Quantitative Easing Explained

Video below [Contains a few unnecessary "4-letter" words, but not overly so...]

Doug Noland’s Credit Bubble Bulletin

www.prudentbear.com, 12/17/2010

Selected News Notes

December 14 – Bloomberg (Jody Shenn):  “A slump in government-backed mortgage bonds that’s sent yields to the highest level since May is threatening a recovery in the U.S. housing market… Yields on Fannie Mae-guaranteed securities that most affect loan rates jumped as high as 4.21% yesterday, an increase of 1 percentage point from an all-time low in October…  Higher loan rates ‘won’t be fun’ for a fragile housing market, said Scott Simon, head of mortgage bonds at… Pacific Investment Management Co…. ‘If you were looking at buying a house a few weeks ago, the same house, to you, looks as much as 9% more expensive,” he said.”

December 13 – Bloomberg (Luzi Ann Javier):  “Consumers of food made from wheat and corn should brace for higher prices, if history is any guide, after bad weather and a shortage of farmland threaten to create supply ‘shock waves.’   The… price of a basket of grains and palm oil has risen almost 50% since the 50-day moving average passed through the 100-day line. On the two previous times this occurred the past decade, prices about doubled or tripled over the following two years before peaking.”

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Q3 2010 Flow of Funds

Doug Noland, www.prudentbear.com, 12/17/2010

This year will mark the second consecutive year where federal borrowings will have actually expanded more than the growth of total Non-financial borrowings.  Nothing similar to this has happened in the post-WWII period.

In just 9 quarters, total federal liabilities have ballooned $4.013 TN, or 60%.  After doubling mortgage Credit in less than 7 years, our system is now on track to double federal debt in about four years.

I saw nothing in the Q3 Flow of Funds that is counter to my thesis of a very problematic inflation of government finance – with an inevitable crisis of confidence and fiscal train wreck.  And as one would expect from such a historic Bubble Dynamic, the longer this Bubble is prolonged the greater the unavoidable financial, economic and social dislocation.

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The Beginning of the End of Dollar Hegemony

Randall W. Forsyth, online.barrons.com, 12/17/2010

With nascent use of other currencies for finance, will redbacks replace greenbacks?

When the monetary history of the year coming to an end is written decades from now, the headlines of European debt crisis and Federal Reserve’s adoption of QE2 may turn out to be mere footnotes to the bigger story: 2010 could be a watershed marking the beginning of the end of the dollar-based, Western-centric monetary system.

To be sure, suggestions that the system dubbed Bretton Woods II should be supplanted by a new regime began in 2009. China proposed the creation of a new, multinational currency for international transactions and as a reserve asset.

This year, the idea of reform was advanced by World Bank President Robert Zoellick, who proposed in a widely read and commented-upon Financial Times op-ed piece “a cooperative monetary system that reflects emerging economic conditions.” That would include the dollar, the euro, the yen, the pound and the renminbi — plus gold “as an international reference point of market expectations about inflation, deflation and future currency values.”

Zoellick’s November commentary followed the outbreak of the so-called “currency wars,” as Brazil’s finance minster dubbed the tensions in the foreign-exchange markets resulting from Fed’s liquidity expansion through the purchase of $600 billion of Treasury securities, dubbed QE2, for the second phase of quantitative easing. The downward pressure on the dollar from the surfeit of greenbacks was viewed by finance officials abroad from Asia to Europe as well as Latin America as tantamount to a competitive devaluation to boost the U.S. economy while beggaring its neighbors.

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$2tn debt crisis threatens to bring down 100 US cities

More than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned.

Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery. Read more»

Ben Bernanke: Juggler of Digits

Gary North, www.lewrockwell.com, 12/11/2010

At a circus, there is always a juggler. If he is dressed as a clown, he is not a great juggler. If he is in a sequin-covered tight suit, he is the real thing. He is there to impress us.

The juggler I most remember was a young man who was juggling a bunch of hoops. He was really good . . . until he dropped all of them in his grand finale. They came down in disarray. He picked them up and walked out of the ring. What else could he do? The finale was not so grand. Read more»

The Big Bank Theory

Doug Noland’s Credit Bubble Bulletin

www.prudentbear.com, 12/10/10

[Selected News Notes]

December 8 – Bloomberg (William Selway):  “U.S. states are preparing for more budget cuts next year as tax revenue isn’t likely to rebound enough to replace almost $38 billion in aid that will be gone as federal economic stimulus ends, according to a report.   At least 31 states and Puerto Rico are forecasting deficits of $82.1 billion in the next fiscal year even as tax receipts are picking up, the National Conference of State Legislatures said… Under a temporary mandate since 2009, the U.S. has provided economic aid to states, helping to pay government workers and shoulder the cost of the Medicaid program to provide health care for the poor… The fiscal 2012 deficits come on top of at least $110.6 billion in gaps that have been dealt with or are pending for the current year….” Read more»

The Fed and Money

Doug Noland, www.prudentbear.com, 12/10/10

…[T]he attribute of “moneyness” in Treasury debt is on track to ensure the doubling of federal borrowings in the neighborhood of four years.  For this round, the “expanding gulf” is much more pernicious and the consequences of a crisis of confidence potentially more devastating [than the recent mortgage securitization boom].

“One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing.”  Federal Reserve Chairman Ben Bernanke, December 5, 2010.

Dr. Bernanke was pilloried this week for his “we’re not printing” comment from Sunday evening’s 60 Minutes interview.  I’ll pile on, but from a different angle.  It seems strange to me – perhaps disingenuous – for our Fed Chairman to suddenly take such a narrow view of “money.” At $917bn, outstanding currency comprises just over 10% of the “M2” monetary aggregate (savings deposits are the largest component at $5.343 TN).  And I have argued over the years that “M2” is a much too narrow definition of “money” to provide a useful barometer of overall Credit and liquidity conditions.   Certainly, the expansion of paper currency has been inconsequential to the grand scheme of Washington stimulus.
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Global bond rout deepens on US fiscal worries

Ambrose Evans-Pritchard. www.telegraph.co.uk, 12/08/2010

Agreement in Washington on a fresh fiscal package has set off dramatic rise in yields of US Treasuries and bonds across the world, threatening to short-circuit any benefits of stimulus. The bond rout raises concerns that the US authorities may be losing control over events.

The yield on 10-year Treasuries – the benchmark price of money worldwide and the key driver of US mortgages rates – has rocketed to 3.3pc, up 35 basis points since President Barack Obama agreed on Monday to compromise with Senate Republicans on tax cuts.

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