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" U.s. Is Closer To A Japanese-Style Outcome"

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Quantitative Easing

The U.S. is closer to a Japanese-style outcome today than at any time in recent history,”
Bullard wrote in a research paper yesterday about the possibility of deflation. “A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”
Fed Chairman Ben S. Bernanke said last week the central bank is prepared to take further policy actions if the world’s largest economy “doesn’t continue to improve.” The Fed cut the benchmark interest rate to a record low range of zero to 0.25 percent in December 2008 and bought Treasury, housing-agency and mortgage-backed securities as the main tool of monetary policy.
A resumption of such purchases isn’t on the horizon, according to primary dealer Citigroup Inc.
“Further balance-sheet expansion is unlikely given the concerns around size of current balance sheet and the diminishing returns to further asset purchases,” Citigroup strategists led by Amitabh Arora in New York wrote in a report.
Assets on the Fed’s balance sheet totaled $2.33 trillion as of July 28, according to central bank data issued yesterday.
Nomura Holdings Inc., a primary dealer, expects policy makers to “ease” at their meeting in August. Economists led by David Resler in New York said the Fed may “change the language of the statement to signal that the balance sheet will remain expanded and change policy around the MBS program to start reinvesting pay-downs.”
Futures on the CME Group Inc. exchange show traders cut the probability policy makers will raise the benchmark interest rate by April to 31 percent, from 54 percent a month ago.

The US seems to already be in a deflationary spiral which could take years to break. IMO, they are locked in as QE will not have any further impact due to the law of diminishing returns now discovered by Citigroup. The more they print the more deflation takes hold.

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So the symtpom they express concern about is soaring Treasuries (falling yields).

They recommend printing and buying some more.

What happens to Treasury yields in such circumstances?

when they do this the utility of holding a bond or money becomes equivalent. Hence bond yields will via the market achieve the same rate of interest as money.

they think they are lowering short rates by increasing inflationary expectations but all they achieve is flattening the yield curve, or more correctly, ensuring there is no yield curve because bonds and money are interchangable.

if bonds are liquid, which they are (government bonds trade every day because they are risk free) then there is no difference in utility between them and money. THis means buyers of bonds do not credibly commit to defer consumption tomorrow, because they can sell their bonds.

intertemporal transfer of consumption requires an illiquid bond to work properly. Therefore the market has moved from holding government bonds (which were illiquid to varying degrees when the gold standard was in effect) to other illiquid default free assets - land as the only intertemporal savings vehicle that actually works.

this all started the day nixon closed the gold window.

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It appears to be the black hole effect. As the article points out, the Citigroup "expert" suggests that printing is self defeating as it just increases deflationary forces. It may be a Jap style checkmate as the OP suggests.

If the economy is cyclical we may be seeing the deflationary side of the cycle. Its been a few decades but hey, it will make a change.

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I saw Bullard yesterday on CNBC. He praised the BoE, said their QE had been done more effectively than the US version - the US did it in one go, while the BoE did it gradually. He admitted that inflation in the UK was maybe too high. Gave the impression that the Fed will follow the BoE method in future and that Japan style deflation is a 40% likelihood.

Honestly, I do not know the difference between the two methods, but it looks like the US is gearing up for an extra-political stimulus.

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