[Jester] HI AND HAPPY THURSDAY MODS, PEEPS, LURKERS, AND CRITTERS...
[Jester] SINCE WE HAVE A FULL HOUSE TONIGHT MAYBE I SHOULD GET STARTED RIGHT AWAY....
[LH] Jester I see Gold and Silver down again today, and people not sure what to expect with the end of QE
[Jester] LH WELL MOST PEOPLE DO NOT UNDERSTAND WHAT QE ACTUALLY EVEN IS.... SO I DON'T DOUBT IT...
[LH] Jester That was just the Fed printing more money each month right
[Jester] I WAS GOING TO TALK ABOUT IT LAST NIGHT BUT WE RAN OUT OF TIME...
[Jester] LH SURE BUT FOR WHAT PURPOSE IS THE ISSUE...
[LH] Jester and buying Treasury Bonds
[Jester] LH AND?
[LH] Jester Well not sure
[Jester] LH MORE TAXES TO PAY IT BACK... JUST SAYING...
[Jester] WHERE DO YOU THINK THE QE MONEY COMES FROM?
[LH] Jester Interest ?
[Jester] LH YOU
[LH] Jester Yeah paying all sorts of taxes
[Jester] ACTUALLY THEY DO PRINT THE MONEY... YOU GET CHARGED INTEREST ON IT.. AND PAY IT BACK WITH TAXES... COOL PLAN YEAH?
[LH] Jester Yeah to bad my checking account doesn't work like that
[Pilgrim] not a cool plan for tax payers however
[LH] Jester most people have no idea that the money is made out of thin air
[Jester] OKAY... SO... WHO WILL LIKE THE TRUTH ABOUT QE?
[Jester] OK THIS IS CALLED.. The Truth About Quantitative Easing
[Jester] SO THERE...
[Jester] QE is a tax.
[Jester] That’s an odd thing to say about the Federal Reserve’s bond-buying stimulus program, known as quantitative easing, or QE. But the reality of QE is different than what most people think.
[Jester] To talk about this, I sought out Warren Mosler, a former hedge fund manager and now trailblazing economist. So on one Sunday afternoon, with Mosler in Italy and me in Gaithersburg, Md., we chatted on Skype about the Federal Reserve and its doings. Mosler was also a successful banker, and he talks about this stuff with the ease that comes from deep familiarity with the plumbing of the system. The US system, importantly, is one of floating exchange rates and a nonconvertible currency. Meaning the government does not fix the price of the dollar against anything (contra what is done in Hong Kong, where they peg their currency to the dollar). And it is not convertible into anything except itself. (You can’t present your dollars to the Federal Reserve and demand gold, for instance.)
[Jester] With those parameters, we started with a simple question: What would the natural rate of interest be if the government didn’t try to interfere in the interest rate market? (‘Natural rate’ in this context means the risk-free, nominal rate of interest.)
[Jester] Well, before we can answer that, think about the ways the government interferes in the interest rate market. There are two ways, Mosler points out. The first is that the government pays interest on bank reserves, which are essentially checking accounts held at the Fed. Currently, that rate is 25 basis points, or 0.25%.
[Jester] The second is to offer ‘alternative accounts at the Fed called Treasury securities’. These are essentially savings accounts and pay higher interest than the checking accounts (or reserve accounts).
[Jester] ‘If we eliminated these things, there would no interest paid on reserves, and there would be no securities,’ Mosler says. ‘So the natural rate of interest would be zero.’ Like in Japan for 20 years.
[Jester] Note this doesn’t mean there would be no interest rates. It means absent these interventions, the market would determine interest rates based on credit risk, etc. But there would be no floor — no risk-free rate, no natural rate — put in place by the government.
[Jester] ‘Not that you should do it that way,’ Mosler says, ‘but that’s the way to look at it. The base case is zero. Then the Treasury comes in and offers $17 trillion in securities. And that’s a distortion, to some degree. If the Fed did QE and bought them all back, it would put you back to where you started. In some sense, QE is undoing what the Treasury has done.’ When the Fed buys securities, it is as if the Treasury never issued them in the first place.
[Jester] Or as Mosler puts it: It can be argued that asset pricing under a zero interest rate policy is the ‘base case’ and that any move away from a zero interest rate policy constitutes a (politically implemented) shift from this ‘base case’.
[Jester] In other words, the government doesn’t have to pay 3% on a 10-year note, as it does today. It doesn’t have to issue bonds at all. It creates dollar deposits (money) in member bank reserve accounts when it spends. By issuing securities/offering alternative interest-bearing accounts, the government pays a lot of interest to the economy.
[Jester] ‘So in that sense,’ Mosler says, ‘issuing securities means paying higher rates than the overnight rate. It is a spending increase and has an inflationary bias by adding net financial assets to the system.’
[Jester] WHY WOULD THEY DO THAT? BET YOU CAN ANSWER THAT QUESTION BUT HOLD ON FOR A SEC WHILE I FINISH THIS ARTICLE...
[Jester] The mainstream view says that when the government sells Treasury securities, it is taking money out of the system, that it’s a deflationary thing to do and it offsets the inflationary effect of deficit spending. ‘Not true at all,’ Mosler says. ‘Selling Treasuries does not take money out.’ What’s happening is akin to a shuffle between checking accounts and savings accounts.
[Jester] EXCEPT WHERE DID THAT INTEREST GO?
[Jester] Let’s turn back to the case of QE, where the Fed buys securities. In this case, the economy loses the interest income from those securities.
[Jester] ‘QE takes money out of the economy,’ Mosler says, ‘which is what a tax does.’ Hence, as noted above, QE is a tax.
[Jester] ‘The whole point of QE is to bring rates down,’ Mosler says. ‘If it does bring rates down, that means the rest of the securities the Treasury sells pay less interest too. So it lowers government interest expense even more. Because the government is a net payer of interest, lower rates mean it pays less interest.’
[Jester] But does it help the economy? Hard to see how it does. Mosler has an interesting take here. I’ll paraphrase as best I can.
[Jester] Let’s say people ask why the Fed is buying securities. Well, to help the economy. So now people have to think about whether that policy will work or not. If it’s going to work, that means the Fed’s going to be raising rates, because the economy will be getting stronger. The only time QE will bring rates down is if investors think the policy won’t work. It’s a policy that works through expectations, and it works only if investors think it won’t work.
[Jester] 'It’s a disgrace,’ he says. ‘On top of that, most investors don’t understand it,’ Mosler says. ‘You’ve got the Chinese reading about how the Fed is printing money. And they go and buy gold. There are knock-on effects all over the world, and portfolios are shifting based on perceptions.’
[Jester] QE, then, because it costs the private sector interest income and doesn’t add money to the economy, is not inflationary. ‘The evidence is that it is not inflationary,’ Mosler says.
[Jester] Let’s look at it another way. The bank of Japan has been trying to create inflation for 20 years. The Fed’s been trying to create inflation as hard as it can. The European Central Bank too. ‘It is not so easy for a central bank to create inflation,’ he says, ‘or you’d think one of these guys would’ve succeeded.
[Jester] ‘People act like you have to be careful because one false move on inflation expectations and, bang, you have hyperinflation,’ Mosler chuckles. ‘If you know what that false move is, tell Janet Yellen [the current Fed chief], because she’s trying to find it.’
[Jester] Though he no longer runs a hedge fund, Mosler is still involved in financial markets. He has a portfolio he runs for himself and for other people. I asked him if he fears interest rates going up. ‘It could happen,’ he says. ‘It’s a political decision where rates go.’
[Jester] WHICH PRETTY MUCH SUCKS IN MY OPINION...
[Jester] And that’s a good place to leave it. Because it brings us back to the beginning. Without the government wading into the interest rate market, the base rate would be zero. And everybody would be working off that. But instead, we have the Fed trying to find monetary nirvana.
[Jester] AND LINE THEIR POCKETS ALONG THE WAY...
[Jester] As Mosler says, it’s a disgrace.
[Jester] SO THERE YA HAVE IT... I PRINTED THE WHOLE THING IN HOPES THAT PEOPLE WOULD ACTUALLY READ IT...
[Truth] Jester interesting.
[Jester] SOOOOO... WAS THAT WHAT YOU THOUGH QE WAS? I DOUBT IT...
[LdyFaith] Jester,,, very enlightening,,,, and not at all what I thought
[Jester] SO I GUESS THE REAL QUESTION IS... WHY DID THEY STOP IT? HMMMM...
[Jester] SOMEONE HAS TAKEN CONTROL OF AN OBVIOUSLY BAD SITUATION AND STOPPED THE BS... WE WILL SEE HOW IT ALL PANS OUT NOW...
[Betsy Ross] Jester They get a slap on the hand?
[Jester] Betsy Ross I DOUBT IT... THEY ARE ABOVE THE LAW... THEY ARE THE LAW... NOTWITHSTANDING OUT OF ORDER BUT IT IS WHAT IT IS...
[Jester] SO... LET'S TAKE IT A STEP FURTHER AND GO A LITTLE DEEPER...GOT ANOTHER ARTICLE TO BUILD ON THAT ONE...
[Jester] QUANTITATIVE EASING: PERCEPTION VS. REALITY
[Jester] The US Federal Reserve’s Quantitative Easing (QE) program of bond buying has been one of its most controversial policies in recent years. In this week’s Trends and Tail Risks, we examine QE by studying its impact upon the yield of 30-year U.S. government bonds. The results show that the market priced new developments in a manner that was totally opposite from how the program was supposed to work. The pricing paradox has important implications for how the bond market may trade in what the Fed promises are the waning months of its QE program.
[Jester] SERIOUSLY? THEY LIED? OOPS...
[Pilgrim] say it isn't so!! lol
[Jester] I CANNOT PUT A CHART IN HERE BUT THERE IS ONE IN THE ARTICLE WHICH POINTS OUT FIVE POINTS OF DECLINE AND EXPANSION....
[Jester] The five points above illustrate important dates in the Fed’s QE program. The first four dates were important points that each marked an expansion of the bond buying program. These took place 1) November 2008, 2) March of 2009, 3) August of 2010, and 4) September of 2012. Each instance marked an enlargement of the program or its extension into new bonds. +
[Jester] The first announcement (QE1) was in November 2008 when the Fed announced it would buy $100b per month of mortgage backed bonds, whose value was plummeting in the forced liquidation caused by the Fed’s decision to let Lehman Brothers collapse. Falling prices for these bonds threatened the solvency of the leveraged US commercial and investment banks who owned them. The presence of such a huge buyer definitely helped to stabilize these asset values with the Fed acting as a large and willing buyer. As bond prices rose, yields fell, which lowered the cost of mortgages and incented new mortgage loans. This was probably the last of the QE programs that worked as it was advertised.
[Jester] THIS IS WHEN I LOST MY ASS IN THE REAL ESTATE MARKET... HAHAHHAHA
[Jester] BUT I DIGRESS...
[Jester] This strange paradox first appeared when the Fed, disappointed with slowing growth, extended its bond buying in early 2009 to include $300b of longer duration US government treasury bonds. The Fed justified further easing with the worthy goal of wanting to lower long term interest rates and ‘stimulate’ the general economy. The end result? Yields on 30 year duration US government bonds rose very quickly from 3.6% to 4.75%, handing holders of these bonds a large capital loss. Yet the Fed was aggressively buying these bonds! How could their price fall? What was really going on?
[Jester] This pattern would repeat again in August of 2010 and again in September 2012. Each time the Fed expanded QE, bond prices fell and bond yields rose. The stock market did go up each time which was the real goal of the Fed anyway, leaving almost no one to ponder this paradox in the bond market. Yet the actual outcome in the bond market was completely at odds with what the Fed had expected to see and how they had sold QE to the American public. When the Fed started to discuss the possibility that it might ‘taper’ its bond buying program in mid-2013 (point 5), yields shot up as bond prices fell. Many commentators expected bonds to crash in 2014 because these observers believed that these bonds would fall in price (rise in yield) without the Fed constantly buying them. These observers were shocked when yields resumed their secular downtrend that started back in 1981 and turned lower again even as Fed bond buying got smaller and smaller. Year to date, 30 year U.S. government bonds have outperformed equities and clocked their best year since 1987. How to make sense of this?
[Jester] We believe that the simplest answer behind this paradox is that the Fed’s QE program works far differently from how it was designed. As evidenced by the direction of bond prices, the market interprets QE as strongly pro-growth, as a sign that the Fed is willing to punish those who try to invest in safe assets of the strongest credits. QE is essentially the Fed’s war on safety, its gamble to kick start growth. How else can we explain the fact that the market’s first reaction to the Fed’s bond purchasing makes the prices of the safest bonds fall – even when the Fed is buying those bonds? Safe is clearly no longer an absolute term. We believe that the secular bull market in U.S. long dated bonds, that began in 1981, is still very much alive as long as over-indebtness weighs upon our economy.
[Jester] The realities of our over-indebted world have forced the Fed to throw away the old playbook. Clearly we live in a complex and challenging age of increasing government intervention in markets, where intervention will, sadly, be increasingly required to prop up growth and support the credit markets to prevent an even worse outcome. Despite this challenging backdrop, investors who have a deeper understanding of the fundamentals will outperform in any market environment.
[Jester] AND THERE YOU HAVE THAT ONE...
[Jester] AGAIN... IT DID NOT WORK THE WAY EVERYONE THOUGHT... DID NOT HAVE THE RESULTS THEY PLANNED... GO FIGURE...
[Pilgrim] the law of unintended consequences plays out AGAIN
[Jester] Pilgrim WELL PEOPLE TRY TO FIGURE OUT WHAT IS GOING ON WITHOUT KNOWING ANYTHING ABOUT WHAT IS GOING ON... NO ONE ACTUALLY TRIES TO FIGURE THAT OUT... THE STANDARD THOUGH PATTERN IS "DOES THAT HAVE SOMETHING TO DO WITH THE RV?"... HAHAHHAHAH
[catinthehat] If lehmans brothers was leveraged at 50% imaging what BOA/countrywide CITI held in over leveraged mortgage backed securities...... The system is doomed just waiting for the Ka Boom
[LdyFaith] Jester,,, no QE,, not raising interest rates,,,,,,, every balloon has a popping point,,,,3rd option?
[Jester] I AM WORKING ON AN EYE OPENER REPORT THAT I HAVE NOT THOROUGHLY VETTED YET.... MAYBE IT WILL DECIDE WHAT TO DO BY SECOND SESSION TONIGHT...
[Jester] WELL THERE YOU HAVE IT FOR THE EARLY SHOW... I AM GOING TO TAKE A LITTLE BREAK... GTP... AND LET THE MODS WRAP THAT UP FOR THE PEEPS THAT CANNOT GET HERE EARLIER...
[Jester] BE BACK IN A BIT...
[BocaLinda] jester do your sources say we’re any closer to seeing the trn released?
[Jester] BocaLinda RELEASED? I DOUBT IT...
[BocaLinda] jester what about digitally then?
[Jester] BocaLinda I ONLY BEEN TELLING YOU THAT FOR A FEW MONTHS.... HAHAHAHHA
[BocaLinda] jester I meant digitally released... but I'm asking now if your sources are giving any indication that the trn will show up anytime soon?
[Jester] BocaLinda HMMM... SO EVEN THOUGH YOU GET THE MOST POWERFUL UPDATE AVAILABLE YOU DO NOT BELIEVE IT?
[Jester] HAHAHHAHA... OH YE OR LITTLE FAITH...
[BocaLinda] jester I must have missed that. what was the powerful update pls n thx!
[Jester] BocaLinda I SENT IT TO YOU BY EMAIL LAST WEEK... YOU REMEMBER?
[BocaLinda] jester oh, that. ok. I got it then. thx.
[Jester] BocaLinda I WOULD HAVE THOUGHT IT WAS READILY APPARENT...
[BocaLinda] jester hmmm...
[ [diditrvyeet] Jester a while back i read articles saying fear deflation. what are your thoughts of that taking place.
[Jester] diditrvyeet DEFINE THAT PLEASE....
[diditrvyeet] Jester what i remember is deflation is prices only come down because no one has money to buy
[Jester] diditrvyeet ACTUALLY DEFLATION IS A DECLINE IN PRICES BECAUSE OF LESS SUPPLY OF MONEY OR CREDIT... NOT SURE WHAT YOU ARE ASKING...
[Jester] GOES ALONG WITH THE SUPPLY AND DEMAND PRINCIPLE TO A CERTAIN EXTENT..
[diditrvyeet] Jester well it seems inflation is going to hit and catch up to us but how the job market is figured it will get worse before better. just thoughts of deflation following or am i on the wrong thought process
[diditrvyeet] Jester and thanks for tonight's earlier discussion, that will take me awhile to digest.
[Jester] diditrvyeet WAS JUST EASIER TO DO IT EARLIER... WAS LONG AND I LIKES TO MAKE SURE I WAS ABLE TO GET IT COMPLETED...
[Jester] HAPPY HALLOWEENY EVERYONE...SEE YOU TOMORROW