Skip to comments.Why A Fed President Just Suggested Doubling QE3
Posted on 10/03/2012 6:23:26 AM PDT by blam
Why A Fed President Just Suggested Doubling QE3
Interest-Rates / Quantitative Easing
Oct 03, 2012 - 02:20 AM
By: Dan Amerman
Chicago Federal Reserve Bank President Charles Evans was interviewed on CNBC on Monday, and he indicated that he was in favor of continuing asset purchases at a rate of $85 billion per month all the way through 2013. If approved by the rest of the Fed, this would have the effect of about doubling the size of "QE3", or Quantitative Easing Three, the massive Federal Reserve monetary creation and market intervention program announced only three weeks ago.
QE3 combines mortgage security purchases of $40 billion per month until the labor market substantially improves, while continuing "Operation Twist", with the Federal Reserve switching another $45 billion a month out of short term Treasuries and into long term Treasury bonds through December. There is a total of $85 billion per month in asset purchases, of which $40 billion a month is to be financed by creating new money out of thin air. Importantly, the amount of market interventions is scheduled to drop in half at the end of 2012.
If the Federal Reserve follows through with what Evans proposes, it will mean that the pace of $85 billion a month won't slow, and that an additional $540 billion will be created out of thin air over the course of 2013, which will likely be directly injected into the economy without "sterilization". In other words, what Evans is proposing is that the government create and spend a little more than $5,500 per above-poverty-line household to manipulate the markets and to hold down pension and retirement investment returns.
Not too long ago, this would have been the most aggressive and irresponsible action in the history of the Federal Reserve. But at this stage with QE1, QE2, QE3, Twist 1, Twist 2, along with assorted trillions of dollars in loans and purchases with unnamed parties under secret terms, a mere proposal by a (currently) non-voting member of the Fed's policy-making Open Market Committee (FOMC) to increase the size of an already staggering program to an even more staggering amount might not seem like that big of deal to the small slice of the public that pays attention to this sort of thing.
So why did Charlie Evans do it? And why did Ben Bernanke likely authorize the nationally televised interview?
Let me suggest that it is only when we answer those questions that we can find out what the Fed is really up to - which is playing a quite different game than what is being put out in the press releases.
Implausible Explanations - Conventional
We'll start with the conventional perspective. The Federal Reserve and Ben Bernanke are already taking a great deal of heat over the recently announced massive and open-ended QE3 program. There is loud and public skepticism about whether QE3 will actually make any difference to the economy, given that both QE1 & QE2 failed in their stated goals of restarting the economy and housing market.
Given the size of QE3, even members of the Federal Reserve are starting to publicly express concern over the danger of causing increased rates of inflation, as shown by the recent comments from Richmond Federal Reserve Bank President Jeffrey Lacker in explaining his dissenting vote on QE3.
There is a presidential election next month, and Bernanke is already taking a great deal of heat for QE3. Why toss gasoline on the fire and have a non-voting board member talk about doubling down on the size of QE3? After all, there is no money being created and no solutions are actually implemented - there is just the risk of political damage for seemingly no benefit at all.
Why did a non-voting Fed member go on national TV to talk about his desire to increase the size of QE3 months down the road? Why risk the pain for no gain?
Implausible Explanations - Contrarian
If the conventional doesn't make sense, then maybe it is the usual contrarian perspective that will hold the answers. OK then, let's assume that what many are writing about is true, which is that the United States dollar is right on the brink of collapse, with destruction likely to occur in the fall of 2012, even as the Federal Reserve desperately tries to hold on.
Now, from that viewpoint, the Federal Reserve and the US dollar are on the verge of imminent annihilation because of the massive creation of fiat currency that is about to lead to a complete collapse in confidence. Viewed from that perspective, what Charles Evens just proposed was insanely stupid - as he just accelerated the loss of confidence and resulting destruction of the dollar for no gain whatsoever. There is no money being created and spent - he's merely talking about why he wants to do so.
Why would he do that? Why did Ben let him?
Again: why would a non-voting Fed member go on national TV to talk about his desire to increase the size of QE3 months down the road?
An Explanation That Is A Perfect Fit
The problem with both the conventional and contrarian perspectives is that Evans went on TV to talk some radical talk that risked bringing down the value of the dollar, but without being in any position to actually do anything about it for some time to come.
If there is a logical explanation to be found then, we should seek outcomes in which it is desirable for Bernanke to use a credible and substantive proxy to talk trash about the dollar and bring it down in value, without actually taking the accompanying concrete actions to go along with it. If he had such an objective, Bernanke would want to deploy someone important enough to command the full attention of the global professionals who watch the Federal Reserve - but at the same time be sufficiently obscure that the average US citizen or reporter would have never heard of him or her, making the proxy far less risky than Bernanke himself making the comments.
Consider the explanation below, published in my article: "'Unlimited QE3' Quick Analysis: Federal Reserve Attacks US Dollar, Risks Currency Warfare" (linked below):
The Federal Reserve is indeed using QE3 to attack the problem of unemployment - but not through the method stated.
The cover story is that QE3 will be used to increase the money available for lending and to lower interest rates. It is a credit to Mr. Bernanke that he was able to read this statement with a straight face, for the assertion that the economy is being held down by too high of interest rates and tight money is ludicrous. Interest rates are already at historic lows, and banks are awash in available cash. Moreover, QE3 is likely to have very little effect when it comes to expanding corporate lending, just as QE2 had very little effect - because that was never the intended route to rebooting employment in the United States.
As described in detail in my article "Bullets In The Back: How Boomers & Retirees Will Become Bailout, Stimulus & Currency War Casualties" (linked below) the United States has a structural problem with unemployment that is essentially unsolvable so long as the dollar remains high in value relative to other global currencies.
This problem was exacerbated by the rise in the US dollar caused by the Euro crisis - and it is no coincidence that the unemployment crisis in the United States is now getting rapidly worse even as the dollar soared this past spring and summer.
The Federal Reserve is, of course, well aware that the unemployment situation is far, far worse than what is being captured in the official headline unemployment rate of 8.1%. The government knows full well that the true unemployment rate, once workforce participation rate manipulations are netted out, is closer to 19% - and getting worse, as explored in detail in my article linked below, "Making 9 Million Jobless "Vanish": How The Government Manipulates Unemployment Statistics".
This building crisis of a strengthening dollar and rising unemployment called for emergency action, and that is exactly what Bernanke is doing. He is effectively calling in a B-52 strike on the US dollar, monetizing for the world to see, and pledging to monetize for as long as it takes - until the US dollar is driven down to a level where American workers can once again be globally competitive.
If the rest of the world sits back and lets the United States drive down the value of the dollar, then US employment is indeed likely to rise - at the cost of falling employment elsewhere. But if the rest of the world is not willing to sit back and watch jobs flow to the US, then there is likelihood of counterstrikes, and even the danger of all-out currency warfare.
Now, let's look at the situation at the start of this week. The building anticipation and then finally the announcement of QE3 had been successful, having driven the dollar from a summer high of 1.206 dollars per Euro down to 1.31 dollars per Euro by mid-September. Then Spain starts to go south, the Euro looks like it is in trouble again, and the dollar starts rising again. The situation gets markedly worse in Spain over the weekend, and the dollar looks poised to rise again. Which, if allowed to happen, would make US workers that much less competitive around the world, and lead to job losses instead of job gains.
Until, that is, a non-voting member of the Federal Reserve Open Market Committee goes on national TV to talk about his desire to see the size of QE3 more than doubled in another few months.
And it looks like it has worked, as the dollar moved from a high of 1.280 dollars per euro on Monday, down to a price of 1.292 dollars per euro on Tuesday afternoon. Now, this may be fleeting if the Spanish situation continues to deteriorate. But nonetheless, the only price for the dollar moving the opposite way that a reserve currency should move during crisis, was a senior Fed official doing a little trash talk about the dollar on TV in a way that his own nation barely noticed - but the rest of the world did.
Suddenly, everything adds up perfectly. The "pain" is the gain, it is the objective and not the undesirable by-product. Whether what Evans proposes ever happens or not in 2013 is almost incidental during the first week of October 2012. What matters is that there is bad news out of Spain and a pre-emptive attempt at changing the psychology of the market must be made, before there is a repeat of the damage that occurred in the spring and summer as a result of the US dollar being the globe's reserve currency.
The point at which things go from not adding up at all to adding up perfectly is a good place for considering a paradigm shift, and then evaluating whether the Fed's real strategy is one of attempting to increase employment by waging undeclared currency warfare - with the myriad financial implications that follow.
No doubt this idiot has some Chicago cronies who are up to the butts in debt and need bail outs with cheap money.
No one from Chicago should ever be allowed near government money.
It occurred to me 4 years ago that the Fed Gov was in desperate need of about 10 Trillion dollars and that everybodies 401K and etc. was in peril (in fact several libtard congresscriminals have raised the topic of “nationalizing the pensions”. Now I realize they have actually raided these things without having to “alarm” folks. They have monetized the debt and are printing like there is no tomorrow. That is why it is a 201K now and headed for 101 K soon. So they have raided those funds.
Show me a Feddie for doubling the QE crap, and I’ll show you someone is a position to take down today’s national economies to smoldering ruins so that a smothering world govt/misery-for-all/socialist state can rise from its ashes.
If I had my way then these Fed presidents along with Ben and a whole lot of big bankers would be asset stripped down to their underwear. They are thieves. And they have pretty much destroyed the united states. That will show in time.
Have they? I mean really? I think our formerly-known 401k's, then 201k's, soon to be 101k's has gone poof, the FED has "taken" none of it, the FED has none of it, the FED has not used it, the govts of the world are still trillions in debt and unfunded liabilities, and we're just closer to economic calamity.
Well the prices of food, gasoline, clothes, shoes, property taxes, movie tickets, parking, bridge tolls, beer & wine, medicine, hospital rooms, aw heck the price of almost everything except labor is going up. But it's not inflation until after the election.
It’s the new normal. Don’t expect it to change if Romney is elected. The alterntives are too politically damaging, and politicians always take the course of least resistance. That’s why Congress is happy to cede monitary policy to the Fed. Doing nothing and letting the Fed handle it lets them avoid making real cuts in spending or default.
Its all about getting Obama re elected
Why the hell can’t I have a million deposited in my account?
We’re witnessing one of the greatest thefts in history. When the money supply is simply expanded on a whim, it cheapens what is already out there. They don’t have to steal anyone’s 401k, because when a loaf of bread costs $53, your retirement nest egg won’t look so hot anymore. A big shell game to conceal the fact that the treasury has been looted several times over.
“Rob from the poor. Give to the rich. It’s the DemocRAT way.”
I think both parties are in bed with each other on this. The only difference...there is no difference they all want us to be serfs. I just prefer the Republican road, more chances to derail the process.
Once a desirable rate of inflation that includes wages and everything is established, the congress will be able to act.
The action will be stabilize the rate. The inflation/devaluation must continue at that painful but acceptable rate until the $$ amount of the debt is reduced to an acceptable level in the new inflated currency.
There can be some growth and revenue enhancing tax measures but the primary function in the debt reduction equation will be inflation.
The current fed action allows the bankers to get upfront earnings to makeup for the coming losses to inflation of outstanding loans and mortgages.
A well regulated inflation including COLA raises and wage adjustments will be tolerated. Retirement accounts in cash will suffer. Investments should be in a diversified portfolio. Betting on American industry will be a long term winning strategy. A little gold and real estate will ride the waves.
The unknown is, can there actually be a well regulated inflation?
Bump so I can find this later. Good post blam. Good comments all.
Do you happen to know what the total supply of USDs in circulation (not just printed, but digital) is? I’m wondering what percentage a trillion new dollars is going to add to the total.
I’ve seen it as “QE4-ever”.
Bernanke has just kicked the can a little further down the road, allowing the central banks to acquire more gold with free money, so that they hold all the “new currency” on the other side.
If you’re aware of this, you can personally plan accordingly, acquiring hard assets and getting out of your soon-to-be-worthless FRN denominated wealth.
I do not know
Your right on target.
It’s also the Middle Class who is going to be destroyed by this. So much for the party that loves the MC.
Very good article, post, thread. BE PREPARED. In the meantime DEFUND/DEPOPULATE the debt slavemasters (stop spending our money), on the way to eliminating the FED or the need for a “FED”.
The left HATES, with a visceral passion, the existance of the middle class.
They want a society in which commoners are dirt poor and under the thumb of the elites (them), and the elites are living the lifestyle they deserve simply by being “elite”.
Any pandering to a “strong middle class” is simply a lie to achieve the power necessary to completely destroy it.
Gotta keep paying the regulators and social brainwashers to keep the riff raff from getting into the pie. It’ll go on, until the consequent crash happens. Then the elite folks will be the zombies. [Remember rash of bizarre incidents and suicides in 1929 and after. Add a few decades of interest.]
Surprise! People who suffer through a gradual decline in their standard of living tend to stay relatively stable per capita. Those who suffer a sudden, steep dive in their standard of living tend to react in more hyperbolic fashion on average.
Poverty doesn’t cause crime. Immorality does. Criminals refuse to consider consequences of their actions, as they are more apathetic. They come from all walks of life, although some tend to be more slippery while having resources that make them “untouchables.” Their counterparts with less in the way of resources commit more obvious crimes. As the more “political” folks fall from government/government-linked incomes, many of them will go haywire. Already beginning to happen, really.
There will be no vainglorious explosion of whatever for those who now regulate against others and feel invulnerable (and all of their government-connected cronies), but things will get worse—much like a leather binding that starts out very wet. It tightens, as it dries.
And eventually, pop! The realization that there will no longer any way to be a big government boss without a big manufacturing base and the freedoms that sustained it. Big business now depends on big, socialist government at all levels. Watch, as the situation changes.
Cheap currency is cheap currency. And any country that increases its manufacturing will have a currency that increases with it. A country that decreases its manufacturing, on the other hand, will see its currency decrease. It’s an unexpected but natural way of “free market” globalism (not so free at home, where Americans are prevented by relatives of globalists from starting, new, small production shops).
There were similarities in ancient tyrannies that were crushed, although most of the more striking similarities didn’t have so much directly to do with money (more social/moral/behavioral).
Yes, the Fed HAS taken it. I mean really.
The sum total of currency units (dollars) is the number of slices of the economic pie (GDP or total inherent value).
When the Fed “prints” more dollars (now at the rate of $85B/mo) the value represented by each dollar decreases, and is shared to the new dollars. Part of your 401k-invested value is transferred to those new dollars - redistribution of wealth via teleportation.
If the Fed doubles the currency supply, the value (purchasing power) of your investments is halved, while the new currency picks up the other half of that value just by coming into existence. The federal government takes that newly-confiscated-by-teleportation wealth and gives it to welfare recipients, creditors, and other unfunded liabilities - satisfying those obligations, while acquiring that wealth thru accounting sleight-of hand, and halving the value which was promised by redefining the representation thereof.
You have $10 in your 401k. Ten dollars of value. The federal government owes others $10 but has zero dollars value. (Note the difference in semantics.)
The Fed doubles the money supply.
The buying power of your investment halves, because inflation just hit 100%.
You still have $10 in your 401k, but it buys five “old” dollars of value.
The federal government now has $10 out of thin air, which also buys five “old” dollars of value (taken from you and you didn’t even notice save for $ shrinkage).
The federal government can now hand $2 to the 47%, $1 to creditors in interest payments, and $2 to other unfunded liabilities; those contracts are fulfilled.
And you sit there going “but...they didn’t _really_ raid my 401k...WTF happened?”
Not when the furious money-printing to catch up with numeric promises causes new promises to accelerate exponentially faster.
Sure the 47% is happy to get their promised money, but now wants bigger checks to cover the increased cost of living directly attributed to inflation caused by conjuring that money out of thin air. Cycle repeats until bubble pops.
If suggesting more QE drives down the value of the dollar, which makes our goods more affordable which will lead to greater demand for our goods, which will lead to more jobs to produce those goods thereby reducing unemployment which is the Fed’s objective, then by expanding QE to the infinity we can reduce the value of the dollar to zero, thereby making our goods free of cost which will create so much demand that will require so many new jobs that unemployment will be wiped out completely and everyone will be working. The only problem is, why is everyone working if the only thing they are earning are worthless dollars that can’t buy anything, but hey, it will solve the unemployment problem, right Bernanke?.................../s (thinking like a Keynesian makes my head hurt)
I agree with you... good explanation.
Isn’t it true, though, that at least right now, the banks have these new dollars in their reserve currency, and either won’t lend it out, or is prevented from lending it out?
Thus, at least in theory, it is not inflationary. If that is all the case, then the FED is thinking they are so adept, all they have to do is snuff out these new dollars when inflation starts to pick up.
Thus, they get to inflate the money supply without us seeing inflation, and then contract it.... IF they are quick enough.
Hmmmm... the hole in this is... I know they are borrowing 1+ Trillion, and spending it...
It’s still inflationary. That value is still being “teleported” (got a better term? please?) out of your pocket/account and into the government’s check-printing department. That cash may sitting in reserve, even prevented from going anywhere, but when those vaults are finally opened there won’t be much left therein.
I’ll have to think about the “snuffing dollars” process. You’re on to something there.
How is that creating jobs.
Doesn't the money have to be moving around to create jobs?
Yes, the money has to move to create jobs...
you see any jobs around? I see no money movement on those reserves to match.