressive feat in and of itself And my one snarky comment is that it isn't what I expected from the great unifyer who was going to bring the world together. At minimum this was not announced/coordinated with the ROW and at most done in an FU manner.

www.reuters.com/article/idUSTOE6A706720101108

It looks like the G20 meeting coming up could be a lot more interesting than they normally are.

While I obviously have a view here, I am curious if my economic view that the risk of deflation doesn't justify this move from the Fed's perspective is shared by others or not.

[HoyaLawya]

Forget the window dressing for the "why" of QE2 (rationales like "stimulate the economy" and "spur exports" and "fight the rigged yuan which is hurting us").

Real reason is that spending is out of control, debt needs to be issued to cover the spending, and purchasers of the debt are starting to say "no thanks, we'll pass" about buying it especially at the interest rates that make it unattractive. China has been diversifying into other reserve currencies for awhile and cutting back on purchases of Treasury offerings. Honcho of World Bank even came out today with a statement that maybe some kind of international reserve currency tied to a gold standard of some kind might be a good idea. (Pigs are truly flying when that suggestion comes from that source.)

Fed is the buyer of last resort on this stuff and increasingly, it seems, the buyer of first resort. $600B - what a problem that's going to set off. There was something like $9 trillion in hot money around the globe during the timeframe of the meltdown and now there's $10 trillion in hot money. Chinese official who spoke out to lambaste Fed and Obama says he is afraid it's going to swamp emerging economies and set off asset bubbles in those.

[hoyawatcher]

Interesting article (at least to me ) from the NYT in the lead up to the G20. Goes through the rational and reactions to QE2. Makes HL's point that at its core this is driven by the current US policy that we are going to spend our way out of the financial mess. What I find interesting is while this is a defacto currency devaluation on our part, the ROW doesn't really have an alternative at this point. The Euro is equally weak and the Chinese are not ready/willing to step up. And that this really is an FU move to the ROW by the great unifier.

www.nytimes.com/2010/11/10/business/global/10global.html?nl=todaysheadlines&emc=a21

I don't expect anything other than some harsh words to the side of the G20. But I am very interested to see how the reactions of the ROW - especially China - in controlling currency flows actually work.

[SirSaxa]

There is a fundamental flaw in your posts guys. I suspect it is due to your "playa hata" feelings about the President as indicted by your condescending references to the "great unifier" and his timing reflecting a FU to the ROW.

The flaw is very basic and frankly I am rather astonished that two guys such as yourselves would not know this. The FED is an independent organization that is NOT controlled by the Treasury Department or the President. This is not new. It was not controlled by Bush II, Clinton, Bush I, Reagan or Carter... etc. The decision for QE2 and the timing and everything else associated with it are under Bernanake's control, not the President. If you think it is an FU move to the ROW, then Ben is the one raising his finger.

The Fed has always been independent. The only control the President has is naming the Fed Chairman - when his four year term is up. Jimmy Carter did name Paul Volcker to a four year term as Fed President toward the end of his presidency. Reagan inherited him, then re-appointed him when his four year term was up. Volcker is generally given the lion's share of the credit for reversing the "stagflation" of the late '70s.

Bernanke was appointed by Bush II and re-appointed by Obama. Some fault him for not having the foresight to head off the Global Financial Crisis of 2008. There is some truth in that. But his actions since then, decisive, dramatic, unprecedented... have done much to avoid the catastrophic potential of the 2008 crisis to be far, far worse. Treasury Secretaries Paulson (Bush II) and Geithner (Obama) also deserve a TON of credit for initiating unpopular but critically important steps -- like TARP -- without which we would be reliving the '30s right now.

The Chinese are not going to suddenly stop buying US Treasuries because they have nowhere else to stash all the $$ they are earning with their huge trade imbalance with the USA. And, by the way, they don't want to cause a US recession because it would kill their exports/economy.

Finally, their concerns are not just about QE2, they are also about our mounting budget deficits. How the Tea Party/Republicans can come in and with a straight face say that is their priority - to reduce our deficit -- and the first thing they want to do about it is make permanent $4 TRILLION dollars of additional tax cuts is beyond my comprehension. Unfortunately, Obama now wants to do nearly the same.

For the US to get its budget together, we will need Cuts/modifications to entitlements AND tax increases. One party won't consider Part A, the other Party won't consider Part B. That is the dilemma we face and no one from either party has a solution. Also, no one seems to notice that if we had not enacted the Budget busting Bush tax cuts in the first place, we'd be in far better fiscal shape.

[TC]

Nov 8, 2010 18:24:03 GMT -5 HoyaLawya said:

Honcho of World Bank even came out today with a statement that maybe some kind of international reserve currency tied to a gold standard of some kind might be a good idea. (Pigs are truly flying when that suggestion comes from that source.)

That statement has already been walked back as some sort of hyperbolic call for a Bretton Woods III rather than an actual desire to peg to anything.

I think HoyaLawya's point about the scope of this is worth paying attention to - $600B is a pittance compared to what the Fed did during the crisis, and we've been seeing deflation since then - not inflation. Unless you believe that we've unwound all of the credit damage - why is this a case of "this time it's different"?

[Nevada Hoya]

Oh, I was wondering what the G20 had to do with an old ship now resting in Dubai.

[RBHoya]

Saxa, are you saying that the president doesn't support QE2? Based on some of the stuff he was saying in India the other day it sure seemed like he was defending/supporting Bernanke. The fact that Obama doesn't "control" the fed may be true but if he supports and advocates the move then I'm not sure it makes much difference to the overall point.

As for quantitative easing, it sucks--enough to make me post on B&G Saved your money and lived within your means, and managed to weather the recession? Sorry, we need to inflate our way out of debt, so your savings are about to be worth much less. Meanwhile all those people who lived beyond their means, bought crap they couldn't really afford, and then saw it all crash down when they lost their job are bailed out by 100 weeks of unemployment insurance and lots of other gimmicky programs, and pandered to at every turn by seemingly every politician. The lesson here, clearly, is just keep spending, don't worry about saving, and if it comes back to bite you later, the government will take care of you. There's plenty of incentive to buy stuff and no incentive to live within your means and save money and take care of yourself. Not a good look for the country going forward.

Also, I'm pretty sure the only reason this isn't getting more negative attention is because a lot of people don't fully understand the economics or are unfamiliar with the terms quantitative easing/qe2.

[badgerhoya]

Nov 11, 2010 11:49:32 GMT -5 RBHoya said:

Saxa, are you saying that the president doesn't support QE2? Based on some of the stuff he was saying in India the other day it sure seemed like he was defending/supporting Bernanke. The fact that Obama doesn't "control" the fed may be true but if he supports and advocates the move then I'm not sure it makes much difference to the overall point.

As for quantitative easing, it sucks--enough to make me post on B&G Saved your money and lived within your means, and managed to weather the recession? Sorry, we need to inflate our way out of debt, so your savings are about to be worth much less. Meanwhile all those people who lived beyond their means, bought crap they couldn't really afford, and then saw it all crash down when they lost their job are bailed out by 100 weeks of unemployment insurance and lots of other gimmicky programs, and pandered to at every turn by seemingly every politician. The lesson here, clearly, is just keep spending, don't worry about saving, and if it comes back to bite you later, the government will take care of you. There's plenty of incentive to buy stuff and no incentive to live within your means and save money and take care of yourself. Not a good look for the country going forward.

Also, I'm pretty sure the only reason this isn't getting more negative attention is because a lot of people don't fully understand the economics or are unfamiliar with the terms quantitative easing/qe2.

No offense, but I think the inflationary fears are a bit overwrought at this point. Currently we're *barely* having any inflation whatsoever -- and that's with the Fed rate being at 0% for at least 2 years. At this point, the Fed is trying to use any tools in its toolbox to try and get the US out of the recession, and frankly, if we have 4% inflation as a result for a few years, that's not a huge deal in my mind.

Moreover, I welcome the fact that we're giving a huge FU to the rest of the world on this. Not only do I think it's mere posturing with a healthy dose of double standard, but the rest of the world can't afford a wary American consumer.

Finally, keep in mind that the only reason they're even considering it is because getting anything through Congress is like pulling teeth out of an unanesthitized llama that's woken up on the wrong side of the bed. If Congress could show that they actually had something resembling a plan to get us out of this malaise (and the votes to get it passed), I'm sure the Fed would back off in a millisecond.

[hoyawatcher]

Yes the Fed is independent and should act independently of the White House. And more to your point Bernake can't do much by himself without the agreement of the Board of Governors (I think that is what it is called).

But what is striking about this QE2 is that it does match the policy of the Administration and the Administration has been the chief defender of the policy. I am reacting to the fact that Obama has taken it as his own and speaks of it as if he were indeed behind it. That is what has struck me about both the policy and the consternation being caused around the G20 (ostensibly Obama's meeting) about the Fed policy that is being seen by others and by Obama as his.

[hoyawatcher]

Nov 11, 2010 12:40:26 GMT -5 badgerhoya said:

Nov 11, 2010 11:49:32 GMT -5 RBHoya said:

Also, I'm pretty sure the only reason this isn't getting more negative attention is because a lot of people don't fully understand the economics or are unfamiliar with the terms quantitative easing/qe2.

No offense, but I think the inflationary fears are a bit overwrought at this point. Currently we're *barely* having any inflation whatsoever -- and that's with the Fed rate being at 0% for at least 2 years. At this point, the Fed is trying to use any tools in its toolbox to try and get the US out of the recession, and frankly, if we have 4% inflation as a result for a few years, that's not a huge deal in my mind.

Moreover, I welcome the fact that we're giving a huge FU to the rest of the world on this. Not only do I think it's mere posturing with a healthy dose of double standard, but the rest of the world can't afford a wary American consumer.

Finally, keep in mind that the only reason they're even considering it is because getting anything through Congress is like pulling teeth out of an unanesthitized llama that's woken up on the wrong side of the bed. If Congress could show that they actually had something resembling a plan to get us out of this malaise (and the votes to get it passed), I'm sure the Fed would back off in a millisecond.

You are now getting back to my original point - Do you think the risk of deflation is that real? While i haven't seen growth anywhere near where I want it and understand the importance of jobs (whether it is the feds focus or not is debatable), but I haven't seen evidence of real deflation ala Japan in any of the numbers I see.

Like you I wouldn't mind 4% inflation. Whether this program will cause us to get to 4% or wildly overshoot that is the issue. I take the later position but I also expect/hope to see some renewed growth. If you do believe in a double dip recession is coming then there is a rational for this move. Doesn't do much for confidence though

I agree that inflation at the moment is low. Whether it will stay that way with a defacto devaluation of the dollar is to be seen. And while I admit I also have an attraction to the FU part of this, I see that as much more of a political function and not really the role of the Fed to execute on. Just my perspective.

I do have a quibble with your last part though. As far as Tarp, bailouts and stimulus bills this past congress has been about as compliant and consistent on a spend our way out of this plan as could be imagined. I don't think it has worked and a look around the ROW would show a mixed record at best. And really a rejection of it in reality. I would agree that going forward spending levels will be significantly reduced.

[HoyaLawya]

Nov 10, 2010 12:53:30 GMT -5 TC said:

Nov 8, 2010 18:24:03 GMT -5 HoyaLawya said:

Honcho of World Bank even came out today with a statement that maybe some kind of international reserve currency tied to a gold standard of some kind might be a good idea. (Pigs are truly flying when that suggestion comes from that source.)

That statement has already been walked back as some sort of hyperbolic call for a Bretton Woods III rather than an actual desire to peg to anything.

I think HoyaLawya's point about the scope of this is worth paying attention to - $600B is a pittance compared to what the Fed did during the crisis, and we've been seeing deflation since then - not inflation. Unless you believe that we've unwound all of the credit damage - why is this a case of "this time it's different"?

Some food for thought ...

The "crisis", the Fed, the huge increase in money base and yet the strange single digit growth in M2:

www.lesjones.com/2008/12/04/the-fed-money-supply-interest-rates-and-inflation/

Some guy a few years back tried to figure out what the "implied" multiplier was in terms of the inflation of a money supply. Don't know if his method was bogus or not, but it's kind of interesting reading from a perspective of 6 or 7 years ago when we had our bout with asset bubbles on steroids.

the-moneychanger.com/articles_files/mmm_files/banks_files/reserve.phtml

Looking at the problem of sovereign debt from an interesting angle, there's this article from a gold bug which takes a look at each major nation's borrowing needs in 2010 and 2011 and charts it as a percentage of that nation's GDP.

news.goldseek.com/PeterSpina/1289367000.php

Maybe it's easier for Fed's bag of tricks (all about the money supply) to jumpstart an economy if that same economy still has a manufacturing base. Or a stable of service economy players with loan-worthy profiles. Seems like the tricks aren't working so that's why I have a hard time seeing a true economic goal here. I'm just seeing a Fed diddling the needs of a government selling mountains of debt because we have a Congress that thinks we can "public spend" our way out of our sinkhole.

[TC]

Nov 11, 2010 14:07:08 GMT -5 hoyawatcher said:

You are now getting back to my original point - Do you think the risk of deflation is that real? While i haven't seen growth anywhere near where I want it and understand the importance of jobs (whether it is the feds focus or not is debatable), but I haven't seen evidence of real deflation ala Japan in any of the numbers I see.

Deflation doesn't have to look like Japan. Do you really think there's a risk of housing prices, salaries, or assets like cars, ipods, or phones going up in price right now?

I bought a phone with Bluetooth the other day for $7. No contract.

[hoyawatcher]

I would separate cars, ipods, phones, etc. from salaries and home prices. Cars were coming down in price (in real terms) long before the current crisis, lost a good bit more price in the crisis but have actually come back in price from last year or so. Especially things like trucks that really got wacked. You don't see the massive discounts/rebates you used to see. Ipods and phones actually work on electronics pricing - Iphones got cheap but have firmed now with the new version. But they will without a doubt keep going down as electronics do. Watch flat screen TV prices over the holidays.

Salaries are flat for sure. Know I haven't had a raise in a while. But I saw where income was up- very slightly but up. It seems housing prices are somewhat stable and not delining as they were (at least last numbers I saw). The obvious comeback is that without jobs home prices will decline.

I am seeing inflation of oil prices and other commodities due to the dollar devaluation and price increases in food and other things driven by oil. Not seeing huge jumps in inflation as those numbers usually discount or dump fluxuations in oil in particular - but not seeing deflation in the overall numbers by any stretch even with electronics etc. coming down.

Overall seeing modest growth in GDP - very slow but not recessionary - and modest pickup in job creation - again very agonizingly slow but not declining. Unless you are projecting a double dip recession I don't see the monetary rational for this move. I can easily see the political rational but not really a deflation rational.

[SirSaxa]

RB -- I looked over my post to see if I wrote anything to suggest Obama does not support QE2, but I couldn't find anything. I don't know how you came to that conclusion.

But suggesting QE2 and the timing of its announcement were Obama’s ideas is, frankly, absurd. Ben Bernanke signaled this move last summer, after which stocks when on to their best Sept/Oct performance in 70 years. The FED meeting the first week of Nov had been scheduled eons earlier and everyone knew that was when the final decision would be made and announced. The market was expecting something in the neighborhood of $500 Billion. Ben announced $600 billion as a loose target over the next 6-8 months. And yes, the FED does require a vote of the board.

TARP has been an enormous, unprecedented success. Most of the money has been repaid. The Govt earned a healthy profit. and, most importantly, Tarp saved the banking industry -- and the US and Global economies. It was instituted by a Republican Admin, endorsed by a Democratic Congress, and implemented by a Dem admin. Remarkable teamwork in the face of a huge crisis... especially remarkable in the current Ultra-partisan environment. And remember, it was instituted in the midst of enormous crisis and it was imperfect. The implementation improved it. If we had it to do over again with 20/20 hindsight and plenty of time -- yes, we could do better.

I totally get -- and share -- your frustration and feeling that things aren't fair. But TARP was a huge success and the stimulus was successful, it just wasn't big enough.

When Obama became president, the US was losing a NET of 750,000 jobs per month. October 2010 saw a net gain of 150K jobs and was the 10th consecutive month of private sector job gains. So we went from a net loss of 750K/month in early 2009 to a net gain of 150K jobs in October 2010. That is a positive change of 900,000 jobs/month.. So yes, I would say the Stimulus... which was 40% tax cuts and a big percentage of one-time transfer payments to cities and states to keep Cops, firefighers and teachers employed... was successful. But we still have a LONG way to go to dig out of the greatest financial crisis of our lifetimes.

The political climate precludes any consideration of additional stimulus. The FED’s job is to ensure a strong economy – specifically, low inflation and high employment. QE2 is intended to assure investors that interest rates will stay low for a long time… so you are better off putting your money to work -- businesses and individuals to make investments, banks to make loans. Increase the money supply. Indirectly lead to higher stock and commodity prices thereby improving the wealth effect so people (at least those with 401-Ks and such) feel like they have more money.... so they will be more willing to spend.

QE2 is not the ideal way to stimulate the economy, but it is the only way available to the FED at this time. If it works, we will ALL benefit from it.

Noted conservative economist Nouriel Roubini said the following on CNBC:

Excerpts
“To me QE2 was a necessary evil because with growth so below potential and with inflation following a risk of deflation, if we had not done QE2, the risk of a double-dip recession and of deflation would become more significant.“
“A lot of that critique of QE2 is somehow misplaced … If anything, you could criticize the ECB for not doing QE2,” he said.

“The Fed believes we need to do (a second round of asset buying) while the ECB and the Germans are dead against it. On that particular issue I think the Germans have it wrong,” he said.

Monetary Easing a ‘Necessary Evil’: Roubini

I should add, the US also needs to work on a long range plan to control spending... not right now when it is desperately needed, but longer term. AND to raise taxes, again, not right now... but establish the changes and a multi-year timetable for implementation.

But that will require REALLY tough choices and I don't have confidence our political system, as it stands currently, is capable of dealing with this issue.

Finally, once again I encourage EVERYONE to go see Inside Job, the excellent documentary about our financial crisis.

[TC]

Nov 11, 2010 17:35:36 GMT -5 hoyawatcher said:

It seems housing prices are somewhat stable and not delining as they were (at least last

Google the latest Zillow report - home prices dropped in almost every major area - and this is in a market with historic mortgage rate lows (you can get 3.75% with 0 points down for a 15-year on a refinance!). What happens when the mortgage rates start going up again? Home prices will drop again because more of buyers payments will be wrapped up in interest AND demographics will work against the market, with baby boomers exiting single family homes and not enough supply of Generation Y to replace them.

The same thing applies to almost every asset class that depends on credit- what happens when people can afford less car because of rising interest rates?

[SirSaxa]

Dick Bove -- perhaps Wall Street's leading Banking Industry analyst -- had this to say about TARP in his comments today:

TARP 'Most Successful US Program Ever': Bove

Excerpts
“In short this may have been the most successful United States program ever,” he wrote. “Moreover, it was bipartisan in the sense that both the Republican Administration that created it and the Democratic Administration that fostered it were unified in their beliefs as to what should have been done—and they did it.”

More than half the TARP banks have repaid the money and the Treasury Department has netted a $28 billion profit so far. The Federal Deposit Insurance Corp also has brought in $12 billion on its guarantee program while the Federal Reserve “may have made” an additional $20 billion, Bove said.

[SirSaxa]

Nov 8, 2010 12:09:58 GMT -5 hoyawatcher said:

IMHO unless there was a significantly higher risk of deflation than has been disclosed by the Fed so far in their pronouncements, I don't understand this from a Fed perspective as they continue to say their primary focus is moderate growth without significant inflation (or WTTE) and this has the real potential of igniting very significant inflation if we are not staring at deflation.

Excerpts
U.S. core producer prices unexpectedly fell in October to post their largest decline in more than four years, according to a government report on Tuesday that underscored the Federal Reserve's concerns about the low inflation environment

"It's a dollar negative—It's certainly undercutting all the arguments that inflation is ready to break out here," said Brian Dolan, chief currency strategist at Forex.com.

Core Producer Prices Fall, Fanning Low Inflation Fears

[hoyainspirit]

Quantitative Easing explained

I actually got a chuckle out of this.

[SirSaxa]

It seems Ben must have been reading this board and has decided to make a speech explaining his decision -- endorsed by a 10-1 vote of the FED Governors -- on QE2.

Bernanke Fires Back at Criticism over Easy Money Policy

Excerpt
"The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States," Bernanke said in comments prepared for delivery to a conference at the European Central Bank in Frankfurt.

If you want to read his remarks in their entirety:
Text of Bernanke's remarks

[TC]

Krugman makes the case for disinflation :

krugman.blogs.nytimes.com/2010/12/05/disinflation-confirmed/?src=twt&twt=NytimesKrugman