Comments on: QE3 arrives A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: TFF Wed, 19 Sep 2012 12:49:55 +0000 * BOJ extends its own asset purchases by another 10 trillion yen (admittedly not quite as much money as it sounds).

* The ECB has embarked on an “unlimited” asset purchase program.

* The Fed will be pushing $40B of new cash into the markets every month for the next forever.

What percentage of the world economy is conducted in those three currencies? Two thirds? Three quarters? This is a coordinated action by all the central banks to make cash cheap and hoarding expensive.

Also, while China might not be publicly jumping on this bandwagon, they will be buying enough foreign assets to keep their currency on par with their trade partners. They cannot and will not allow the yuan to appreciate substantially.

By: TFF Tue, 18 Sep 2012 20:09:33 +0000 @MrRFox, this mess isn’t limited to the US.

As for my portfolio, I own quite a few foreign-based stocks and evaluate US-listed companies largely according to their ability to grow in the emerging economies. They may be “dollar based” investments, if they are listed on the NYSE, but that doesn’t much concern me if they are making most of their profits in other currencies.

By: brotherkenny4 Tue, 18 Sep 2012 17:02:52 +0000 As with all aging empires this one will weaken and falter. The knowledge is gone and replaced by politics and tricks. Once upon a time there was the potential that the capable and skilled would be rewarded. That is all gone now and everyone except the stupid know it. So only the stupid buy into the tricks of less than skilled manipulation class.

By: MrRFox Tue, 18 Sep 2012 15:24:18 +0000 @TFF – I don’t know what the preferred soultion is. I do have a pretty strong feeling that whatever it is, we’re not going to get it. IMO the people making the decisions care about enriching themselves and their ‘peers’, and no one else.

Inflation’s a bitch for those with savings. Rather than mess around with equity investments, much easier (‘specially for a non-US resident, but really anyone) to just get the hell out of the US$ by making overseas portfolio investments/deposits – only takes a mouse-click or two.

By: TFF Tue, 18 Sep 2012 14:39:10 +0000 The banks profit from the flow of money (and so they will profit from this), but they don’t hold the bulk of investment assets. The MBS being purchased will either come directly or indirectly from the assets of pension funds.

Prop trading activity has been shrinking and (under new regulations) will continue to shrink. That’s a bit of a red herring.

We agree that capital is already excessively abundant. So how do you encourage investors to actually put it to use? I know you detest inflation, and it doesn’t directly cure any ills, but perhaps in this situation the threat of inflation will convince people to **** or get off the pot?

QE3 isn’t terribly good for my personal situation. I’ve already seen my future investment returns evaporate. Now the Fed is guaranteeing (or trying to guarantee) that I will face a period of high inflation some time in the next half decade. I’m watching the future value of my savings fall. Meanwhile, my share of the national debt has gone up by $50k-$100k over the last few years.

But we’re all in deep doo-doo if the real economy and employment continue to slide, and Congress isn’t about to implement your (preferable) solution.

By: MrRFox Tue, 18 Sep 2012 13:30:27 +0000 I could buy your argument, TFF, if there was any evidence that capital is in short-supply in the market. As best I can deduce, capital is already excessively abundant – banks deposit it with the Fed right now, apparently because there are not enough trustworthy borrowers to absorb what they already have.

Even if there were such borrowers, why would I as a banker use my capital to earn the low interest rates that are on offer now when I can score much more by turning the cash over to my prop traders?

My guess, the banks use substantially all their QEIII bailout windfall for prop trading and more Fed deposits. Little or none of it goes for new loans to enterprises.

By: TFF Tue, 18 Sep 2012 12:49:40 +0000 I haven’t seen the specifics, but I doubt they are buying “toxic MBS garbage”. They are likely buying agency-guaranteed debt, ultimately backed by the Treasury.

And ultimately it doesn’t matter what the Fed buys. If they buy existing securities, they push the investment capital back into the system. But they could buy rocks at $100/lb and it would have much the same effect. New money in the system, seeking a new landing pad. This is why stocks move higher in response to QE — the money has to go SOMEWHERE, and only a fool will compete for bonds at prices that the Fed is willing to accept (they have no profit motive).

End result:
(1) Capital goods (including stocks and real estate) push higher, or at least resist their natural tendency to decline in a bad economy.

(2) Inflation expectations pick up. This is why the bond market may paradoxically turn LOWER on this action. Makes the “hoarding” behavior that KenG talks about less attractive.

(3) The promise of low interest rates for an extended period of time MAY spur investment. If inflation picks up even a little, then holding Treasuries is likely to be a losing trade.

Spending $40B/month on infrastructure might be better. If the Treasury borrows and spends on infrastructure, you are creating new money (Treasury debt) and immediately dictating how it will be used (infrastructure spending). This program creates new money (since long-term MBS are not cash-equivalents) but doesn’t dictate how it will be spent. If it is plowed back into the trading of existing securities, then there isn’t any economic gain. But perhaps private enterprise will use some of it for real investing?

Unfortunately, spending on infrastructure requires the participation of Congress. Good luck getting that…

By: MrRFox Tue, 18 Sep 2012 08:04:59 +0000 Could someone please explain something to me (in terms my room-temperature IQ can grasp, please) –

How does spending $40Bil a month to buy toxic MBS garbage off the books of banks and Agencies promote employment, or anything other than bank balance sheets and banker-bonuses?

Spending $40Bil on infrastructure I could see – gets real demand and employment and we get a finished-product that has social utility. ‘Course, it does nothing in particular for The Street, so I guess we scratch that approach.

By: TFF17 Mon, 17 Sep 2012 12:47:44 +0000 Two thoughts…

The dollar is crashing? Bond yields rising? Good! (Or at least less bad than the alternative.) The goal is to get economic activity restarted, not to keep the fat cats in cookies and cream. If the Fed has finally succeeded in generating an expectation of inflation, we may yet break out of this liquidity trap.

The biggest difference between QE3 and the previous programs may be in the lack of limitations invoked. Previously, the Fed announced, “Here’s some money, and we’ll take it back once inflation starts to pick up.” Now they are saying, “Here’s some money, and we’ll give you more next month, and more the month after that, and we’ll keep pushing money into the system until unemployment falls.” There is a HUGE difference between targeting inflation and targeting employment. This is closer to the NGDP target that people have been floating here for a few years.

By: MrRFox Sun, 16 Sep 2012 17:08:11 +0000 ** wonders – why do I even bother tryin’ to post on the bug-infested blog site? **

@ phil20 – Happy days are here again, beside myself with joy I am. But wait, besides those things you listed – rising mining stocks, rising bond yields, rising bank stocks – there is one more you didn’t mention – crashing US$. If everyone was expecting the happy outcome you propose – why would investors be fleeing the US$? Logically, if your take is accurate, money should be flowing into the US, not out of it.

Seems more likely that fear of inflation/dollar-debasement has inspired markets to dump dollars and bonds and buy inflation-protected assets. I’m not entirely sure that’s cause for joy. And bank stocks – they’re rising because the Fed is about to take the toxic MBS stuff they’re holding off their books and on to the Fed’s – at a nice profit, most likely. I’m damn sure that’s no cause for joy to anyone but a banker.