Posted on 11/15/2012 3:06:11 AM PST by gotribe
Prior to the financial markets' obsession over the looming fiscal cliff, their single-minded focus was on monetary policy. Now, two months after the Federal Reserve announced its so-called QE3, its third round of quantitative easing, it appears the fuss was much ado about very little.
Ben Bernanke seems to be losing his battle with deflation, observes Walter J. Zimmerman, chief technical analyst for United-ICAP. So far, the Fed's scheme announced in September to buy $40 billion of mortgage-backed securities for however long it takes to lower unemployment has little to show for it. Quite to the contrary, market prices show the U.S. central bank has shown itself impotent in its fight against the undertow of deflation.
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Governments are the other great beneficiaries of the bond market's beneficence -- for now. There has been no penalty for the U.S. hurtling toward the fiscal cliff -- and more potential downgrades of its remaining triple-A ratings from Moody's and Fitch after last year's cut by Standard & Poor's -- while the Treasury can borrow at record-low interest rates. The so-called bond vigilantes of yore -- who in the 1980s and 1990s sharply boosted interest rates at the first sign of inflation -- are overcome by the central bank's purchases of the securities that finance the budget deficit. So, Bernanke & Co. are enablers of the dysfunction in D.C.
But, the signs are building that even the Fed is failing in its main aim of QE3, the blunting of deflationary forces. Along with equities, Zimmerman points out that even the DJ-UBS Commodity Index is down 8.4% since the mid-September announcement -- a sharp contrast to the 42% total rise after QE1, the 23% pop after QE2 and the 8.6% gain after Operations Twist.
(Excerpt) Read more at online.barrons.com ...
“There’s no net impact on the U.S. economy.”
Yes, there’s a net inflationary effect that’s staving off deflationary pressure on the US economy.
Essentially - what the Fed is doing is trying to keep housing prices up and fighting off the market forces telling people that housing prices need to drop.
Basically, they are setting fire to their money. This increases the dollars in circulation.
QE3 ineffective
Outside the short term gas prices, what exactly has gone down in price. Hell, my homeowners insurance premiums just went up 19%, my property tax up 10% Some deflation!!!!!!!
You can’t fix the monetary problem until you fix the fiscal problem.
You have to look at commodities. Taxes go up because of politicians.
“Outside the short term gas prices, what exactly has gone down in price. Hell, my homeowners insurance premiums just went up 19%, my property tax up 10% Some deflation!!!!!!!”
Here in NC Duke Energy just received approval from the utilities commission for a 7% rate increase. It is needed because they are closing down coal plants as fast as they can due to the Obama Administration environmental regulations. My homeowner’s and auto insurance premiums also jumped. The cost of a doctor visit is up over 10% this year. Every time I go to the grocery store food prices are up and the container size is reduced. I see stock prices declining today but not much else.
I just got a notification from Fannie Mea that my mortgage (from Chase)had just been transferred to Fannie Mea, and “not publicly recorded”???
So I suspect they’re laundering money into the banking system that way.
If Fannie Mea paid Chase for my loan, and I’m paying Chase for my loan ??????????????
Well, OK -- but after having been nearly burned once, I can assure you that smart institutional investors aren't going to be too enthusiastic about investing in mortgage-backed securities -- or ANY dollar-denominated assets, for that matter.
And voila, you have it exactly...
eventually (e.g. Europe) people will not - and can not - continue to buy securities issued by goverments that need to borrow more (”roll over” the debt) just to pay the interest on the bonds they sell to people.
An annual SURPLUS is necessary, mathematically, in order to “pay down” the debt. That means, to “retire” debt without having to borrow to do it.
If on Jan 1 gubmint has $16 trillion outstanding,
then, during the year, the gubmint
a) issues $1 trillion in new bonds, and
b) redeems $2 trillion in old bonds
at year end, December 31, the outstanding debt would be $15 trillion.
This reduction in debt is limited to the size of annual surplus. Of course nowadays we have no surpluses in sight - just annual deficits.
Since investors know the annual deficit/surplus picture for the next ... forever years looks so dismal, and the debt is about 8 times as large as every dollar that comes in for 1 typical year, investors are indeed getting to the point of having no stomach for buying more government bonds.
1. The money supply is only one factor in inflationary pressure. The velocity of that money supply -- i.e., the rate at which it changes hands -- is a very important factor, and is one that has declined considerably in the last couple of years.
2. Don't focus on home prices when assessing inflationary pressure. Hardly anyone pays cash for a home, so the prices are heavily influenced by credit terms, availability of credit, interest rates, etc. Very few people have actually bought homes in the last couple of decades. As we've seen since the housing market collapsed, most of them bought mortgages.
In any case, Bernanke will be able to arrest the deflationary collapse, he won’t be able to stop it.
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