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Posts Tagged ‘QE3’

David DeGraw
AmpedStatus
08/25/2011 22:39 -0400

There are many factors that clearly demonstrate why it would be disastrous for the Federal Reserve to repeat their vicious Quantitative Easing (QE) policy. If you want to know a significant reason why they cannot get away with another round of QE, here is an equation for you:

(Quantitative Easing + Extreme Weather = Revolution + World War III)

From the very beginning we knew that the Federal Reserve’s QE program was going to cause the cost of food to rise and the dollar to decline in value, and that these intended results would lead to an increase in poverty and civil unrest. Now there is a new study that gives us some more proof of this obvious fact:

Are food prices approaching a violent tipping point?

“A provocative new study suggests the timing of the Arab uprisings is linked to global food price spikes, and that prices will soon permanently be above the level which sparks conflicts….

… there is a specific food price level above which riots and unrest become far more likely. That figure is 210 on the UN FAO’s price index: the index is currently at 234, due to the most recent spike in prices which started in the middle of 2010 [coinciding with QE2].

Lastly, the researchers argue that current underlying food price trends – excluding the spikes – mean the index will be permanently over the 210 threshold within a year or two. The paper concludes: “The current [food price] problem transcends the specific national political crises to represent a global concern about vulnerable populations and social order.” Big trouble, in other words….

The next part of the study identifies that the serious unrest in North Africa and the Middle East also correlates very closely with [the QE2] food price spike. Bar-Yam also notes: “Several of the initial riots in North Africa were identified in news stories as food riots.” From there, the researchers make their prediction of permanently passing the 210 threshold in 12-24 months.”
[read full report]

In other words, if the Fed engages in another round of QE, the global unrest that they have already ignited will go hyperbolic.

Before getting into the details on how the Fed deliberately made these food prices spike, let’s look at another new study, which also helps demonstrate the obvious, extreme weather is linked to war:

Climate cycles linked to civil war, analysis shows

“Changes in the global climate that cut food production triggered one-fifth of civil conflicts between 1950 and 2004

Cyclical climatic changes double the risk of civil wars, with analysis showing that 50 of 250 conflicts between 1950 and 2004 were triggered by the El Niño cycle, according to scientists.

Researchers connected the climate phenomenon known as El Niño, which brings hot and dry conditions to tropical nations and cuts food production, to outbreaks of violence in countries from southern Sudan to Indonesia and Peru.

Solomon Hsiang, who led the research at Columbia University, New York, said: “We can speculate that a long-ago Egyptian dynasty was overthrown during a drought. This study shows a systematic pattern of global climate affecting conflict right now. We are still dependent on climate to a very large extent.”…

Mark Cane, a member of the team, said global warming would have greater climatic impacts than El Niño, making it “hard to imagine” it would not provoke conflicts.”
[read full report]

Put all these factors together and you have, “The Road Through 2012: Revolution [and/or] World War III.”

In summation, Ben Bernanke and the Fed’s economic central planners were clearly aware of the hostile climate and weather patterns when they engaged in QE2. The Fed’s infamous policy, as I said before, “deliberately threw gasoline all over those brush fires. QE2 was another economic napalm bomb from the global banking cartel.” They knew that they were deliberately attacking (sacrificing) tens of millions of people, but that was secondary to keeping their global Ponzi scheme going by pumping another $2.1 trillion into their fraudulent, insolvent banking system through both QE programs. This is why Ben Bernanke is guilty of crimes against humanity.

Now, let’s revisit what I’ve been reporting on for the past year:

I: Centrally Planned Economic Repression

The IMF has a well-worn strategy that they use to conquer national economies. As I warned four months ago, we have now progressed into Step 3.5: World Wide IMF Riots. Back in October, in a TV interview with Max Keiser, we discussed leaked World Bank documents that revealed the IMF’s strategy. I stated the following:

“They have a four-step strategy for destroying national economies…. We are about to enter what they would call Step Three. Step Three is when you’ve looted the economy and now food and basic necessities all of a sudden become more expensive, harder to get to. And then, Step 3.5 is when you get the riots. We are fastly approaching that….

We are headed to, as the IMF said, and as they plan, Step 3.5: IMF Riots. That’s what’s coming…”

Fast-forward four months to today, and now we see country after country rebelling against high food prices. Since our October interview, food prices have spiked 15%. According to new World Bank data, since June 2010, “Rising food have pushed about 44 million people into poverty in developing countries.”

As Federal Reserve Chairman Ben Bernanke announced another round of Quantitative Easing (QE2), those of us paying attention knew that the trigger had been pulled and Step Three had been executed. It was a declaration of economic war, an economic death sentence for tens of millions of people – deliberately devaluing the dollar and sparking inflation in commodities/basic necessities. It was a vicious policy that would impact people from Boston to Cairo.

When QE2 was announced, I warned: “Food and Gas Prices Will Skyrocket, The Federal Reserve Just Dropped An Economic Nuclear Bomb On Us.” I also wrote: “The Federal Reserve is deliberately devaluing the dollar to enrich a small group of a global bankers, which will cause significant harm to the people of the United States and severe ramifications throughout the world…. The Federal Reserve’s actions are already causing the price of food and gas to increase and will cause hyperinflation on most basic necessities.”

To be clear, there are several significant factors contributing to rising food prices, such as extreme weather conditions, biofuel production and Wall Street speculation; but the Federal Reserve’s policies deliberately threw gasoline all over those brush fires. QE2 was another economic napalm bomb from the global banking cartel.

In a recent McClathy news article entitled, “Egypt’s unrest may have roots in food prices, US Fed policy,” Kevin Hall reports:

“‘The truth of the matter is that when the Federal Reserve moved on the quantitative easing, it did export inflation to a lot of these emerging markets…. There’s no doubt that one of the side effects of the weak dollar and quantitative easing has been rising commodity prices. It helped create this bullish environment for commodities. This is a very delicate balancing act.’

It’s a view shared by Ed Yardeni, a veteran financial market analyst, who reached a similar conclusion in a research note to investors…. He joked that Fed Chairman Ben Bernanke should be added to a list of revolutionaries, since his quantitative easing policy, unveiled last year in Wyoming, has provoked unrest and change in the developing world.

‘Since he first indicated his support for such a revolutionary monetary change… the prices of corn, soybeans and wheat have risen 53 percent, 37 percent and 24.4 percent through Friday’s close,’ Yardeni noted. ‘The price of crude oil rose 19.8 percent over this period from $75.17 to $90.09 this (Monday) morning. Soaring food and fuel prices are compounding anger attributable to widespread unemployment in the countries currently experiencing riots.’”

The people throughout the Middle East and Northern Africa, on the fringe of the Neo-Liberal economic empire and most vulnerable to the Fed’s inflationary policies, are the first to rebel.
[read full report]

The conclusion that we reach, the unfortunate reality of our current crisis: the Federal Reserve and global economic central planners have declared war on us. We are under attack.

We must remove Ben Bernanke from power and hold him and the rest of the global banking cartel accountable. We must also break up the “too big to fail” banks. This a message I, along with many others who have analyzed our economic situation, have been repeating over and over for the past three years.

Hopefully, a critical mass of people will soon understand this reality and back it up with non-violent civil disobedience before riots and violence rip our society apart. For these reasons, let’s all go to Wall Street on September 17th and show these tyrants that we’ve had enough.

Read the entire article HERE.

By Greg Robb
MarketWatch
August 25, 2011

Bernanke will open the Fed conference with a speech on Friday morning at 10 a.m. Eastern. Stocks have moved higher this week after being pummeled in mid-August, and many analysts attribute the move to investor hopes that Bernanke will use his speech to promise another round of asset purchases, or QE3.

Economists said that the recent weakness in the economy stems from structural issues like foreclosed properties and an unskilled pool of unemployed labor that are immune from monetary policy stimulus.

“I hope he talks about the limitations of monetary policy,” said Mickey Levy, chief economist at Bank of America.

Fed policy is very effective at preventing a downturn but once weak demand is in place, monetary policy cannot lift it, Levy said.

“All the targeted counter-cyclical stimulus is not going to address the huge pocket of distressed properties,” Levy said.

John Silvia, chief economist at Wells Fargo, agreed that the woes facing the economy are structural in nature and described the Fed policy options as modest.

“The Fed has shot the big cannons. They are now playing the game with smaller ammunition,” Silvia said.

At its interest rate meeting earlier this month, the central bank surprised the markets by promising to keep its benchmark Federal funds rate near zero until mid-2013.

Former Fed governor Randall Krozner said that is all the Fed is prepared to do at the moment, and speculation of an announcement of QE3 in markets was misplaced.

Such a big policy shift would only come at a formal Federal Open Market Committee meeting and not in a speech, he said.

Many Fed watchers, including former vice chairman Alan Blinder, believe the central bank is likely to engineer another round of asset purchases, or quantitative easing. Bernanke ready for action but when is in doubt.

In the first round of bond purchases between Dec. 2008 and March 2010, the Fed bought $1.7 trillion of mostly mortgage securities, and in the second round between November and June, the central bank snapped up $600 billion of Treasury bonds.

These purchases did not stimulate demand, Levy noted.

“The slowdown is not the fault of not enough liquidity,” he said.

Levy said he expected Bernanke to say the Fed will do whatever it has to do to avoid recession.

Ultimately, the next step is likely to be take steps to alter the composition of the composition of the Fed’s balance sheet to keep bond yields low, he said.

“That is all the Fed can do,” Levy said.

“More QE would not help. Lower long-term yields on the margin would help,” he added.

Silvia forecast sluggish growth in the 2% range over the next 18 months.

“We are in one of those periods where the economy grows far below potential and the unemployment rate will probably rise,” he said.

“It is a very challenging economy. I just don’t see a silver bullet or a special spark,” he said.

Read the entire article HERE.

July 29, 2011
ProActive Investors UK

by Agustino Fontevecchia
Jul. 13 2011 – 11:26 am
FORBES

Chairman Ben Bernanke faced-off with Fed-hating Representative Ron Paul during his monetary policy report to Congress on Wednesday. The head of the Fed was forced to respond to accusations of enriching already rich corporations while failing to help Main Street, while he was pushed on his views on gold. When asked whether gold is money, Bernanke flatly responded “No.” (See video below).

While most of Bernanke’s reports to Congress serve politicians to pursue their own agendas by gearing the Chairman towards their issues, with Republican Rep. Bacchus talking of the unsustainability of Medicaid and Rep. Frank (D, Mass.) asking about the need to raise the debt limit without cutting spending, it was a stand-off between Bernanke and Ron Paul that took all the attention. (Read Apocalyptic Bernanke: Raise The Debt Ceiling Or Else).

Rep. Ron Paul, Republican for Texas, asked Bernanke why a capital injection of more than $5 trillion “hasn’t done much” to help the consumer, who makes up about two-thirds of GDP in the U.S., and prop up the economy, while it helped boost corporate profits. “You could’ve given $17,000 to each citizen,” Ron Paul claimed.

Gallery: The Five Stages of Greece’s Financial Woes

Bernanke, clearly on the defensive, told Rep. Ron Paul that his institution hadn’t spent a single dollar, rather, the Fed has been a “profit center” according to the Chairman, returning profits to the federal government. As Bernanke began to sermon Rep. Paul on the history of the Fed (“we are here to provide liquidity [in abnormal situations],” the Chairman said), he was interrupted.

“When you wake up in the morning, do you think about the price of gold,” Rep. Paul asked. After pausing for a second, Bernanke responded, clearly uncomfortable. that he paid much attention to the price of gold, only to be interrupted once again.

“Gold’s at about $1,580 [an ounce] this morning, what do you think of the price of gold?” asked Rep. Paul. A stern-faced Bernanke responded people bought it for protection and was once again cut-off, with Ron Paul once again on the offensive.

“Is gold money?” he asked. Clearly bothered, Bernanke told the representative, “No. It’s a precious metal.”

After Paul interrupted him to note the long history of gold being used as money, Bernanke continued,”It’s an asset. Would you say Treasury bills are money? I don’t think they’re money either but they’re a financial asset.”

“Is gold money?” he asked. Clearly bothered, Bernanke told the representative “no, gold is not money, it’s an asset. Treasuries are an asset, people hold them, but I don’t think of them as money,” said Bernanke.

Rep. Ron Paul again jumped in, noting the long history of gold being used as money, and then asked Bernanke why people didn’t hold diamonds, clearly hinting at his fiat money criticism of the U.S. monetary system. The Fed Chairman told Rep. Paul it was nothing more than tradition, and, as he was attempting to develop his argument, Rep. Ron Paul quickly asked the acting authority of the House of Representative’s Committee on Financial Services, Rep. Bacchus, to excuse him for exceeding his time, as he returned the floor to the Committee. (Read Bernanke To Rep. Paul Ryan: QE2 Created 600,000 Jobs).

The interesting exchange served as one of the few times Bernanke has been publicly pushed off his comfort zone by an elected official. Rep. Ron Paul brought up the issues that he’s famous for, namely, a sort of allegiance between the Fed and the nation’s most powerful institutions, the illusion of fiat money, and the gold standard. Bernanke, angered and bothered, had no option but to respond. (Read Bernanke’s Contradiction: Minutes Reveal QE3 Talk And Exit Strategy).

Read the entire article HERE.

By Jennifer Ablan
Reuters
NEW YORK | Wed Jun 22, 2011 12:15pm EDT

Jackson Hole is an annual global central banking conference, led by the Fed, which takes place at Jackson Hole, Wyoming. It was at this event last year that Fed chairman Ben Bernanke said the U.S. policymakers were prepared to make a major new investment in government debt or mortgage securities if the economy worsened significantly or if the Fed detected deflation — a prolonged drop in prices of wages, goods and assets like homes and stocks.

Gross, the co-chief investment officer of PIMCO, the world’s top bond manager, on Wednesday said on Twitter: “Next Jackson Hole in August will likely hint at QE3 / interest rate caps.”

PIMCO oversees more than $1.2 trillion in assets, mostly in fixed-income. PIMCO confirmed Gross had sent the Tweet on QE3.

Last week, Gross first introduced the idea that the Fed on Wednesday could signal that interest rates could be capped if warranted due to soft economic growth.

Gross said on Twitter last week on Tuesday that: “QE3 likely to take form of ‘extended period’ language or interest rate caps on 2-3-year Treasuries.”

Gross also said on Twitter last week: “Next week’s Fed statement will likely stress ‘extended period of time’ language or even a period of interest rate caps.”

The Fed will issue its policy statement after the close of its meeting on Wednesday.

The recent soft patch of economic data has increased speculation over whether U.S. policymakers will perform a third round of bond purchases, an unconventional monetary measure known as “quantitative easing,” or QE2. The second round of QE2′s $600 billion in purchases will conclude on June 30.

Read the entire article HERE.

By Greg Robb
June 20, 2011, 10:19 a.m. EDT
MarketWatch

The Federal Open Market Committee, which on Tuesday starts a two-day meeting, is widely expected to make the formal decision to end the current program of buying $600 billion of Treasury securities on June 30. It is also expected to maintain its existing policy to reinvest principal payments from maturing securities to not let its balance sheet shrink, and to keep the target range for the federal funds rate at between 0% and 0.25%.

That decision, due at 12:30 p.m., should hold few surprises, though the accompanying statement will be eyed. But the fireworks will start at 2:15 p.m., when Bernanke holds his second post-rate-decision press conference.

Bernanke’s challenge this week will be to calm financial markets, Corporate America and Main Street, all jittery about what’s in store for the U.S. economy.

A recent soft patch of economic data has only added to existing concerns about the fate of the U.S. once the Fed’s Treasury bond purchase program, frequently called QE2, comes to an end.

A stock market that has slumped for six weeks out of seven, a sky-high unemployment rate of 9.1% and the biggest 12-month inflation rise since Oct. 2008 has provided ammunition of all sorts for the Fed’s many critics.

“What Bernanke needs to do is build confidence in the economy. He has got to be able to step up there and say things are going to get better,” said Robert Brusca, chief economist at FAO Economics.

Bernard Baumohl, managing director of The Economic Outlook Group, said that Bernanke will need solid arguments to convince investors.

“I don’t think he is going to be a cheerleader. I think he’s going to have to be practical and realistic,” Baumohl said.

“He’s got to be straight,” agreed Scott Anderson, senior economist at Wells Fargo.

Baumohl said Bernanke will try to soothe markets by saying there is not going to be any fundamental change to policy in either direction for the foreseeable future.

While the hurdles to a third round of bond purchases are high, the same is true for an exit from the current ultra-low policy stance, Baumohl said.

“He will convey the message that the Fed is going to take a wait-and-see approach, Baumohl said.

But Bernanke will stress that the end of the QE2 program is not the equivalent of pulling the plug on the economy, said Michael Moran, chief economist at Daiwa Securities in New York.

In another step to build confidence, Bernanke will pledge to very closely monitor conditions to see if any of the threats facing the U.S. economy materialize such as a financial crisis in Europe, Baumohl said.

On inflation, Bernanke is likely to be a bit more hawkish than previous meetings, said Maury Harris, chief economist at UBS Securities, in a comment echoed by a number of analysts.

Core consumer price inflation, excluding food and energy prices, rose 0.3% in May, the biggest gain since June 2008. Many see core inflation rising near 2% year-over-year by the end of the year.

“Bernanke will have to acknowledge that,” Harris said.

Mike Englund. chief economist at Action Economics, said the public is so upset about higher energy prices that Bernanke is not likely to “pop the cork” about the recent small drop in gas prices.

“It is hard to be optimistic about $98 per barrel price of oil,” he said.

Ray Stone, economist at the forecasting firm Stone & McCarthy Research Associates, said he was intrigued by some news reports that the Fed might adopt a formal inflation target. Atlanta Fed President Dennis Lockhart this month backed an inflation target, and Bloomberg News reported that Fed officials were seriously discussing it. The Wall Street Journal said action isn’t likely at this meeting.

At the moment, the Fed has an implicit target of roughly 2% inflation.

But with inflation moving higher while Fed policy is accommodative, an inflation target might be one way for the Fed to stress it remains vigilant, said economists at Barclays Capital Research.

Stone said the odds are “less than 50-50” that the Fed would adopt a formal target “but I wouldn’t be knocked out of my chair if they did it,” he said.

The Fed also is expected to cut its economic growth forecast, which currently calls for growth between 3.1% and 3.3% this year.

Read the entire article HERE.

by Lance Roberts
June 6, 2011
StreetTalkAdvisors

The media has been replete lately with a variety of different government officials saying that there will not be a third round of Quantitative Easing. Even the great Ben Bernanke himself on April 27th spoke against the possibility of QE 3. This isn’t surprising, of course, because in order for something like QE to have the most effect it needs to be, well, a surprise.

However, I am throwing down the gauntlet and making the call – there will be Quantitative Easing, and a big one most likely, by the end of summer. There I said it; of course, I have actually been saying this for the last couple of months and it doesn’t take much of a real genius to figure it out considering that we are heading into a presidential election year. However, it most likely won’t be called QE 3 since the term QE is now politically and socially almost taboo.

The Whitehouse Effect

So why does QE play such an important role for Obama going into an election? No president has ever been reelected to office when unemployment is above 8%, much less 9%. With the unemployed labor pool at very high levels, poor sales being the biggest concern for small business owners (according to the most recent NFIB survey) and wages failing to keep up with a rising cost of living there is no incremental demand on businesses to create new jobs. Since small businesses have 6 applicants for every 1 job opening, are are the primary creators of 70% of the jobs in the country, there is no pressure for wage increases. Without rising incremental demand from consumers, because 1 in 5 are underwater or delinquent on their mortgage, are unemployed or on food stamps, there is no reason for small business to expand production or manufacturing. While the Federal Reserve has been worried lately about commodity price inflation – the real threat to the economy is wage deflation as it bites into the basic economic cycle of a supply/demand economy.

However, it isn’t just the unemployed that will kill Obama at the polls. Without another round of QE, and most likely soon, the economy will be headed for extremely low or potentially even negative growth. When round one of QE finished in the summer of 2010 the economy slid form 3.1% annualized growth to 1.7%. This shock to the system immediately launched the Fed into overdrive to start QE 2. Today we are heading into the summer with a 1.8% annualized growth rate, likely to be revised down a notch, and as QE 2 winds up entirely at the end of June we are likely to see a slide to below 1%. This will most likely get a very late night phone call placed to Mr. Bernanke from the Whitehouse as the average American votes psychological and emotionally.

In the last election the average American overwhelmingly voted an inexperienced and unproven individual with great oratory skills and personality into the highest office in the country on the back of a Pepsi slogan – “Hope and Change”. Unfortunately today, 70% of the population, according to a recent Gallop poll, have lost the “Hope” part of the equation as they still “feel” like we are in a recession or depression. That’s right, they “feel” like things are not good which is an emotional bias; and they will vote the same way.

Furthermore, as the economy slides, so does the stock market as prices are adjusted to reflect what the future profitability of companies may look like. With the market currently expensively valued and analysts still predicting higher profit margins in the coming months – anything that creates stress on corporate profitability, like a weakening economy, will cause a correction in asset prices to reflect new estimations. As always, the market, because it is driven by human psychology (fear and greed) in the short term will overshoot on the upside as well as on the downside. Therefore, another nail in Obama’s reelection coffin will be if the stock market has declined by 20% going into campaign mode. Remember, it was just earlier this year during his State of the Union address that he specifically stated that under his watch the economy had recovered along with the stock market. People are emotionally affected by the value of the stock market – the “wealth effect” is a driver of consumer behavior. When Ben Bernanke launched QE 2 he even added a third mandate to the Fed to include not only full employment and price stability but also asset inflation to create a wealth effect. Without that wealth effect going into the polls – voters are very likely to pull the lever for “Change”.

How To Play It

Beginning back on April 25th we began writing about reducing allocations to risk based assets (read: equities and commodities) going into the summer months and the end of QE 2. As shown in the chart when QE 1 ended last year there was a fairly substantial decline in the markets of almost 20% as the economy began to slow down. Having only that precedent to work off of we should remain cautious and reduce allocations of invested dollars in all risk based categories rather than rotate sectors. I say this because rotating from Technology to Utilities may provide outperformance in the portfolio – during a market correction it will only mean that you will lose less money. Moving into cash and fixed income for the summer months as QE ends has yielded a net positive return to date.

Furthermore, this strategy now sets up the individual investor for part two of the strategy which is having dry powder available to buy back into equity exposure when QE 3 is announced. The market has now been trained, like Pavlov’s dogs, to respond to the QE call. When Ben Bernanke and friends ring the dinner bell the dogs will come running and having cash on the sidelines protected from the summer sell off certainly provides an opportunity to be the “strong hand” buying from “weak hands” at that point.

Remember, being cautious is more important than losing money. The media is constantly telling people to chase stocks which have been one of the, if not the, poorest performing asset class over the last decade. You can always make up a lost opportunity – it is nearly impossible to make up lost capital.

How Much And When?

So, now we know that the Whitehouse needs QE 3 the most right now but how big might it be. QE 1 was $1.25 Trillion coming off the lows of the market in 2009. QE 2 was $600 Billion in the 3rd quarter of 2010 but really had very little effect relative to the effects received from QE 1. I have spoken in the past about the “Diminishing Return” syndrome that would come with each successive QE program. In order for QE to have any real “bang for the buck” this time around it will have to be big, really big, like $2 Trillion in total. However, not only that, but it will also prove ineffective unless it is combined with a serious attempt at mortgage equity write downs, which will have to be combined with guarantees for the second lien holders, mortgage fraud forgiveness for the banks, further tax cuts and credits for small businesses and some real regulation for the banking industry to restore faith in the stability of the financial system. (As a side note – I am really against bailing out homeowners and banks as it is a process fraught with peril and another article for another day.)

This is what it will take to kick start the markets again and boost asset prices, jolt the economy back to 2.5% growth and keep the big “O” in office for another four years – maybe, and that is a big maybe at this point. It will also just “kick the can” down the street for another brief period in time until we all realize that we are in a balance sheet recession and until the total amount of debt, which the majority of it belongs to households, is reduced to a sustainable level, savings rise to historical levels which can sustain growth and the consumer is able to start creating the incremental demand needed for businesses to grow – we are going to be stuck in this cycle for quite a long and frustrating time.

by Puru Saxena
Editor and Founder at Money Matters and Puru Saxena Limited
05/27/2011
Financial Sense

Over the past few weeks, we have spent a lot of time digging into the macro data pertaining to the world’s developed economies. After careful analysis, our research has convinced us that quantitative easing (money creation out of thin air) will not end anytime soon.

In fact, we believe that quantitative easing will only end when there is a run on one, or some of the world’s major currencies. Remember, the world is governed by short-sighted politicians and as long as the policymakers continue to ‘kick the can down the road’, quantitative easing (destruction of the purchasing power of money) cannot and will not end.

Figure 1 captures the state of the American currency. It shows that the US Dollar Index has recently broken below an important support level and is currently in free-fall. Furthermore, it is notable that the US Dollar’s downtrend commenced last summer when the Federal Reserve announced the second round of quantitative easing. Now, the Federal Reserve may continue to argue that its quantitative easing program is not inflationary but the market clearly does not like the dilution of the existing money stock.

Figure 1: Is this really the world’s reserve currency?

It is notable that since the credit crisis in 2008, the Federal Reserve has created over US$2 trillion new dollars via its various programs. Some of this newly created money was spent on buying dubious mortgage backed securities from the banks at inflated prices. More recently, a large percentage of the money was lent directly to the US government. In fact, PIMCO believes that since last summer, approximately 70% of newly issued US Treasury securities have been bought by the Federal Reserve!

With the latest round of quantitative easing ending in June, the market is now waiting for the Federal Reserve’s next move. However, if a recent Bloomberg news release is any guide, the central bank plans to continue lending money to the US government (by purchasing additional US Treasury securities from the proceeds of the maturing mortgage backed securities).

So, based on the Federal Reserve’s intentions, it should be clear to everyone that Mr. Bernanke will keep financing the American government’s deficit. Given the fact that foreign demand for US Treasury securities is waning and China has been a net seller for four consecutive months, it is hardly surprising that the Federal Reserve has stepped up as the lender of last resort. After all, Mr. Bernanke knows full well that if he stops lending money to the US government, interest rates will rise significantly which in turn will exert tremendous pressure on the American public. If interest rates surge anytime soon, millions of indebted Americans may default on their debt; thereby bankrupting the American financial institutions.

More importantly, rising interest rates will also exert tremendous pressure on the American government. It is noteworthy that America’s federal debt has already climbed to US$14.2 trillion and every one percentage point increase in the cost of capital will cost an extra US$142 billion annually in interest payments alone. Therefore, if short-term interest rates moved up to even 4%, the American government’s annual interest expense will rise by a staggering US$568 billion. Furthermore, when you consider the fact that the American government’s 2011 revenue is expected to be in the region of US$2.3 trillion, you begin to realise that America has a problem on its hands. The reality is plain and simple – America cannot afford higher interest rates.

Thus, in order to keep short-term interest rates artificially low, the Federal Reserve will have to continue with its policy of creating new dollars and lending them to the American government. Our assessment suggests that if the American stock market wavers in the summer, the Federal Reserve will promptly announce another round of quantitative easing. The truth is that once a heavily indebted nation has embarked on a zero interest rate policy, it is very difficult to remove the punch bowl.

To complicate matters even further, the American government continues to spend way more than its revenue permits and this year, its budget deficit will come in at US$1.4 trillion or 10% of America’s GDP! If the White House spends US$1.4 trillion more than its tax receipts in 2011, then it will have to borrow this money from somewhere; thereby adding to the nation’s federal debt. It goes without saying that at record low interest rates, America’s foreign friends are not too keen on lending money to Mr. Obama’s administration. Therefore, it is inevitable that the Federal Reserve will continue to provide cheap funding.
Unfortunately, there is no such thing as a free lunch and the Federal Reserve’s mindless money creation will have dire consequences. If the central bank continues to create new dollars out of thin air and finance Mr. Obama’s deficit spending, the end game will be a severe decline in the value of the American Dollar.

Under ‘normal’ circumstances, if America was the only guilty party, its currency would have collapsed against other major currencies (which it has to a certain extent). However, in today’s ‘modern’ day and age, most of the developed countries are in the same sinking boat, thus it is very difficult to forecast which currencies will emerge as the winners.

Consider Europe’s financial health. Defying logic, the Euro area’s debt has increased over the past 3 years. When the house of cards collapsed in 2008, any sane person would have expected debt deleveraging to occur. However, the genius of European ‘bailouts’ and ‘stimulus’ has managed to achieve just the opposite – Euro area’s federal debt has now climbed to 85.3% of GDP! Finally, as far as Japan’s developed economy goes, its federal debt has surged to almost 200% of GDP!

Although federal debt to GDP is a popular yardstick often used by economists to measure a nation’s pulse, a US based hedge fund firm (Hayman Capital) argues that it may be better to compare the debt overhang in each nation with the government’s revenue. In this respect, Figure 2 does a good job of summarising the predicament of the developed world. As you can see, Japan tops this infamous list and its federal debt is over 1900% of the government’s annual revenue. Note that America’s debt burden is very similar to Greece – yet its government debt securities enjoy the highest credit rating!

Figure 2: Government debt to revenue ratio (2010)

Look. As long as the politicians refuse to restructure debt and continue to run large deficits with artificially suppressed interest rates, the purchasing power of all currencies will plummet over the years ahead. The unintended consequence of pursuing reckless monetary and fiscal policies will be extreme inflation and a currency crisis.

Perhaps this is the reason why one of the Chinese officials recently opined that China must reduce its foreign exchange reserves by an astonishing 65% to US$ 1 trillion. Interestingly, only a couple of days later, the Chinese media reported that its policymakers are in the process of setting up investment funds specifically to acquire precious metals and energy.

As it turns out, the Chinese are not alone in understanding the true impact of money creation and deficit spending. Ironically, in an article published in 1966, Mr. Greenspan (who later became one of the biggest money printers in history) had the following to say about deficit spending:

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

Given the ridiculous debt overhang in the developed world, the ongoing deficit spending programs, artificially low interest rates and the endless quantitative easing, we believe there is a genuine risk of very high inflation.

Accordingly, from an investment standpoint, we have allocated a reasonable portion of our managed capital to precious metals. If our assessment proves to be correct and the price of gold and silver sky-rockets over the next 2-3 years, our directional bets will produce very large gains.

Read the entire article HERE.

Rolling Stones Matt Taibbi

The fact that those responsible for the recent economic crisis have not been held accountable is setting a very dangerous trend, believes investigative journalist Matt Taibbi, author and contributing editor to Rolling Stone magazine.

by Tyler Durden
ZeroHedge
04/25/2011

From Peter Tchir of TF Market Advisors

To QE or not to QE, that is the question.

So here is what I expect to happen and why.

The Fed will continue to re-invest proceeds from repayments.

The Fed will use proceeds from pre-payments and redemptions to buy new assets. If they don’t purchase new assets, they are effectively tightening. Any time one of their treasuries matures, they will receive payment from the treasury. This money has to be reinvested or else the Fed will have to remove some 1’s and 0’s from somewhere in the system, effectively, unprinting money. So using the proceeds merely keeps the status quo.
As part of this, they will also announce that they tend to purchase longer dated assets with these redemption proceeds. They will argue that they want to add additional support to the long end of the curve specifically to help the mortgage market. They may even go back to purchasing mortgages and not just treasuries. The rationale of using the money to lend as much support to the mortgage market as possible is the most politically acceptable reason. An unspoken reason for extending maturities will be growing concern within the Fed that this tool will be taken away, so to ensure the most control of their balance sheet they will want to extend their portfolio and reduce roll off going forward.

I believe the market has almost completely priced this in. Any sign that they will not re-invest proceeds would be a negative for the market. I’m not sure the market is pricing in any extension out the curve or into mortgages so those could provide mild upside. I’m a little concerned that much of what I read and hear tends to view re-investment as a continuation of QE2. I don’t see it that way. Any re-investment of proceeds from a treasury redemption is merely keeping the status quo. No new money is being created nor being pumped into the system, its no different than if the Fed had originally purchased this longer dated bond.

QE3 will differ from QE2 and has only a 50/50 probability of being announced

On a basic level, the hawks within the Fed would like to pause the QE program at the end of June. The doves are far more likely to be pushing for another round, but they seem less aggressive right now. The economic data is much stronger than when QE2 was first announced, although it has been weakening of late, and the sovereign debt crisis in Europe has taken another leg down. In an ideal world for the Fed, they would allow QE2 expire in June, but talk up the potential for QE3 in the event it is needed. There are two problems with this approach. One problem is that the Fed is well aware of the growing criticism of the policy. Somewhere in the back of his mind, Ben, must be concerned that if he does not proceed with QE2 now, there will be too much pressure on the voting members to launch QE3 later. If they don’t launch QE3 in June but the data deteriorates to the point they want to launch in September, the outcry might just be too strong. The government as a whole is already against it. Certainly the argument that ‘it worked’ would be difficult to make, the reality would be that just like so many other programs is that it increased current economic activity at the expense of future economic activity. Also, since Ben is constantly trying to manage expectations, what would the market reaction be to a Fed that does not proceed with QE3 in June but tries to do it only a short while later?

So I think they might be pressured into launching a version of QE3 in June, but I think it will look very different from QE2. I expect that it would target longer dated treasuries and possibly even mortgages, in an effort to create the most political support. I also believe it will be more open ended. Rather than saying we will spend $X billion in 6 months and here is our purchase schedule and target portfolio, he will create a ‘war chest’. QE3 will be positioned as we have $X billion that we are prepared to use to purchase longer dated treasuries and mortgages if and when we see the need to add support. This would be a true compromise. It does not force the Fed to create a schedule of auctions like QE2, in fact if the data remains stable they don’t have to do anything. That should appease the hawks. By targeting maturities that directly impact mortgage rates, its more palatable to the average American, and by keeping the activity less obvious they can deflect any links to inflation more easily. It also keeps the purchases open at a time when there must be some real concern that this alternative tool could be restricted in the future.

I believe that the market is set up for some disappointment. It feels like a lot of investors are saying they don’t expect QE3 but deep down think it’s likely and are positioned for the positive surprise. Another group of investors seems convinced that no QE3 is priced in so are comfortable being long since only a positive surprise could happen. In the end, I think a full QE3 announcement is mildly positive, a version of QE3 lite as described above is a minor negative, and no QE3 would be negative for the markets.

What the interested parties are pushing for

Ultimately Ben and the board will determine whether to pursue QE3 based on its merits, but there are a lot of interested parties that are pushing their agenda and likely have some influence on the outcome. In the end, for all these reasons, believe that it is only 50% chance that QE3 is implemented, and if it is implemented it will have more flexibility than QE2 and a more concentrated effort to help mortgage rates.

Wall Street is for QE3

The QE program is great for Wall Street. They will want to see it continue. At the most basic level, the treasury is purchasing about $120 billion a month in treasuries from them. If the street is making 1/8 on each trade with the government, that is $150 million of profit for the street every month. For a product like treasuries, maybe an 1/8 is too much, but since the Fed doesn’t disclose the purchase price, just the quantity, it’s not a horrible assumption. Asides from the direct bid/offer income made from the sale, the Fed is a dream client. They are big, and tell you what they want to do. If the street isn’t able to scrape out another 1/8 or 1/4, I would be surprised. So I think we can assume that the treasury desks make another $200 million a month from trading ahead of the POMO schedule. That is over $1 billion of additional profits for the street every quarter. That is hard to give up. From the earnings announcements so far, most of Wall street had strong revenues in their fixed income departments. A part was certainly coming from corporate new issues, but with secondary volumes light across the board in corporates, it makes sense that a portion of that performance came from treasury trading related to QE2.

That $1 billion a quarter is just an estimate of the direct impact for the banks. The extra $300 billion a quarter in money the Fed is printing has helped increase asset values and likely enhanced trading revenues on other desks as the money had to go somewhere.

So Wall Street would certainly prefer to see a QE3. They would never tell the Fed these are the reasons, but its certainly in their interest to push for more QE.

New York Fed is for QE3

I am going to treat the New York Fed separately from the other Fed members. First, their district benefits the most from QE. Keeping Wall Street happy is particularly important for the New York Fed. But I also believe that they like buying $120 billion of treasuries every month. They are an important player in the market. Wall Street traders who make multiples of what they do are finally at their beck and call. Maybe its all subconscious but its hard not to believe that Dudley enjoys having Wall Street ‘need’ him. The New York Fed gains prestige and the employees enjoy the power of wielding so much money, so they have a strong bias to maintain POMO. They won’t say it, but buying bonds and dealing with the street all day, is a lot more fun than writing two year plans that no one will ever read or follow.

The Average American is against QE3

The average American cares about jobs, mortgage rates, and how much it costs to make it through a day. The ‘success’ of QE2 has always mystified them. They heard about job creation but never really knew anyone who got a job from QE2. They heard it helped mortgage rates, but most had already refinanced, or are so underwater it doesn’t matter, so they assumed it must be working. They have some stocks in their 401k, so that’s been good, but their company is threatening their pensions which is what they were really relying on anyways. Nothing they heard about QE2 seemed to match what they were experiencing, but they let it go. Suddenly the cost of making it through the day has been sky rocketing. Their paycheck is the same, but gas, coffee, and food are all getting more expensive. They are nervous about the prices they are paying for things and are starting to blame this QE thing for it. They are also doubting it really did any of the good things people said it did. This message is becoming louder and congress is hearing it loud and clear.

Foreign Governments are against QE3

Regardless of what Ben says, other countries see QE as inflationary. Regardless of Obama’s contention that speculators are pushing up the price of oil (in dollars) other countries see the QE policy as partly responsible. China and other countries closely tied to the dollar as seeing inflation as a result and are not happy. The U.S. is also not the only country experiencing minimal growth. Other countries are too and the devaluation of the dollar is not helping their recovery. Even strong countries like Germany must occasionally look up from the task of bailing out the PIGS and wonder what the consequences of a strong Euro will have on their economy down the road. We have annoyed the world before, but usually we do that when we feel that we have the moral high ground. With QE, I’m not sure that anyone can really hold their head high and argue with foreign governments that what we are doing isn’t short sighted and selfish. This would be less of a concern if we didn’t need them to buy our debt and weren’t hoping that they won’t retaliate on the trade front.

Corporations are mixed on QE3

The impact to corporations has been mixed.

The immediate impact to any company with overseas income has been positive as they translate those earnings back into weak dollars. This is good so far, but may be temporary as other countries implement policies to fight the weak dollar.

Those that can sell overseas are benefitting from the weakness in the dollar as their products are more competitive. The commodity companies are benefitting directly as prices of their selling prices spike. Companies that have relatively low costs of input (technology) are also doing well; whereas, some manufacturing companies with intensive raw material usage are seeing pressure on margins in spite of increased opportunities overseas.

So in general, corporations are slightly positive on QE as beneficiaries of the weak dollar but are growing concerned as they see margin pressure building.

The Fed is pro QE3

The Fed still feels like it is leaning towards QE3 but is being held back by fear of backlash from the average American, government, and foreign pressure. Maybe they are even a little afraid they have unleashed inflation in spite of their denials that QE2 could in any way cause inflation – it merely caused the expectation of inflation which reduced the risk of deflation and made the whole world better. If they knew for certain that they would be able to launch QE3 anytime they wanted to, they would definitely hold off, but I think they feel it would be prudent to put QE3 in place right now, even if on a limited basis, rather than having to restart the program – which could be very unpopular, and may cause us more harm then good if that flip-flopping behavior spooked the markets.

Read the entire article HERE.

Posted: Apr 20 2011
By: Dan Norcini

There is only one way to describe what is occurring to the US Dollar; its future as the global reserve currency is in serious danger of disappearing forever. Under the “leadership” of the US Federal Reserve, and thanks also to the reckless and incredibly short-sighted spending occuring at the Federal level, the Dollar has run out of friends.

It’s decline this morning has opened the door for gold to push past $1500 and silver into what looks to me like the beginning of a “MELT UP” mode. It has also send further speculative money flows into the commodity sector with the result that the CCI, the Continuous Commodity Index, is within a whisker of matching its all time high.

What many of us have feared could happen but were hoping to see avoided, is becoming increasingly likely the further the Dollar descends into this abyss. As a citizen of my nation who cares deeply for its future for the sake of my own children, I am both disgusted and grieved at what those who were charged with preserving the integrity of its currency have done to our birthright.

A pox on these scurrilous men who have sold out our nation for political expediency. Their only loyalty is to their own pocketbooks and their crony pals who could give a rat’s ass what happens to the nation as long as they can profit from it all. This plague of locusts is stripping us bare.

Click charts to enlarge in PDF format with commentary from Trader Dan Norcini

For further market analysis and commentary, please see Trader Dan’s website at www.traderdan.net

Read the original article HERE.