Posted on 03/24/2015 1:54:38 PM PDT by Signalman
Many stock market investors have, in the back of their minds, the comforting illusion that the Quantitative Easing with which the Fed showered Wall Street during the past three years could restart if the market falters. (Under Quantitative Easing, the Fed gave banks $85 billion each month to help stimulate lending and spending and to drive up stock prices). Some also see that the impending rise in interest rates can be reversed if the economy begins to drop. Both assumptions are really illusions. The factors that impelled an end to Quantitative Easing and to higher interest rates rule out a reversal of either policy. Instead, mutually reinforcing higher rates and tighter monetary policy are the most likely paths in the future. Here’s why:
Low Interest Rates Aren’t Working And Are Causing Long Term Rates To Rise The Fed has no control over long term interest rates and can only raise or lower short term rates by fiat. As short term interest rates have dropped to zero and the Fed has pumped trillions into liquidity via quantitative easing (QE), long term interest rates, determined by the bond market, have steadily risen. As bond buyers have seen the Fed wantonly expanding the money supply, their fears of inflation have driven them to demand higher interest for long term loans. Ultimately, this rise in long term rates is inhibiting the economic growth the Fed had hoped to encourage with low short term rates. So QE has backfired. That’s why its over. Now, unless the Fed convince the bond market that it has gotten religion and won’t be profligate with the currency, the market will continue to add to long term interest rates because they are freaked by inflation.
The situation is analogous to that confronting President Clinton when he took office in 1993. The bond market needed to be convinced that he would balance the budget in order to get it to lower long term rates. So Clinton needed to raise taxes. Now the Fed needs to raise short interest rates to bring down long term rates.
Quantitative Easing No Longer Is An Efficient Way To Expand The Money Supply.
The Fed does not print money, as some have suggested. It creates liquidity. It exchanges its own paper for less liquid mortgages and other paper banks are holding in their vaults.
But this swap does not create money…yet. It is only when the recipient bank lends the money to a business or an individual that money is created. To convert the Fed paper into cash, someone must be willing to borrow and a bank must be willing to lend. No borrowers, no lenders mean no new money is created whatever the Fed does.
With doubts about the economy and fears of inflation, many corporations, flush with cash reserves themselves, see no reason to incur additional debt. They aren’t spending their current cash reserves because they have no confidence in the economy, so why should they borrow more money?
By the same token, those who do want to borrow funds are generally insolvent and banks, with regulators breathing down their necks, are unwilling to lend them money. Without Enough Borrowers, QE Cannot Create Money Quantitative Easing Could Not Continue, Nor Can It Be Restarted Due To A Shortage of Quality Bonds in the Market When quantitative easing started, the Fed looked for banks to swap quality paper for Fed paper. But soon the supply of low risk, high quality bonds in the banks’ portfolio was used up, so the Fed began to settle for mortgage backed securities instead.
But, now, the supply of even that is drying up so the Fed finds it increasingly difficult to find marketable paper out there for which to swap.
So, the message to investors is: You’re on your own. Don’t wait for quantitative easing or continued low rates. The cavalry isn’t coming.
“Long term interest rates have steadily risen” ????
Dick Morris needs to pull up a yield chart because he’s making an ass of himself with stupid comments like that.
Seems to me that Dick missed the part about trillions being created as the Fed buys seemingly unlimited amounts of newly printed Treasury paper, not to mention all of the other paper the Fed buys unrelated to paper held by banks.
“The Fed does not print money, as some have suggested. It creates liquidity.”
That’s splitting hairs. The Fed is the head of a system that prints money, even if the money printing happens a little further down the pipeline.
Ummmm....no it didn't.
Low Interest Rates Aren’t Working And Are Causing Long Term Rates To Rise
Ummmm....long rates aren't rising.
Maybe he was sniffin' a funky shoe?
i love not only reading about the people that hated qe without knowing why, but also the responses from people that ain’t got a clue...
here we go..
back in ‘06-07, crap started to hit the fan..
it hit fast, hard and furious..
bernanke, head of the fed, had to think fast.
now, for those who do not know, bernanke was and is a scholar of the great depression..
i will go so far as to say, there is no one, NO ONE who is more knowledgeable about this event in human history than him..
saying that, he knew one of the 3 major reasons of the great depresssion was a shortage of physical cash (cash on hand)
banks closed, and both people and businesses went under, because the bank they dealt with closed. they closed because they did not have enough physical dollars to give out due to the panic..
this is why the QE started, to ensure that banks had enough physical cash to pay depositors and to loan businesses..
bernanke was not trying to shorten recessession, HE WAS TRYING TO PREVENT DEPRESSION...
now, fubo tried to get him off of this plan, and fubo failed miserably.. how many times did he call for bernankes head???
the recession of 06-07 has never run it’s course, it has to be allowed to do that. the question to the new head of the fed is, do we come in for a soft or a hard landing?
soft landing will be 2 to 5 years... hard landing will be right now...
Two things:
First, raising interest rates would immediately bankrupt many of the blue states. Many have been borrowing to keep retirement plans afloat. Higher interest rates would also cause US to borrow more to pay interest.
Second, a bit longer term is the unfunded entitlements that are going to need to be paid. The reason 0 has had no budget is that they don’t want to call attention to the fact that the total of the entitlements is greater than all money in all forms of currency that exist today!
“...Some also see that the impending rise in interest rates can be reversed if the economy begins to drop....”
Here we are again, talking about how to get the economy moving by modifying the monetary policy.
We have forgotten how to talk about getting the economy moving by removing the government. Remove regulations, taxes, etc, on businesses and the people, and then watch the economy go crazy.
Watch... If there is a republican president in ‘16 all hell will break loose. Right now the USA policy is to PROTECT OBAMA and the donor elite. Nothing else matters.
I just posted this link to my MBA Facebook page ... because Dick is right, and I love to tweak my Keynesian classmates. (I am pretty hardcore Hayek).
If you want to actually learn how the Fed “creates” money, Dick’s explanation is a pretty good synopsis for the lay person. No, his explanation is not perfect, but at least he understands the mechanics of it. And no, the Fed does not print money, rather it lends money with the intent that once the banks get it they too will lend it. This is not bills that are printed, it is data in a database ... or more accurately journal entries on a ledger. The general rule of thumb that the Keynesians work on is that every $1 the Fed lends to a bank, based on reserve requirements, translates into $20 of new “money” that the banks can lend to you and me.
By the way, QE was not invented in the last few years ... if you remember the Goliath that was the Japanese economy back in the 80’s, you might wonder what happened to it? Well, they had a crisis and responded with QE ... I don’t know what number of rounds of QE they are up to now ... I think it is in the mid-20’s, but regardless, they are living proof that QE does not work. The Japanese economy has been basically stagnant for 30 years because of QE. If you ever heard of Abe-nomics, that was just a new version of QE.
For those who complain about the Fed mucking with monetary policy ... um, that is their job. The Fed has a dual mandate. The mandate is to maximize employment and create stable prices through monetary policy. If either one of those is starts to change too fast, the Fed takes action by changing monetary policy, either by expanding (lending) or contracting (buying back) bonds. That’s all they can do.
What would change the game for the Fed considerably, is if we were to convert back to a hard currency such as Gold. If we did that, then the only way for the Fed to increase the money supply would be to either A) acquire more Gold or B) devalue the currency already in the market so that each dollar is worth less Gold. In short, converting to a hard currency pretty much makes it impossible for the Fed to achieve their dual mandate, which is why trying to convert us back to the Gold standard is great political theatre, but has virtually no chance of actually happening. At present, the US has roughly 260,272,000 ounces of Gold in its reserves. The US currently has $1.36 Trillion in circulation. Doing the math, Gold would have to be at over $5,225/oz to support our currency. Since Gold is currently at roughly $1,200/oz ... our currency would have to be devalued by around 77% to achieve equilibrium. In short ... we are talking revolution if someone tried to do that boys and girls ... cause that aint happenin.
Bingo! Interest on the debt is the thing to watch as interest rates rise. Obama and the dems can’t let rates rise.
The Fed isn't lending money to the banks. They haven't done that in years and years.
Right now the banks are lending money to the Fed. Currently, $2.4 trillion in excess reserves.
Isn’t the Fed buying $85 billion a month in assets from the banks? I’m assuming these assets are loans that are underperforming.
They stopped in October.
I’m assuming these assets are loans that are underperforming.
Nope. US Treasuries and guaranteed MBS.
Excess reserves are when banks choose to hold greater reserves than the law requires. In other words, if the law said ABC Bank had to hold 3% of their depositors $100M in reserve, legally they are only required to hold $3M in reserve. If they choose to hold $5M in reserve, that is excess reserves.
What praytell do you think QE is if not lending to banks?
QE is the Fed buying, not the Fed lending.
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