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http://www.reuters.com/article/rbssFinanci...150021120090611

NEW YORK, June 11 (Reuters) - Mortgage rates leaped with bond yields in the past week to the highest since November, erasing strides made by a massive government program to help revive U.S. housing.

In late November, the government announced Federal Reserve programs to buy enormous amounts of mortgage-related debt to reduce loan rates and stabilize the hardest-hit housing market since the Great Depression.

The programs were later deepened, putting the Fed on track to absorb up to $1.45 trillion in mortgage bonds and agency notes as well as up to $300 billion in Treasury securities.

Average 30-year fixed mortgages jumped 0.30 point to 5.59 percent, the highest since the week ended Nov. 26, Freddie Mac (FRE.N) said on Thursday.

That is more than a 7/8 point spike just since April, when the rate touched down to 4.78 percent -- the lowest since Freddie Mac began tracking it weekly in 1971.

Bond yields are a peg for setting home loan rates.

After falling sharply, bond yields soared over the past few weeks on economic reports that were not as weak as expected. The promise of record Treasuries issuance to fund various federal rescue programs has also pressured yields higher.

Mortgage rates, in response, swung swiftly from record lows back to rates seen prior to the federal interventions.

Home purchase activity has been fairly stagnant during this period, based on data from the Mortgage Bankers Association.

Mortgage rates remain lower than a year ago, when the 30-year loan averaged 6.32 percent.

But refinancing, which is highly sensitive to rate shifts, has fallen to the lowest levels since November.

To see more rates for the week ended June 11, click on [iD:nWEQ001090].

Lenders charged an average of 0.7 percent on loans in the past week, unchanged from the prior week. (Reporting by Lynn Adler; Editing by Diane Craft)

Back where we started ?

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There is an interesting discussion going on at market-ticker on one of the auction results today here

Basically, the 30-year Treasury yield dropped significantly, with significant indirect (presumably foreign central bank) interest - a v successful auction.

But it came a day after the 10-year jumped over 4%.

So the TFHers over there are asking - are the foreign institutions, with this risky move (a potentially worthless purchase if inflation rockets) signalling they will force a deflationary stock market crash?

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Latest update on the ticker is A LOT more worrying:

http://acrossthecurve.com/?p=6288

Barclays inherited the Lehman indices against which many portfolios index or measure performance. Barclays announced today that the mortgages which the Federal Reserve owns will be included in the index. Apparently, many thought those bonds would not be and many investors were instantly underweight the 4 and 4 1/2 coupons and that was the catalyst for a round of buying.

Swap spreads are tighter across the curve. Two year spreads are 1/4 basis point tighter at 46 1/2. Five year spreads are 1 1/4 basis points narrower at 53 1/3. Ten year spreads are 3 1/2 basis points tighter at 35. Thirty year spreads have narrowed 3 basis points to NEGATIVE 19.

IF that's true (I didn't see the report) that means that the government DIRECTLY propped up the auction by buying through a conduit that would make it look as if it was normal purchases.

IE: Trying to fool the market into believing all is good. They normally TELL when they buy T's. They may have been AFRAID to tell today because they bought most of them. Or all of them. It is a REAL possibility that it was a totally failed auction had they not been buying through the backdoor. If so -- that's about as bad as it gets. Not only did the auction fail but the government tried (unsuccessfully) to cover it up. That's NOT a good way to build confidence.

Edited by housesforcourses
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just got back off holiday... my rate futures positions are nicely making money.... sold 2010's

bring on the collapse...

I hear the government has enlisted the help of every man and his trading assistant to help flog the gilts/treasuries.... muppets

http://market-ticker.org/archives/1115-30y...lts-Beware.html

Thursday, June 11. 2009

Posted by Karl Denninger in Monetary at 14:05

30y Bond Results: Beware

The auction results make absolutely no sense under "conventional wisdom."

Median yield down, primary dealers took about half and indirect bidders took the other half, basically.

What? 50% take for foreign central banks on 30y debt at a 4.6ish coupon?

That makes no sense given what we're being told is coming: massive inflation, maybe even hyperinflation, commodities ramping to the moon, the stock market going to the moon in a hyper-inflationary printing explosion.

The stock market rocketed on the release. I couldn't make sense out of the initial FX moves, especially in the DX and Yen. Someone was front-running in the financials bigtime as well, with a big ramp for an hour or so prior to the results.

Folks, if you think hyperinflation is coming, or even serious inflation, you're going to get your head cut off on a 4.6% 30y bond. In fact you could easily lose half or more of your investment, should you need to sell, and your coupon will be half or less of what it should be.

So how does this make any sense?

There is only one reason for the FCBs to want this sort of exposure:

They expect a ramp in the dollar and crushing DEFLATION, as this is the only way that bet will pay off.

If you're on the other side of this trade in any way, I hope you are putting on some sort of hedge.

Remember, foreign central banks can FORCE a pull in liquidity and make their desires a self-fulfilling prophecy.

Care to bet against someone who can make their bet pay off?

That's what I thought.....

Oh guess what - the primary dealers would like this outcome too......

PS: If this analysis is correct then we're in for some really NASTY trouble, quite soon. If you're short Ts, short dollars or long equities, your neck is in the guillotine. Better move before the blade falls!

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http://market-ticker.org/archives/1115-30y...lts-Beware.html

Thursday, June 11. 2009

Posted by Karl Denninger in Monetary at 14:05

30y Bond Results: Beware

The auction results make absolutely no sense under "conventional wisdom."

Median yield down, primary dealers took about half and indirect bidders took the other half, basically.

What? 50% take for foreign central banks on 30y debt at a 4.6ish coupon?

That makes no sense given what we're being told is coming: massive inflation, maybe even hyperinflation, commodities ramping to the moon, the stock market going to the moon in a hyper-inflationary printing explosion.

The stock market rocketed on the release. I couldn't make sense out of the initial FX moves, especially in the DX and Yen. Someone was front-running in the financials bigtime as well, with a big ramp for an hour or so prior to the results.

Folks, if you think hyperinflation is coming, or even serious inflation, you're going to get your head cut off on a 4.6% 30y bond. In fact you could easily lose half or more of your investment, should you need to sell, and your coupon will be half or less of what it should be.

So how does this make any sense?

There is only one reason for the FCBs to want this sort of exposure:

They expect a ramp in the dollar and crushing DEFLATION, as this is the only way that bet will pay off.

If you're on the other side of this trade in any way, I hope you are putting on some sort of hedge.

Remember, foreign central banks can FORCE a pull in liquidity and make their desires a self-fulfilling prophecy.

Care to bet against someone who can make their bet pay off?

That's what I thought.....

Oh guess what - the primary dealers would like this outcome too......

PS: If this analysis is correct then we're in for some really NASTY trouble, quite soon. If you're short Ts, short dollars or long equities, your neck is in the guillotine. Better move before the blade falls!

As I comment in the post above, there is a suggestion that the FED did purchase a lot of these bonds but they tried to do it in secret. Trying to fool the market into believing all is good. If so that's not good, not good at all......

Edited by housesforcourses
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Read about the French Assignat

http://www.britannica.com/EBchecked/topic/39316/assignat

In December 1789, to pay its immediate debts, the National Assembly issued the assignat as a bond bearing 5 percent interest, with the recently nationalized church lands as security. By September 1790 the Assembly made the assignat into a paper currency, and the amount in circulation was increased from 400,000,000 livres to 1,200,000,000. The initial effect of the paper currency was beneficial, stimulating economic growth and eliminating a money shortage. But a deep public distrust of paper money and the fear that the currency would be worthless if the uncertain Revolutionary regime collapsed soon caused the assignat to depreciate.

Also http://en.wikipedia.org/wiki/Assignat

yep

history rhymes

http://mises.org/books/inflationinfrance.pdf

And, first, in the economic department. From the early

reluctant and careful issues of paper we saw, as an immediate

result, improvement and activity in business. Then

arose the clamor for more paper money. At first, new issues

were made with great difficulty; but, the dyke once broken,

the current of irredeemable currency poured through; and,

the breach thus enlarging, this currency was soon swollen

beyond control. It was urged on by speculators for a rise

in values; by demagogues who persuaded the mob that a

nation, by its simple fiat, could stamp real value to any

amount upon valueless objects. As a natural consequence a

great debtor class grew rapidly, and this class gave its influence

to depreciate more and more the currency in which

its debts were to be paid.†

The government now began, and continued by spasms to

grind out still more paper; commerce was at first stimulated

by the difference in exchange; but this cause soon ceased

to operate, and commerce, having been stimulated unhealthfully,

wasted away.

Manufactures at first received a great impulse; but, ere

long, this overproduction and overstimulus proved as fatal

to them as to commerce. From time to time there was a

revival of hope caused by an apparent revival of business;

but this revival of business was at last seen to be caused

more and more by the desire of far-seeing and cunning men

of affairs to exchange paper money for objects of permanent

value. As to the people at large, the classes living on fixed

incomes and small salaries felt the pressure first, as soon

as the purchasing power of their fixed incomes was reduced.

Soon the great class living on wages felt it even more sadly.

Prices of the necessities of life increased: merchants were

obliged to increase them, not only to cover depreciation of

their merchandise, but also to cover their risk of loss from

fluctuation; and, while the prices of products thus rose,

wages, which had at first gone up, under the general stimulus,

lagged behind. Under the universal doubt and discouragement,

commerce and manufactures were checked or

destroyed. As a consequence the demand for labor was

diminished; laboring men were thrown out of employment,

and, under the operation of the simplest law of supply and

demand, the price of labor—the daily wages of the laboring

class—went down until, at a time when prices of food, clothing

and various articles of consumption were enormous,

wages were nearly as low as at the time preceding the first

issue of irredeemable currency.

The mercantile classes at first thought themselves exempt

from the general misfortune. They were delighted at the

apparent advance in the value of the goods upon their

shelves. But they soon found that, as they increased prices

to cover the inflation of currency and the risk from fluctuation

and uncertainty, purchases became less in amount and

payments less sure; a feeling of insecurity spread throughout

the country; enterprise was deadened and stagnation

followed.

New issues of paper were then clamored for as more

drams are demanded by a drunkard. New issues only increased

the evil; capitalists were all the more reluctant to

embark their money on such a sea of doubt. Workmen of

all sorts were more and more thrown out of employment.

Issue after issue of currency came; but no relief resulted

save a momentary stimulus, which aggravated the disease.

The most ingenious evasions of natural laws in finance which

the most subtle theorists could contrive were tried—all in

vain; the most brilliant substitutes for those laws were

tried; "self-regulating" schemes, "interconverting" schemes

—all equally vain.* All thoughtful men had lost confidence.

All men were waiting; stagnation became worse and worse.

At last came the collapse and then a return, by a fearful

shock, to a state of things which presented something

like certainty of remuneration to capital and labor. Then,

and not till then, came the beginning of a new era of prosperity.

Just as dependent on the law of cause and effect was the

moral development. Out of the inflation of prices grew

a speculating class; and, in the complete uncertainty as to

the future, all business became a game of chance, and all

business men, gamblers. In city centers came a quick growth

of stock-jobbers and speculators; and these set a debasing

fashion in business which spread to the remotest parts of

the country. Instead of satisfaction with legitimate profits,

came a passion for inordinate gains. Then, too, as values

became more and more uncertain, there was no longer any

motive for care or economy, but every motive for immediate

expenditure and present enjoyment. So came upon the

nation the obliteration of thrift. In this mania for yielding

to present enjoyment rather than providing for future comfort

were the seeds of new growths of wretchedness: luxury,

senseless and extravagant, set in: this, too, spread as a

fashion. To feed it, there came cheatery in the nation at

large and corruption among officials and persons holding

trusts. While men set such fashions in private and official

business, women set fashions of extravagance in dress and

living that added to the incentives to corruption. Faith in

moral considerations, or even in good impulses, yielded to

general distrust. National honor was thought a fiction cher-ished only by hypocrites. Patriotism was eaten out by

cynicism.

Thus was the history of France logically developed in

obedience to natural laws; such has, to a greater or less degree,

always been the result of irredeemable paper, created

according to the whim or interest of legislative assemblies

rather than based upon standards of value permanent in

their nature and agreed upon throughout the entire world.

Such, we may fairly expect, will always be the result of

them until the ñat of the Almighty shall evolve laws in the

universe radically different from those which at present

obtain.*

Edited by lowrentyieldmakessense(honest!)
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Denniger needs to make his mind up!

Once again we have the hyperinflation or massive crushing deflation alternatives.

the idea that we go thru a very boring unpleasant period of not much of either seems impossible to contemplate.

I am of the opinion if they can manage this it will be to try and achieve what you describe above, both high deflation and high inflation are not a good place to be. If they manage markets up and down the may be able to achieve the middle ground without letting any one thing completely collapse. This has to be the best outcome if they can achieve it.....

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Denniger needs to make his mind up!

Once again we have the hyperinflation or massive crushing deflation alternatives.

the idea that we go thru a very boring unpleasant period of not much of either seems impossible to contemplate.

Perhaps you are right, but the suggestion that the FED is trying to disguise its actions doesn't make me believe they are as confident as you are. Interesting to see if FEDs actions are confirmed

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I am of the opinion if they can manage this it will be to try and achieve what you describe above, both high deflation and high inflation are not a good place to be. If they manage markets up and down the may be able to achieve the middle ground without letting any one thing completely collapse. This has to be the best outcome if they can achieve it.....

surely that's 'flation equilibrium & by nature can't be obtained medium or long term.

edited for last bit.

edited again - confounded I didn't mean that last reply to sound ar$ey btw. :)

Edited by grumpy-old-man-returns
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surely that's 'flation equilibrium & by nature can't be obtained.

Yup.

The idea being that by running left with one leg and right with the other, you just stay still.

Of course you don't, you fall flat on your ****.

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Denniger needs to make his mind up!

Once again we have the hyperinflation or massive crushing deflation alternatives.

the idea that we go thru a very boring unpleasant period of not much of either seems impossible to contemplate.

I think that Denninger made his mind up ages ago, he has plumed for the deflation route. I read his article as contrasting the “conventional wisdom†(Schiff), with his own take on the situation, which is deflationary.

Personally I think that Denninger argues a more convincing point, what with his use of evidence and the like. Where as Shiff falls back on the same dubious analogies again and again.

From what I have read, I get the feeling that we are again on the cusp of something major and bad, but before it happens it seems that all the bears on this site will have to turn to bulls.

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Cheers for this thread chaps. Definately the most interesting one up at the mo. Not really in a position to contribute, other than...

From what I have read, I get the feeling that we are again on the cusp of something major and bad, but before it happens it seems that all the bears on this site will have to turn to bulls.

Not I, as my Amateur-Problem-o-Meter is still flashing very red. To me, the current situation (specifically the central bank interest rates and their disconnection from real rates, the direct state banking aid, QE, the level of consumer debt, and massive levels of state borrowing) has just too many wierd pieces in play for it to look like there's going to be a smooth outcome.

(snipped... a long post that didn't belong in this thread)

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surely that's 'flation equilibrium & by nature can't be obtained medium or long term.

edited for last bit.

edited again - confounded I didn't mean that last reply to sound ar$ey btw. :)

No offence taken, I am only offering an oppinion, I am no expert :rolleyes:

I think people are seeing things as too black and white atm. I am sticking with they fact that the powers to be still have control of every major market atm. Which if they do then you have to empathies what they will be aiming for and that is relative stability in inflation at a time where it should be hyper deflation, why would they want hyper inflation?

If they did not want to manage people inflation expectations up why would they publicise printing money out of thin air? For me this almost seems a criminal act and if the increase in money printing on it's own would have an impact then why advertise this worrying monetary policy. It is because they want people to think inflation is coming (the famous managing inflation expectations is a greater tool than interest rate setting). When the inflation expectation gets too great I believe they will pull the plug in the equity markets herding people back into bonds. By doing this they keep the rates low for the mortgage holders giving them a fighting chance to survive this episode for a bit longer.

Monetary policy is continuing it's move away from fundamentals and relying more and more on sheeple guidance, just look at the effects post G20 worldwide media campaign has had on the recession expectation. The week before G20 you had AD coming out and saying this was far worse than he expected and looking truly terrified about our future, post G20 he was all up beat saying we would be out of the recession by the end of the year. With the recent government sponsored statistic trying to intimate to the sheeple that we are already showing signs of being out of the recession you can see the power of the media. Currently nothing is about fundamentals it is all about managing our way out of this disaster and the sheeple play the key part. Who would have thought they would try and engineer a housing market bounce at an affordability level above the start of the 80-90's crash and people would buy into it! Insane but we are in unprecedented times.

We both know how grave things are and my point of view is more about the near term (1-2 years) rather than the longer term. With the monetary base increasing at the rate we have seen it does pose a serious threat if we do come bouncing out of this mess but my money is still on a multidecade recovery.

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No offence taken, I am only offering an oppinion, I am no expert :rolleyes:

I think people are seeing things as too black and white atm. I am sticking with they fact that the powers to be still have control of every major market atm. Which if they do then you have to empathies what they will be aiming for and that is relative stability in inflation at a time where it should be hyper deflation, why would they want hyper inflation?

yes, I suppose I am guilty of doing that a bit. We all generalise when we post. For me I keep it simple. They are telling everyone that they expect deflation, yet adopt an inflationary monetary policy. h'mmm..........

If they did not want to manage people inflation expectations up why would they publicise printing money out of thin air? For me this almost seems a criminal act and if the increase in money printing on it's own would have an impact then why advertise this worrying monetary policy. It is because they want people to think inflation is coming (the famous managing inflation expectations is a greater tool than interest rate setting). When the inflation expectation gets too great I believe they will pull the plug in the equity markets herding people back into bonds. By doing this they keep the rates low for the mortgage holders giving them a fighting chance to survive this episode for a bit longer.

which makes the pain a lot worse when it comes, & come it will. There's no such thing as a free lunch. At the moment what they are doing is putting everything they buy on the credit card. When they reach their limit, it will stop.

Monetary policy is continuing it's move away from fundamentals and relying more and more on sheeple guidance, just look at the effects post G20 worldwide media campaign has had on the recession expectation. The week before G20 you had AD coming out and saying this was far worse than he expected and looking truly terrified about our future, powould st G20 he was all up beat saying we would be out of the recession by the end of the year. With the recent government sponsored statistic trying to intimate to the sheeple that we are already showing signs of being out of the recession you can see the power of the media. Currently nothing is about fundamentals it is all about managing our way out of this disaster and the sheeple play the key part. Who would have thought they would try and engineer a housing market bounce at an affordability level above the start of the 80-90's crash and people would buy into it! Insane but we are in unprecedented times.

Ok, fair points. I agree that it is being TOTALLY managed & hence people falling for the stock market rebound. I suppose it depends on whether we think they can beat the markets, which has NEVER been done before. Let’s hope they can’t do it yet, otherwise that means ALL freedom has been lost.

We both know how grave things are and my point of view is more about the near term (1-2 years) rather than the longer term. With the monetary base increasing at the rate we have seen it does pose a serious threat if we do come bouncing out of this mess but my money is still on a multidecade recovery.

this again is the problem when we (everyone) discusses the situation. Are we talking short term or medium/long term. Are we all defining these terms the same ?

what a great learning curve though eh ?

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yes, I suppose I am guilty of doing that a bit. We all generalise when we post. For me I keep it simple. They are telling everyone that they expect deflation, yet adopt an inflationary monetary policy. h'mmm..........

It is a bit of a double bluff, they are publicising mild deflation which the sheeple just shrug and think oh well that is good news but not really going to change my spending habits. They then advertise their inflationary monetary policy (to tackle the hugely deflationary issues we have now) to the people that have money and understand the threat inflation will have on their accumulated wealth. These people are key for moving the equity markets and housing markets. The bond markets are where the serious money is and this is where they are still expecting deflationary pressure to persist, but in recent weeks they have been sending a signal that they can not let this really go much further before igniting a damaging crack up boom.

I look to the bond markets for guidance, not gold or the equity markets.

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It is a bit of a double bluff, they are publicising mild deflation which the sheeple just shrug and think oh well that is good news but not really going to change my spending habits. They then advertise their inflationary monetary policy (to tackle the hugely deflationary issues we have now) to the people that have money and understand the threat inflation will have on their accumulated wealth. These people are key for moving the equity markets and housing markets. The bond markets are where the serious money is and this is where they are still expecting deflationary pressure to persist, but in recent weeks they have been sending a signal that they can not let this really go much further before igniting a damaging crack up boom.

I look to the bond markets for guidance, not gold or the equity markets.

ah yes, the bond market. been following the bond vigilante threads at the various places.

So it's down to who wins, the FED or the MARKET ?

history tells us the market wins every time.

also, surely gold & pm's is a good indicator to be used in conjunction with everything else ?

also, it's worth noting that reinhardt has said that he won't be investing anything in the stock market until October. Now for a guy who makes a living from investing, that's a strange thing to say. I think what he means is that total manipulation exsists now & it's impossible to gauge what's happening. I know this will interest you from the managed/manipulation pov you hold for the stock market. ;)

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ah yes, the bond market. been following the bond vigilante threads at the various places.

So it's down to who wins, the FED or the MARKET ?

history tells us the market wins every time.

also, surely gold & pm's is a good indicator to be used in conjunction with everything else ?

also, it's worth noting that reinhardt has said that he won't be investing anything in the stock market until October. Now for a guy who makes a living from investing, that's a strange thing to say. I think what he means is that total manipulation exsists now & it's impossible to gauge what's happening. I know this will interest you from the managed/manipulation pov you hold for the stock market. ;)

indeed, event he fed admits to being in uncharted waters, experimenting with QE, and probably coercing a few top execs in the banks while they are at it.

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yes, I suppose I am guilty of doing that a bit. We all generalise when we post. For me I keep it simple. They are telling everyone that they expect deflation, yet adopt an inflationary monetary policy. h'mmm..........

I'm not sure that's something to consider as sinister in and of itself. After all, that's no different to saying that the base rate will rise to combat rises in inflation. To get the maximum inflationary benefit from QE, they've got to get V going in the 'real economy' as well increasing M in a rather abstract manner*, so the six months worth of dropping it into speaches, and the resultant endless stream of broadsheet and financial articles were simply aimed at stoking up inflationary fears amongst ordinary bods with cash to get existing non-QE money moving.

* By which I mean sticking a load £s on the balance sheet of some foreign institution has much less immediate effect than cash-rich 50-somethings looking for inflation hedges, or bringing forward a load of purchases in anticipation of a re-run of the 70s. I can certainly think of at least one property transaction that occured near me that as a direct result, not of low interest rates, but of Fear of Inflation from QE... that happened before QE even started.

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I'm not sure that's something to consider as sinister in and of itself. After all, that's no different to saying that the base rate will rise to combat rises in inflation. To get the maximum inflationary benefit from QE, they've got to get V going in the 'real economy' as well increasing M in a rather abstract manner*, so the six months worth of dropping it into speaches, and the resultant endless stream of broadsheet and financial articles were simply aimed at stoking up inflationary fears amongst ordinary bods with cash to get existing non-QE money moving.

* By which I mean sticking a load £s on the balance sheet of some foreign institution has much less immediate effect than cash-rich 50-somethings looking for inflation hedges, or bringing forward a load of purchases in anticipation of a re-run of the 70s. I can certainly think of at least one property transaction that occured near me that as a direct result, not of low interest rates, but of Fear of Inflation from QE... that happened before QE even started.

I do agree that some properties are being sold...obviously & for exactly that reason. What happens after the baby boomer downsizers & cash holders have bought at 20-30% discount though?

the next leg down will be steeper & longer imo.

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Isn`t the problem though that the sheeple don`t know or care about inflation/deflation in the way you guys are discussing it, and they don`t consume if they don`t have credit? For "expectations about inflation to be managed" and "sheeple herding" you need to assume a large pool of people with something to invest and an interest in being influenced where to invest? That doesn`t describe the sheeple, they once had credit now they don`t, they used to pay back to get more now they wont bother? At the moment, to me, QE money seems to be used just to pump the markets trying to create a feel good factor, in the UK anyway it is not reaching Main st. or Mortgage st.? Demand for non-essentials will just colllapse (Radox already shifting for 38 pence a bottle) and sheeple will default on debt if and when serious inflation takes off in essentials? The numbers looking to buy a house with cash surely don`t affect the bigger picture much, even if they are correct that cash would be at better use invested in a house? Isn`t this just the VI`s and the Fed trying to scare an ever dwindling pool of elecronic money this way and that trying to hide the fact that their system is f*cked? Isn`t deflation and less growth inevitable without the sheeple`s fully charged credit card?

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Hi Free Trader. I had a conversation recently with a good friend about quantitative easing in Japan and I wonder if you can shed some light on the topic. Given that Japan has battled deflation years, prefers a low value Yen for its export driven economy, and has massive government debt, would it not be a good idea for Japan to engage in quantitative easing on a massive scale? If quantitative easing has the danger of stoking inflation and lowers your currency, there will be less problem of this in Japan compared to UK/USA. Now I know that QE has been tried repeatedly in Japan, but I was under the impression it had been done so on a comparatively low scale. What could stop the bank of Japan upping QE to a much bigger level?

I can't answer a question like that in a few short sentences, and I'm sure there are people far more familiar with the workings of Japanese monetary policy who could give you a much better response.

First of all though, it isn't true that the BoJ only implemented QE "on a comparatively low scale". Before QE was first implemented in 2001 the required amount of current account balances (reserve balances) for the Japanese banking system was c. 4 trillion yen. Although the initial QE reserves target was to only expand those balances by some 25% (5 trillion yen), by 2005 the target had increased to 30-35 trillion. That's roughly 8x the original reserves level.

Compare this with the BoE's QE programme. Back in 2007 before the credit crunch started, our banking system managed to function with a level of roughly £18 billion of reserves. By March 2009, before QE started, that level had risen to £31 billion. QE has expanded this enormously, and we're now at £121 billion and we've still got another £40 billion of QE to go – so we'll end up with around £160 billion, or roughly 9x the level we had a couple of years ago.

In effect then the BoJ's QE programme was of comparable size to the one that the BoE is implementing here, and it involved a huge expansion of the reserves portion of the monetary base.

Whether Japan's QE policy was a success or not is a matter of debate, but I'm on the side of those who don't think it really worked. As far as I can see, a good number of those who have argued that it was successful have a vested interested in QE being pursued by the Federal Reserve, whereas those who regard it as a failure have no particular axe to grind. John Richards gave a good overview of the policy on the FT's Economists' Forum at the end of last year.

So, to answer your question: "What could stop the bank of Japan upping QE to a much bigger level?"...what's stopping them as far as I can see is that QE was tried on a large scale, didn't really succeed, and they're probably reluctant to go through the process again.

There are a couple of other points worth a mention and these very much relate to investor and public perceptions and expectations.

After the enormous asset bubble in Japan and its failure to recognise the dangers, the BoJ has become almost pathologically fearful of reigniting an asset bubble. In 2001 everyone knew that the BoJ was not in the game of creating high inflation through QE. The BoJ gave a clear exit strategy for its programme – it said it would unwind it when core CPI went to 0% for a while, or went year-on-year positive. I don't think that anyone doubted that the BoJ was sincere in this commitment, and indeed it ended QE when its criteria had been met.

In a sense therefore QE didn't work because it didn't create the inflationary expectations that might have encouraged business and consumer behaviour to change. Compare this with the present Western outlook to the Fed, the BoE, and the ECB where there is no articulated exit strategy for QE. There is considerable distrust of the motives of these central banks and of their willingness (and even ability, if they are under political pressure) to unwind the operations. So in this sense inflationary expectations are certainly being raised, but are they in danger of being raised too high?

We are getting plenty of assurances from the BoE and the Fed that they will not be deterred in reversing the situation if inflationary pressures emerge, but the problem nowadays is that the Western central banks have lost a tremendous amount of credibility. During the boom we had Fed heavyweights such as Donald Kohn and Timothy Geithner making speech after speech in which they emphatically stated that there would be no bailouts for those who had indulged in reckless lending and poor risk management. Members of the MPC, including Mervyn King, made similar proclamations over here.

Empty, empty words is all you can say about how weakly the central bankers buckled before the vested interests of the investment banks and the political pressures of not allowing anyone to fail. Considerations of moral hazard counted for nothing, and the taxpayer has footed the bill for the bankers' recklessness and excess.

I think it's fair to say that there is now a 'central bank risk premium' in government bonds, and that premium will grow or lessen based on what the markets see and not what is said. Every past action has a price, and they are in danger of paying for it now.

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