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

[John]

6-Nov-10 News -- International fury at U.S. quantitative easing

Revival of the Islamic Movement of Uzbekistan (IMU)

** 6-Nov-10 News -- International fury at U.S. quantitative easing
** http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e101106#e101106

Contents:
"International fury is growing at America's $600 billion quantitative easing plans"
"Revival of the Islamic Movement of Uzbekistan (IMU)"
"Additional links"
Two major terrorist attacks at mosques in Peshawar, Pakistan
Hamas warns Gazas not to buy cars from Israel
Malaysia is becoming leader in Islamic finance
Friction is growing between China and India over Kashmir

[vincecate]

If QE2 was not going to reduce the value of the dollar, other countries would not care about it. As it is their central bank reserves will be worth less and exchange rates will be messed up. This international fury shows they think the drop in the value of the dollar will be significant. I too think the value of the dollar will go down and prices will go up, at least for things we need like food and energy.

[vincecate]

Is Obama a Keynesian? No, he was born in Hawaii. Funny stuff.

http://www.youtube.com/watch?v=Q-37qUrgFXQ

[Higgenbotham]

If QE2 was not going to reduce the value of the dollar, other countries would not care about it. As it is their central bank reserves will be worth less and exchange rates will be messed up. This international fury shows they think the drop in the value of the dollar will be significant. I too think the value of the dollar will go down and prices will go up, at least for things we need like food and energy.

I think we're at the point where the truth is going to be known about whether the international community will stand for QE. I've been surprised they've been as tolerant as they have up to this point. On the other hand, they only had something to react to once it became official through the Fed announcement. Notice the Fed announcement was conditional. You and others have told me Bernanke will just print as much money as he wants. One poster said he will start slowly and be very sneaky about it which turned out to be true as he started in a very sneaky manner with the rollover of MBS. I've said international political realities will not allow for hardly any QE in the sense of QE2 (US Treasuries for cash). As of this moment I'm more in your camp - that he's printing as much money as he wants to, though much higher numbers were thrown around by Krugman, etc.

[vincecate]

The Fed said they would not monetize the debt and talked lots about their "exit strategy". They even agreed that if they did not unwind their liquidity injection it would create inflation. Now not only are they not unwinding they are injecting more. Between the MBS they are reinvesting in treasuries and this new $600 billion going into treasuries, for the next 8 months they will be printing just about matching the rate of deficit spending. It means that there is no net private buying of government bonds. This is usually part of the hyperinflation story.

The next thing that happens is people realize that the government is just printing money to spend so the value of the dollar will be going down. With this realization they won't want to buy any more bonds and will redeem existing bonds as they come due. Paying off existing bonds as they come due requires a next level of printing speed. When we get to that point I think we will be very close to the end of the dollar.

Take a few seconds to watch Bernanke lie under oath saying he will not monetize the debt:
http://www.youtube.com/watch?v=n6qo2S84r5w

[Higgenbotham]

The Fed said they would not monetize the debt and talked lots about their "exit strategy". They even agreed that if they did not unwind their liquidity injection it would create inflation. Now not only are they not unwinding they are injecting more. Between the MBS they are reinvesting in treasuries and this new $600 billion going into treasuries, for the next 8 months they will be printing just about matching the rate of deficit spending. It means that there is no net private buying of government bonds. This is usually part of the hyperinflation story.

The next thing that happens is people realize that the government is just printing money to spend so the value of the dollar will be going down. With this realization they won't want to buy any more bonds and will redeem existing bonds as they come due. Paying off existing bonds as they come due requires a next level of printing speed. When we get to that point I think we will be very close to the end of the dollar.

Take a few seconds to watch Bernanke lie under oath saying he will not monetize the debt:
http://www.youtube.com/watch?v=n6qo2S84r5w

I think they meant if they did not unwind their liquidity in the context of an improving economy that would create inflation.

I don't believe the Fed is printing the money to spend. I think they are trying to offload the MBS from their balance sheet back onto the banks and fill in the hole from deteriorating real estate prices. When they took the MBS, they gambled that they would make money or at least not lose anything. As the MBS are offloaded, the dollars will be pulled back in. This is all my guess as to what they are really trying to do. They will never admit it because they can't admit to a second bank bailout, but that is probably why Bernanke is saying it will not create inflation.

If you see the dollar etc. start to reverse, it will be because the market thought the money printing would be inflationary but then realized the Fed is going to hold the banks' feet to the fire in order to save themselves and use sleight of hand to do it.

[vincecate]

I don't believe the Fed is printing the money to spend. I think they are trying to offload the MBS from their balance sheet back onto the banks and fill in the hole from deteriorating real estate prices.

They are not selling their MBS. They are just using any income from their $1.7 trillion holding of MBS to buy Treasuries. In other words, no exit strategy. Then to this they added $600 billion over the next few months.

The Fed gives cash to the Treasury for bonds. The Treasury spends. My point is that there is about $100 billion per month deficit spending and there is about $100 billion per month that the Fed is giving to the Treasury. So in effect, for the next 8 months, there will be no net bond sales to the public. All new debt is being funded by newly printed money from the central bank. This is what usually happens right before things get really bad.

[Higgenbotham]

They are not selling their MBS. They are just using any income from their $1.7 trillion holding of MBS to buy Treasuries. In other words, no exit strategy. Then to this they added $600 billion over the next few months.

I read the Fed is likely to be part of a lawsuit brought by the REMICS that forces the fraudulent mortgages back to the banks who originated them. One piece of evidence things are moving in this direction: http://news.yahoo.com/s/afp/20101019/bs ... 1019233422

The Fed gives cash to the Treasury for bonds. The Treasury spends. My point is that there is about $100 billion per month deficit spending and there is about $100 billion per month that the Fed is giving to the Treasury. So in effect, for the next 8 months, there will be no net bond sales to the public. All new debt is being funded by newly printed money from the central bank. This is what usually happens right before things get really bad.

Bernanke discussed the plan Friday during a Q&A at Jacksonville University. The Fed is taking the treasuries from banks and exchanging them for reserves. Granted, the banks can buy the treasuries from the Treasury anyway but existing money has to be used. What I'm guessing and I can't prove it is that when the fraudulent mortgages get forced back to the banks, they are going to be marked down and some of those reserves will disappear. In the meantime, most of the reserves will sit at the Fed and money velocity should decrease further if that is happening.

Since the Fed is not a transparent organization and I don't sit inside it, this is speculation like anyone else is speculating. There is a tremendous range of opinions as to what is really happening. I've been reading continuously for 4 days on this subject.

[vincecate]

Bernanke discussed the plan Friday during a Q&A at Jacksonville University. The Fed is taking the treasuries from banks and exchanging them for reserves.

When the Fed does this is it buying treasuries for new money. That it increases some bank's account labeled "reserves" on a computer instead of really printing new paper money does not matter. If the bank then said it wanted to withdraw some real paper money the Fed would have to really print paper, if they did not already have enough on hand.

It does not matter if the Fed buys directly from the treasury or from banks who buy from the treasury (except to the banks who may be getting a cut for laundering the money). The net effect is that new money is going to the treasury.

People would be afraid if they understood the Fed was printing $100 billion per month in new money which then made its way to the treasury, and that this just happened to be the amount needed to cover the deficit. This sounds like something stupid that a place like Zimbabwe would do. So the Fed wants to confuse people as much as possible. Here are some other synonyms/euphemisms for "printing money" to look out for, "seigniorage", "making money", "quantitative easing", "QE", "issuing fiat currency", "adding to bank reserves", "spending without borrowing", "debasement", "expanding the Fed's balance sheet", "monetization", "liquidity operations", and "deficit accommodating".

[Higgenbotham]

Bernanke discussed the plan Friday during a Q&A at Jacksonville University. The Fed is taking the treasuries from banks and exchanging them for reserves.

When the Fed does this is it buying treasuries for new money.

It is, but earlier you said and are still saying the new money will be given to the Treasury to spend, directly or indirectly. The question is, what's going to happen to the money. For now, the treasuries are locked up on the Fed's balance sheet doing nothing. That's why people like James Galbraith are saying this is only a duration swap and he's right that it is...for now.

As John keeps saying, money is being lost and the Fed is trying to replenish it. The Fed can replenish the money that the banks have lost or will lose and the news flow is corroborating that's exactly what they are doing. If the banks have losses they know they are going to take, they may be able to gamble with the money for a bit, but they can't tie it up for too long because the writedowns and writeoffs are coming.

At the same time, in no way does the Fed have any plans to directly replenish the money that Main Street is losing. The government is doing some of that through increased transfer payments though.

Now I'll tell you something really funny. Volcker was asked about this and he said he can't see that there will be any inflation for years. Then he said he can't see that there will be any deflation either. So are we all wasting our time debating this? Maybe going short the stock market is what everyone should be discussing. I'd have to think that Volcker knows more about this subject than anyone on the planet and he is being honest.