[bratticus]

The end of QE2 will lead to massive depression according to former Fed economist
Kenneth Schortgen Jr / Examiner / May 17th, 2011


The end of QE2, and the unwinding of government and Fed stimulus, will lead to a massive depression according to former Fed economist Richard Koo.

In a report on May 17th by Mr. Koo regarding Federal Reserve stimulus and Quantitative Easing programs, much of the current run in the stock market, equities, and commodities has been primarily achieved through money printing, and not by market and economic growth.

Entire report: Richard Koo - QE2 has transformed commodity markets into liquidity-driven markets

The Man Who Wrote The Book On This Economy Demolishes Bernanke's QE2 "Gamble"
Joe Weisenthal / Business Insider / May 18, 2011

There's probably no better person to assess the state of this economy than Richard Koo, the Nomura economist whose book The Holy Grail Of Macroeconomics is all about the unique nature of a post-crisis, deleveraging, balance sheet recession.

So when he speaks out on QE2, it's a must read.

... skip ...

His conclusion: QE2 was a huge gamble, and the end of these bubbles could exacerbate the great recession.

CHART OF THE DAY: The Biggest Myth About QE2 Gets Busted
Joe Weisenthal / Business Insider / May 18, 2011

Money Supply has barely grown, and loans and leases in bank credit continue to fall.

RICHARD KOO: This Could Be The 1937 Great Depression Relapse All Over Again
Joe Weisenthal / Business Insider / May 18, 2011

Roosevelt made same mistake in 1937

This pattern of expansion in the money supply and the economy despite an absence of private-sector credit growth was also observed in 1933–36 as the US economy emerged from the Great Depression. President Franklin D. Roosevelt was unaware of the importance of this relationship and, believing that the economy was already on a self-sustaining growth path, embarked on a path of fiscal consolidation in 1937.

Heading for a post-QE collapse?
Karen Maley / Business Spectator / May 19, 2011

Are we about to see a collapse in global share and commodity prices as QE2 draws to a close?

That’s the pressing question asked by the highly regarded Richard Koo, who is chief economist at the Nomura Research Institute, in his latest research note.

Koo argues that when US Fed Reserve boss Ben Bernanke announced his $US600 billion bond-buying program, dubbed QE2, his deliberate strategy was to push asset prices higher.

... skip ...

Now, Bernanke announced that the Fed would buy $US600 billion in long-term bonds between November 2010 and June 2011, which was roughly equal to all the debt issued by the US Treasury in that period. According to Koo, these purchases by the US central bank meant that “in aggregate, private-sector financial institutions would be unable to increase their purchases of US Treasury securities, because all of the growth in Treasury issuance would be absorbed by the Fed.”

At the same time, US businesses and households were still rushing to repair their balance sheets that had been damaged in the wake of the financial crisis. As a result, private investors were unable to increase their overall purchases of private sector debt.

According to Koo, this left US institutions, such as banks and insurance companies, with few investment options. After all, the Fed was buying all the new government debt that was being issued, while the private sector was simply not borrowing. Little wonder that money poured into stocks and commodities.

But because oil production since 2005 can no longer be significantly increased the amount of money pouring into commodities does not drive up oil production, does not increase value, it merely crushes the life out of the world's economy so when QE2 ends it will be like the 2008 bubble popping.

[Daniel_Plainview]

QE3 is a certainty ... and, in fact, QE will never end. Money printing will never end ... at least not while Obama is President. If QE were to end, then Banana Ben's massive bubbles would pop, leading to an ominous deflationary depression.

History informs us that this will not end well.

[Fishman]

Surprise, surprise, QE 2 is a bust. Sort of like cash for clunker, sort of like the house incentive last year. No trend here. Keynesian economics fails again and again and again.

[Lore]

Surprise, surprise, QE 2 is a bust. Sort of like cash for clunker, sort of like the house incentive last year. No trend here. Keynesian economics fails again and again and again.

Here let me fix that, "Modern capitalism fails again and again and again.”

[bratticus]

I call it the "Great Squeeze". Dumping money in to a system that has no place to put it but stocks and commodities plus stagnant world oil production rates stuck for six years and counting at more-or-less the same rates as in 2005.

Right now money is being dumped in by QE Lite, QE2, Bank of Japan's post-quake money creation and the Federal Reserve dumping cash due to the debt ceiling.

Part of it is QE Lite which they started before QE II. QE Lite takes the drop in value of their mortgages securities and buys treasuries with it. The change in mortgage securities between now and when QEII started is over $100 billion.

Bank of Japan injects $245 bln into markets
By Chris Oliver / MarketWatch / Mar 15, 2011

HONG KONG (MarketWatch) -- Japan's central bank injected 20 trillion yen ($245 billion) into the money markets Tuesday in an effort to help calm financial markets, according to reports. The move was designed to ensure that banks have enough liquidity to meet a surge in demand from companies and households seeking to raise funds. The same-day funds injection came as Japan's unfolding nuclear crisis deepened on Tuesday, with an explosion at reactor No. 2 and as the danger spread to reactor No. 4 at the stricken Fukushima nuclear plant. Elevated radiation levels were reported in Tokyo as southerly winds carried the radioactive plume from Japan's eastern coast towards urban areas.

Debt Fight Unleashes QE3 by Stealth: Economist
CNBC / Mar 14, 2011

“As the Treasury has gotten closer to the debt ceiling, it has been forced to start running down its cash reserves," he noted. "From around $300 billion a month ago, the Treasury only had $100 billion in cash left at the end of last week. The critical point is that the Treasury keeps that cash on deposit with the Federal Reserve.” Those funds get deposited into the banking system and show up as excess reserves, he said. “The 200 billion dollar decline in the size of Treasury deposits has led to a corresponding increase in the size of reserve balances.” “Admittedly, this is a bit geeky, but that expansion of reserve balances is effectively a quantitative easing," Ashworth said.

[bratticus]

End of QE2 to hurt stocks, bonds: Reuters poll
By Walter Brandimarte / Reuters / May 20, 2011

Investors betting on a rise in stocks, bonds and commodities should prepare for a loud sucking sound in their portfolios next month when the Federal Reserve pulls the plug on its $600 billion stimulus program.

Stocks, bonds, gold and the euro are expected to fall in the three months after the end of the Fed's second massive bond buying operation, also known as quantitative easing, or QE2, a Reuters poll of 64 analysts and fund managers found on Thursday. ...

[bratticus]

I agree this stock market bubble is a consequence of Fed policy, QE (it's recent climb began in late 2008) but gold and oil (not so silver) have been on their own trajectory long before QE . It is wrong to blame commodities inflation on QE.

Obviously you didn't read what I wrote. You probably just read the title of the thread and posted something about that.

[evilgenius]

I agree that we need more easing. I also agree that we may not see it. It is politically expedient to try to address debt right now. Both sides in Washington are becoming consumed in the reality of debt, from various sectors. What nobody seems to be seeing is what awaits us if the easing stops and the underlying money supply destruction was never actually remedied. Simply put, if it had been remedied then we would not be seeing such a continued fall in housing. Saving the banks was necessary, no matter what you conspiracy theorists think, but if you don't then work the average man into your equations there is only one direction things can go when you lift the aid that has been provided.

[crude_intentions]

Here let me fix that, "Modern capitalism fails again and again and again.”

Not much of a fix because It's not modern and it's not Captalism.

Using currency debasement as a means to try and stave off collapse goes back to the last days of the Roman empire.

http://mises.org/daily/3663

Listen/Read the lecture and see if you can't spot the parallels between it and the U.S

[EOTWAWKI]

Rather than giving all that money to the banks, they should have given it to people to pay their mortgages with. It would have ended up at the banks anyway, but millions of people wouldn't have been forced to abandon their houses and flood the market with them and hence force down the prices. Government can be so stupid. That move would have been popular too. Instead look at the mess.

[dolanbaker]

Rather than giving all that money to the banks, they should have given it to people to pay their mortgages with. It would have ended up at the banks anyway, but millions of people wouldn't have been forced to abandon their houses and flood the market with them and hence force down the prices. Government can be so stupid. That move would have been popular too. Instead look at the mess.

If you intend to give QE money to the general population , it should be to all taxpayers, not just mortgageholders underwater.

It would be the largest last throw of the dice ever, many people would end up debt free for the first time. Rampant inflation of course and no-one saving any of the money so the Fed would get it back fairly quickly.

[Pops]

Roosevelt made same mistake in 1937...
Roosevelt was unaware of the importance of this relationship and, believing that the economy was already on a self-sustaining growth path, embarked on a path of fiscal consolidation in 1937.

This is the way I see things, except this time we're "embarking on a path" herded by Medicare Power Chairs headed right over the cliff, all in a tribute to The Gipper's legacy of selfishness.

Even Reagan would be proud of the way the rich are playing this one.


Of course in the overall scheme of things, if you see oil production topping out in the next 4 or 5 years and/or a global economy past peak, then pretty well anything that's done will be decades too late.


Oh well, efarmer prophesied Armageddon for 8pm Missouri time so its all moot anyway.

[pup55]

QE3 is a certainty ... and, in fact, QE will never end. Money printing will never end ... at least not while Obama is President.

I agree with this completely. But, the problem did not start with Obama, nor will it end with him or anybody that replaces him.

Rather than giving all that money to the banks, they should have given it to people to pay their mortgages with.

We will never know what the outcome would have been but if you have a lot of ex-wall street bankers running the place, rather than a lot of homeowners, you will get this every time. They have a fear-driven but inflated self-important view of their role in society. They propped themselves up first. Do over. We make the rules.

As in the case of not raising the debt ceiling, the whole idea of QE2 ending is preposterous. We have already embarked on this path, the economy is much too weak to pull the so-called rug out from under it despite the whining by the so-called conservatives who sat idly by while the previous Fed chairman inflated bubble after bubble, and the previous administration borrowed money like the drunks that they were to attack Iraq and also start the bailouts and stimulii in 2008. "Reagan said deficits don't matter..." 80-year old McCain would have done exactly the same thing if not worse.

It is the little college professor's ball now. He will either go down in history as a genius or an idiot, depending on whether it ultimately "works" (and I do not believe for a minute he knows what "works" means or will look like on the other end). He, student of the Depression that he is, is determined not to repeat the mistakes of the Roosevelt administration. But, by doing this he is making plenty of mistakes of his own.

I still think that years from now, young college students will be studying his actions in this era, seeing what mistakes he made, including moral hazard by bailing out the very people that perpetrated the problem in the first place, and hopefully realize that the seeds of the problem were sown much earlier. But undoubtedly, one of them will rise to the position of Fed chairman, and make a whole new set of mistakes. Silly humans.

It'll be an election issue, of course, Obama will have the audacity to blame it on someone else and run against it, and the opponent will try to blame it on Obama, while all the time, behind the scenes, neither will have the courage to stop it.

It will go on as long as it can until people realize what is actually happening and lose faith in the system, but for the time being it is too painful to imagine what will happen to the system if it stops, so it won't.

[bratticus]

I was merely commenting on what Koo said. He blames commodity-price inflation on the QE, not market-forces/peak-resources.

Reserve stimulus and Quantitative Easing programs, much of the current run in the stock market, equities, and commodities has been primarily achieved through money printing, and not by market and economic growth.

I think he is wrong (even though your analysis does sort of fix it). But if Koo is wrong in his assumptions then who cares what his prognostications are. Right? Therefore the correct implication is that the market is in balance and so there won't be a depression, crisis, perturbation, etc. but rather continued commodities inflation negatively indexed to oil production.

I often wonder who really knows what vs. what they think they can get away with saying without causing damage to their image.

Suppose Richard Koo knows about peak oil but is simply unwilling to write or speak in those terms because it will cast him in a light he doesn't want to be seen in? It does make certain classes of people pigeonhole you and label you a crank, etc. to speak openly of it.

People publish messages to achieve a desired effect, not to be some sort of schoolteacher. Richard Koo and those who promulgate his words are trying to influence the markets not give someone an education in macroeconomics.

[bratticus]

QE3 is a certainty ... and, in fact, QE will never end. Money printing will never end ... at least not while Obama is President.

I agree with this completely. But, the problem did not start with Obama, nor will it end with him or anybody that replaces him.

Rather than giving all that money to the banks, they should have given it to people to pay their mortgages with.

We will never know what the outcome would have been but if you have a lot of ex-wall street bankers running the place, rather than a lot of homeowners, you will get this every time. They have a fear-driven but inflated self-important view of their role in society. They propped themselves up first. Do over. We make the rules.

As in the case of not raising the debt ceiling, the whole idea of QE2 ending is preposterous.

When QE2 has ended the replacements will be even more preposterous.

Richard Koo Explains Why An Unwind Of QE2, With Nothing To Replace It, Could Lead To The Biggest Depression Yet
Tyler Durden / Zerohedge / May 17, 2011

Over the past several days, quite a few readers have been asking us why we are so confident that QE3 (in some format: it does not and likely will not be in the form of the Large Scale Asset Purchases that defined QE1 and 2 - the Fed could easily disclose that it will henceforth sell Treasury puts, a topic discussed previously, or engage any of the other proposals from Vince Reinhart disclosed in June of 2003, or worse yet, do what the BOJ does and buy ETFs, REITs and other outright equities) will eventually be implemented by the Fed.

[Lore]

The end of QE2 simply means The Federal Reserve will stop buying up bonds. Which is a stop to printing money for that purpose. In its place we will have to go back and rely on China and countries like Japan to back us up again. However, they have their own problems right now. The shock will happen when we have a sale and no buyers, or not enough of them. Liquidity will then be stripped from the market unless it can be added by other programs.

[evilgenius]

Rather than giving all that money to the banks, they should have given it to people to pay their mortgages with. It would have ended up at the banks anyway, but millions of people wouldn't have been forced to abandon their houses and flood the market with them and hence force down the prices. Government can be so stupid. That move would have been popular too. Instead look at the mess.

I have similar thoughts. My idea was that they should have arbitrarily lowered everyone with a mortgage's rate down to a very low amount, say 2-3%, as far as their circumstances were concerned. They then could have paid the banks the difference between the rate as was and the new temporary rate as is with some of the TARP money. The government could have subsidized the difference. People would have been able to save hundreds per month on most mortgages. It would have saved many and in addition those that didn't need it could have spent the difference, thus stimulating the economy. The big institutions would have still needed some money because much of what threatened to kill them was derivative based and vulnerable, mostly because they have had an enduring love affair with tax dodging offshore money. Kept up for a sustainable period of time this scheme would have allowed a thorough re-examination or sub-prime loans. People could have been brought into new arrangements with their lenders that could have reflected their real positions vis a vis their ability to pay. The lenders would then only have needed to take a haircut down to a certain level, not all the way to zero on whole clusters of homes. further, we could be looking at recovery under a new paradigm insofar as our attitude toward real estate goes, not hoping for the old unscrupulous order to come back so that we could ride the next housing bubble to happiness.

[bratticus]

Tweat or be Tweaten!

PIMCO (via twitter)
May 24, 2011

Gross: End of QE2 may or may not lead to higher yields, but what is clear is that a 1.79% 5 yr offers a negative real yield after inflation.

Where "Gross" is William H. Gross, CFA, PIMCO.

When the Consumer Price Index which tries so hard to hide inflation has to admit that it looks like this:
(click for source)
The interest from a measly 1.79% on a 5 year US Treasury bond is effectively a negative yield.

You would need maybe 3% interest to keep up.