On Wednesday, November 3, 2010, Ben Bernenke, Chairman of the Federal Reserve announced that the Fed planned on a second round of quantitative easing (QE2) to stimulate the economy. The Fed's plan was to purchase $600 billion of U.S. Treasury securities by the middle 2011. The irony of this announcement is that it occured right after the November 2, 2011 General Election, and the majority of Americans missed it (or could care less) because the election took over the news headlines.
I missed the Fed's November 3, 2010 quantitative easing announcement as well. It does make you wonder about the timing of that announcement doesn't it? It has taken nearly six months for me to realize the full repercussions of that announcement. Just too much work and other personal issues. However, I cannot take it any long, and need to talk about it.
I am sure that many of you are asking just what the hell is 'quantitative easing'? I looked up the definition of 'quantitative easing' on Wikipedia and it sounds suspiciously like a form of extreme "Voodoo" economics. Here's what it says,
Quantitative easing (QE) is an unconventional monetary policy used by some central banks to stimulate their economy when conventional monetary policy has become ineffective. The central bank buys government bonds and other financial assets, with new money that the bank creates electronically, in order to increase the money supply and the excess reserves of the banking system.
In short, the Fed authorizes the U.S. Treasury Department to "turn on the presses" and print money. Figuratively speaking, no real currency is actually printed, but the Fed electronically credits each commercial bank. Just the same, that money is used to purchase maturing U.S. bonds and treasury notes held by banks as part of their liquidity reserves. The good news is that conventional banks cannot print their own currency (God forbid), but the Fed can and has been doing so with impunity even before the financial meltdown of 2008. You will shit when you discover the full extent of the Fed's quantitative easing policy.
In addition to the $600 billion quantitative easing announced in November 2010, the Federal Reserve announced that it will be "reinvesting" an additional $250 billion to $300 billion from the proceeds of its mortgage portfolio in U.S. Treasury securities over the same time period. So that is a total injection of about $900 billion.
One of the reasons I am writing this article is because quantitative easing has been aggressively pushed to the forefront by politicians, economists, banks and Wall Street as the mid-2011 deadline approaches, and all of them are wondering whether the Fed will announce a third round of quantitative easing or QE3.
If the Fed believes that the economy is not growing fast enough, and decides more quantitative easing is needed, things will get very dicey in the financial community. Truth be told, many economists believe that the Federal Reserve is already out-of-control and is relying too much on quantitative easing as the last resort to fix the nation's economic ills, and that results have been anemic at best. If so, what does this mean for inflation, the stability of the world financial system and the future of the U.S. dollar? Great questions that will be answered below thanks to the good people at Seeking Alpha.
According to Fed insiders, Fed Chairman Bernanke believes that quantitative easing is working, and that additional quantitative easing may not be needed, due to a decrease in the nation's unemployment rate, employers are beginning to hire again (in certain sectors), rise in retail sales, increase in exports, and a robust stock market rally.
Personally, the stock market rally is meaningless to me, since it is driven by higher corporate earnings created by downsizing, the practice of hiring mostly part-time workers and contractors, exporting jobs overseas, and the accumulation of corporate cash that is then used to buy back their own stock and raise earnings per share for the benefit of shareholders. The stock market has created no real jobs, per se, but padded the pockets of the richest Americans and increased the value of your 401K.
On the other side of the equation, the Nation is faced with economic ills which cannot seem to go away. Home prices continue to decline, foreclosures are on the rise again, construction spending has seen several consecutive months of declines and inflation is on the rise. The turmoil in the Middle East has driven oil prices to near record levels and gasoline prices now average $3.88 per gallon nationwide. Finally, the catastrophic earthquake and tsunami in Japan, has severely impacted production of parts and electronic components for both the technology and automobile sectors. The full economic effect of Japan's earthquake is already being felt as the automakers temporarily close auto plants and furlough workers, and the technology sector scrambles to locate electronic components to keep pace with the heavy demand for computers and consumer electronic devices.
Many economists believe that QE1 and QE2 did very little to improve the economy and that any positive effects will be short-lived. That sneaky $600 billion quantitative easing (QE2) announced in November 2010 came under considerable political pressure. In the bigger scheme of things, that $600 billion barely kept pace with the government’s issuance of new debt, so in a sense QE2 has amounted to a wash.
The Fed's policy-making board prepares to meet on Tuesday and Wednesday, April 26 and 27 — after which the Fed Chairman, Ben Bernanke will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing economic results show the limits of the central bank’s ability to lift the nation from its economic malaise. One way or another, the financial community waits with baited breath whether further quantitative easing will be needed.
From November 2008 to March 2010, the Fed bought more than $1.7 trillion in mortgage back securities and Treasury bonds, holding down mortgage rates and reducing borrowing costs for well-regarded companies by about half a percentage point, according to several studies. That is an annual savings of $5 million on every $1 billion borrowed. Through quantitative easing the Fed has created a portfolio of U.S. bonds and treasury notes purchased from banks totalling more than $2.057 trillion at the end of May 2010. Many economists believe that this may impede the Fed's ability to raise interest rates to curb inflation. Some of these critics view the rising price of oil and other commodities as harbingers of broader price increases.
To gain an understanding of quantitative easing, we must look at quantitative easing just prior to the financial meltdown of September 2008, and look at quantitative easing after the meltdown which began in force in 2009.
The below graph shows the contraction of U.S. Treasury securities by the central bank in late 2007 and holdings remained flat through the rest of the financial crisis in 2008 until Agency Debt was purchased in late September 2008 resulting in an immaterial increase in quantitative easing of about $500 billion.
In 2009 and 2010, the Federal Reserve began to purchase massive amounts of Fannie Mae and Freddie Mac Mortgage Backed Securities (MBS). The below graph shows the quantitative easing components during late 2008 through May 2010, when quantitative easing totaled $2.057 trillion. That's a swing of $1.5 trillion in about a year and a half.
If the Fed fully implemented QE2, the total of QE1 and QE2 should tally about $2.657 trillion ($2.057 trillion balance at May 2010 and $600 billion announced November 2010). The upward sloping curve in the above graph would go off the chart.
According to the FRB's Economic Letter of January 3, 2011 titled "Measuring the Macroeconomic Effets of the Fed's Asset Purchases" asset purchases from QE1 and QE2 will total about $2.6 trillion and remain at this level through mid-2012. This correlates exactly with my tally of $2.657 trillion. Asset purchase holdings will taper off gradually until they hit $1.5 trillion in early 2016.
I had a look at the Fed's Tentative Outright Treasury Operation Schedule under QE2 announced on November 3, 2010, the total outright purchases of assets are $470 billion through the period ending May 11, 2011. This would mean that the Fed has $13o billion to go, if they adhere to the above schedule.
So did quantitative easing work?
It may have helped stabilize the economy in the short-term, but unemployment still remains high (8.8% at the end of March 2011). Monthly U.S. home sales continue to come in at close to record low levels. New construction units are at historic lows. Banks have tightened their credit criteria and are lending very little. In fact, as of January 2011, American banks had excess reserves of $1 trillion. Individuals are borrowing less money. Bankruptcy rates have been steadily increasing since 2005. There is an eminent danger of a Student Loan Bubble as total student loans outstanding approach $1 trillion.
One undeniable fact remains: A strong and sustainable robust economic recovery cannot be attained through the monetary policies of the Federal Reserve. Quantitative easing, is a last ditch effort if there ever was. It appears that the Fed has divorced itself to an "economic recovery" based on new debt creation.
The fact remains that Americans lost $17 trillion in the stock market and real estate bubble just prior and during the Great Recession. Anyone who believes that pumping $2.9 trillion into the banking system can overcome an estimated $50 trillion in overpriced assets (primarily mortgage debt obligations held by banks) and $10 trillion in uncollectible debt may well be disappointed.
In May 2010, economists at Goldman Sachs (biggest crooks on Wall Street) estimate that it would take a staggering $4 trillion in quantitative easing to get the economy really rolling again. We have already gone through $2.9 trillion.
So why should Americans be concerned about quantitative easing? The following are 10 reasons why quantitative easing is bad for the U.S. economy....
- Quantitative Easing Will Damage The Value Of The U.S. Dollar - Each time you add a new dollar to the system, it decreases the value of each existing dollar by just a little bit. The Federal Reserve has pumped $2.9 trillion in funny money into the system and that is going to have a significant impact. Bill Gross, the manager of the largest mutual fund in the entire world said, he believes that more quantitative easing could result in a decline of the U.S. dollar of up to 20 percent. We have already seen large declines in the value of the dollar versus key foreign curries like the Euro
- Inflation Is Going To Hit Already Struggling U.S. Consumers Really Hard - Already, investors have been fleeing from the U.S. dollar and other paper currencies and have been flocking to commodities, precious metals and oil. Gold hit an all-time high of $1,500 per ounce on April 22, 2011. In flation is already increasing the price of food. The record price increases in the cost of imported oil has increased the price of gasoline to near records. This means that it costs more to produce goods and services and ship those goods. American family budgets, especially among the poor and middle class are being stretched. Discount coupons, daily deals and dollar stores have been big beneficiaries.
- Once An Inflationary Spiral Gets Going It Is Really Hard To Stop - The Federal Reserve is playing a very dangerous game by flirting with inflation. Once an inflationary spiral gets going, it is really difficult to stop. Just ask anyone who lived through the Weimar Republic or anyone who lives in Zimbabwe today. If the Federal Reserve is now going to be dumping hundreds of billions of fresh dollars into the system whenever the economy gets into trouble it is inevitable that we will see rampant inflation at some point.
- Inflation Is A Hidden Tax On Every American - Millions of Americans have worked incredibly hard to save up a little bit of money. These Americans are counting on that money to pay for a home, or to pay for retirement or to pay for the education of their children. Well, inflation is like a hidden tax on all of those savings. In fact, inflation is a hidden tax on every single dollar that all of us own. We have been taxed more than enough - we certainly don't need the Federal Reserve imposing another hidden tax on all of us.
- The Solution To The Housing Bubble Is Not Another Housing Bubble - Today, approximately 40% of U.S. real estate is "underwater" or estimated to have negative equity. The Federal Reserve apparently believes that by flooding the system with cash that the banks will start making home loans like crazy again and home prices will rise substantially once again - thus wiping out most of that negative equity. The inventory of unsold residential homes now exceeds 6.6 million units, or roughly two times worth of inventory in a good real estate market. The spector of a second real estate bubble is a definite possibility, and several real estate experts and economists, and yours truly, have predicted this.
- More Quantitative Easing Threatens To Destabilize The Global Financial System - We have already entered a time of increasing global financial instability, and the Federal Reserve is not going to help things by introducing hundreds of billions of new dollars into the game. Over the past two decades, bubble after bubble has caused tremendous economic problems, and now all of this new money could give rise to new bubbles. Already, we see financial institutions and investors pumping up carry trade bubbles, engaging in currency speculation and driving up commodity prices to ridiculous levels.
- Quantitative Easing Is An Aggressive Move In A World Already On The Verge Of A Currency War - Quantitative easing will likely help U.S. exporters by causing the value of the U.S. dollar to sink, and this has already occurred. However, this gain by U.S. exporters will come at the expense of foreigners. It is essentially a "zero sum" game. So all of those exporting countries that are already upset with us will become even more furious as the U.S. dollar declines. Could we witness the first all-out "global currency war" in 2011?
- Quantitative Easing Threatens The Status Of The Dollar As The World Reserve Currency - As the Federal Reserve continues to play games with the U.S. dollar, quite a few nations around the globe will start evaluating whether or not they want to continue to trade with the U.S. dollar and use it as a reserve currency. Already there are some grumblings that the world economies may move away from the U.S. dollar reserve standard and to a basket of currencies consisting of the Euro, Swiss Franc, Chinese Yuan, and Japanese Yen. In fact, a recent article on The Market Oracle website explained how this is already happening.
- It Is Going To Become More Expensive For The U.S. Government To Borrow Money - Right now, the U.S. government has been able to borrow money at ridiculously low interest rates. But as the Federal Reserve keeps buying up hundreds of billions in U.S. Treasuries, the rest of the world is going to start refusing to participate in the ongoing Ponzi scheme.
- The U.S. and Europe Face A Debt Crisis - Total U.S. government debt stood at $14 trillion at the end of March 2011. The European Union owes nearly an equal amount. The U.K. owes over $9 trillion. European countries in emininent danger of default include, Ireland, Greece, Spain, Italy and Portugal. Greece had to be bailed out by the EU and US in 2010 just so that it could pay its debts and government workers.
Foreign countries are balking at U.S. government's quantitative easy policies, and the U.S. will either have to start paying higher interest rates on government debt in order to attract enough investors, or the Federal Reserve will just have to drop all pretense and permanently start buying up most of the debt. Either way, once faith has been lost in U.S. Treasuries the financial world will never, ever be the same.
Most Americans have absolutely no idea how fragile the world financial system is right now. Once the rest of the world loses faith in the U.S. dollar and in U.S. Treasuries this entire thing could completely unravel very quickly.
On April 19, 2011, Standard & Poors, a major debt obligations rating service for corporate and soverign debt, lowered its outlook for America's long-term credit rating to "negative" from "stable." The change means that there is a one-in-three chance that S&P could downgrade the nation's "AAA" credit rating within two years. That would make it harder for the U.S. government to borrow money to fund its activities. This would have a devastating effect on the U.S. economy.
The Federal Reserve is playing a very dangerous game and they are openly threatening the delicate balance of the world financial system. Keep tuned for the Fed announcement on Wednesday, April 27.
Wall Street investor's, once very bullish on stocks, have driven the DOW to new highs in 2011, but many stock market experts are recommending that investor's get out of equities. The full effect of rising oil prices and the global economic effects from the Japanese earthquake will be felt in the 2nd Quarter 2011. When corporate earnings reports for Q2 2011 are announced in July, the bad news is going to spook many investor's. Many are already starting to hedge and slowly moving into commodities like precious metals like gold, valuable minerals, and oil.
I do not want you to lose any sleep or give you nightmares. My job was simply to inform and educate you. Yet, there will be some of you, who still believe in the greatness America, and that the U.S. is just too big to fail. That's the kind of extreme capitalism that got us into the Great Recession. There is plenty of blame to go around. We obviously need radical change, everybody will need to pay more taxes, and government spending needs to be cut. I am all fore it, but let's not penalize the poor, middle class while rewarding the richest Americans and the big corporations, many of them are not paying their fair of income taxes while continuing to export jobs overseas.
Courtesy of an article dated November 4, 2010 appearing in Seeking Alpha, an article dated April 24, 2011 appearing in The New York Times Economy, an article dated May 31, 2010 appearing in the Economic Crisis Watch Blog
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Posted by: John Peter | 01/14/2013 at 01:58 AM