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The Fed's Impending Blunder - Aep

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http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100008351/the-feds-impending-blunder/

OK, I’ve calmed down after a week of Jamon Iberico and Rioja in Granada’s Albaycin, so I will try to be polite about the US Federal Reserve. Try, that is, not necessarily succeed.

For a good insight into the thinking of the New Keynesian priesthood that rules our money and our lives, it is worth reading “QE2: How Much is Needed?” by Jan Hatzius from Goldman Sachs.

His argument – crudely – is that US interest rates at zero are 7pc too high given the Taylor Rule on output gaps, et cetera (not that Professor Taylor himself happens to agree, but let us not quibble).

Since rates cannot be minus 7pc, the Fed would need to launch a $4 trillion blitz of fresh bond purchases to fully compensate, such is the mess that America’s leadership has inflicted on the Great Republic. I have over-simplified: Goldman Sachs relies on a “policy gap” concept, which factors in fiscal tightening et al.

This would push the Fed balance sheet to $6.3 trillion, above the $5 trillion pencilled in as the upper limit during the Great Crash.

Mr Hatzius is not saying the Fed will do this, or should do this. His forecast is that the Fed will start off with baby steps of $500bn spread over six months or so, rising over time to meet the bank’s “dual mandate of low inflation and sustainable employment”.

(Actually the Fed’s mandate is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Stable prices are not the same as low inflation. It takes Ben Bernanke’s maniacal obsession with the doctrine of inflation targeting to twist this into a mandate for printing large sums of money at a time when the Dallas Fed’s `trimmed mean’ measure of annual inflation has jumped from 0.5pc in May, to 0.8pc in July, and 1.5pc in August. But again, let us not quibble).

Mr Hatzius said the Fed sees “tail-risks” in using QE to the full, but may nevertheless do another $2 trillion in the end.

I have no doubt that this report reflects thinking at the Fed Board in Washington, and among Bernanke allies at the San Francisco Fed and Boston Fed – though not of course at the Dallas Fed where Richard Fisher confesses: “In my darkest moments I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.”

......

Having argued during the boom that it was not the business of central banks to stop asset bubbles – and specifically that any fall-out could “safely” be cleaned up later – Bernanke now seems to determined to validate this absurd doctrine, bending all the sinews of the US economic and financial system to this end. One error leads to the next.

In a sense QE has worked all too well. M3 has stabilized. The M2 gauge used by the Fed – which was still contracting in May – has been growing annual rate of 8.4pc over the four weeks to mid-October. The pace has been accelerating for months.

OK, 8.4pc is not Weimar, but it is not imminent deflation either.

So interest rates are too high, but they can't be negative so the US need to print another $4tr!!!!

I realize this is a GS employee being quoted but it's clear that the recovery to help the bankers isn't working and they need more cash.

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You're not suggesting that some of this printed money could end up with Goldman Sachs, are you? Surely it's for the benefit of the people.

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These guys will make up anything as part of the output gap to rationalise the money printing. I think it was Krugman who once wrote that all of people's acquired skills contribute to the gap so if millions of mortgage brokers are suddenly unemployed his assumption is not that those skills were misallocated but we just need some massive stimulus so they can continue to contribute to the economy.

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here's the deal:

hatzius is right about where rates need to be to deal with the unemployment issue.

AEP is right that deposit rates can't be negative (not in 2010, 2020 is another story).

and this from AEP:

"But we are no longer in a systemic financial crisis"

is correct but what we ARE in, is a systemic long term growth crisis, which is far more serious than a mere financial crisis.

and this:

" and the Fed’s motives have become subtly corrupted."

is wrong, because people think that having a FED focussed more on unemployment than on price stability is a corruption, when in fact if their focus were reversed, then they could be termed corrupt.

QEII won't help the banks, who did well from the steep yield curve of late 2009 but won't do well at all from the much flatter curve that will obtain after QEII. The negative impact on bank profits of flatter yield curves is already in evidence. Long may that continue.

The curve is going to flatten much further despite AEPs latest paranoid turn.

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here's the deal:

hatzius is right about where rates need to be to deal with the unemployment issue.

AEP is right that deposit rates can't be negative (not in 2010, 2020 is another story).

and this from AEP:

"But we are no longer in a systemic financial crisis"

is correct but what we ARE in, is a systemic long term growth crisis, which is far more serious than a mere financial crisis.

and this:

" and the Fed’s motives have become subtly corrupted."

is wrong, because people think that having a FED focussed more on unemployment than on price stability is a corruption, when in fact if their focus were reversed, then they could be termed corrupt.

QEII won't help the banks, who did well from the steep yield curve of late 2009 but won't do well at all from the much flatter curve that will obtain after QEII. The negative impact on bank profits of flatter yield curves is already in evidence. Long may that continue.

The curve is going to flatten much further despite AEPs latest paranoid turn.

good to see you posting again

does the inflation rate get more volatile with the size of the fed's balance sheet?

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here's the deal:

hatzius is right about where rates need to be to deal with the unemployment issue.

AEP is right that deposit rates can't be negative (not in 2010, 2020 is another story).

and this from AEP:

"But we are no longer in a systemic financial crisis"

is correct but what we ARE in, is a systemic long term growth crisis, which is far more serious than a mere financial crisis.

and this:

" and the Fed’s motives have become subtly corrupted."

is wrong, because people think that having a FED focussed more on unemployment than on price stability is a corruption, when in fact if their focus were reversed, then they could be termed corrupt.

QEII won't help the banks, who did well from the steep yield curve of late 2009 but won't do well at all from the much flatter curve that will obtain after QEII. The negative impact on bank profits of flatter yield curves is already in evidence. Long may that continue.

The curve is going to flatten much further despite AEPs latest paranoid turn.

You think there will still be a fed in 2020?

:lol:

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here's the deal:

hatzius is right about where rates need to be to deal with the unemployment issue.

AEP is right that deposit rates can't be negative (not in 2010, 2020 is another story).

and this from AEP:

"But we are no longer in a systemic financial crisis"

is correct but what we ARE in, is a systemic long term growth crisis, which is far more serious than a mere financial crisis.

and this:

" and the Fed’s motives have become subtly corrupted."

is wrong, because people think that having a FED focussed more on unemployment than on price stability is a corruption, when in fact if their focus were reversed, then they could be termed corrupt.

QEII won't help the banks, who did well from the steep yield curve of late 2009 but won't do well at all from the much flatter curve that will obtain after QEII. The negative impact on bank profits of flatter yield curves is already in evidence. Long may that continue.

The curve is going to flatten much further despite AEPs latest paranoid turn.

I'm quite a fan of your posts, but how can you state any of this with any kind of certainty?

The only thing I think is absolutely certain is that QE cannot work to achieve it's publicly stated aims. Beyond that, there are only competing theories, the validity of which can't even be proven in hindsight, e.g. every economist has a different view on what caused the great depression and what exacerbated it. Every economist starts with the theory which is based in their own political views, then works back from there with ex post facto reasoning.

When you can't even say with hindsight, you have no chance with foresight, so you might as well admit that policies are driven by politics rather then economics, and as the politicians change views with every passing faux economic indicator, even those with inside knowledge aren't really able to come to any long-term view (short term speculation is different).

Edited by WageslaveX14

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I'm quite a fan of your posts, but how can you state any of this with any kind of certainty?

I could outline the whole train of logic that leads me to make these assertions but it would take too long*, and in any case, would you be any more convinced afterwards?

The only thing I think is absolutely certain is that QE cannot work to achieve it's publicly stated aims.

I certainly agree with that. However when you zoom out far enough QE is not a policy designed to achieve a goal but a natural stage of the transformation underway for a long time now and now nearing completion.

Beyond that, there are only competing theories, the validity of which can't even be proven in hindsight, e.g. every economist has a different view on what caused the great depression and what exacerbated it. Every economist starts with the theory which is based in their own political views, then works back from there with ex post facto reasoning.

except I work forwards from first principles. My first principles are:

1) there is an economic surplus of production at any given instant in history or present or future and at any time there is a mix of people who want to consume now and those who would rather consume the surplus which is generated at some point in the future.

2) the distribution of today's surplus to the parties described in (1) is the entire purpose of the political economy.

3) there is more to life than economics.

my suggestion is that you derive first principles that work as well now as they would do 6000 years ago and then work forwards from there. Really, stripping away everything you are culturally conditioned to believe is the only possible way to understand changes that vastly exceed the scope of current western culture and science.

* maybe I'll eventually get round to doing that but not right now. Besides, I keep learning new things (which is why I could never be a conviction politican) ...

Edited by scepticus

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except I work forwards from first principles. My first principles are:

1) there is an economic surplus of production at any given instant in history or present or future and at any time there is a mix of people who want to consume now and those who would rather consume the surplus which is generated at some point in the future.

have you tried to find one?

2) the distribution of today's surplus to the parties described in (1) is the entire purpose of the political economy.

have you asked anyone?

3) there is more to life than economics.

Category error, I think.

my suggestion is that you derive first principles that work as well now as they would do 6000 years ago and then work forwards from there. Really, stripping away everything you are culturally conditioned to believe is the only possible way to understand changes that vastly exceed the scope of current western culture and science.

* maybe I'll eventually get round to doing that but not right now. Besides, I keep learning new things (which is why I could never be a conviction politican) ...

I agree.

Perhaps you might like to try it yourself sometime?

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...is correct but what we ARE in, is a systemic long term growth crisis, which is far more serious than a mere financial crisis.

I certainly agree with that. However when you zoom out far enough QE is not a policy designed to achieve a goal but a natural stage of the transformation underway for a long time now and now nearing completion.

Could you expand on the growth crisis, what is meant by it and why it is far worse?

What is the natural transformation that QE is bringing about?

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Could you expand on the growth crisis, what is meant by it and why it is far worse?

the growth crisis is that we can't continue growing. You list the reasons. They begin with P, E and I.

What is the natural transformation that QE is bringing about?

QE is not bringing about anything. It is part of the action of the overall market. By the overall market I mean the sum of all human interaction including politics and technology.

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the growth crisis is that we can't continue growing. You list the reasons. They begin with P, E and I.

QE is not bringing about anything. It is part of the action of the overall market. By the overall market I mean the sum of all human interaction including politics and technology.

QE isn't part of the market.

It's a rape.

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rape is part of the overall tapestry of human interaction. that is all I have to say along this line of discussion.

And if you'd gone to first principles you'd understand what rape does to value and why we aren't growing.

Your unwillingness to make these vital distinctions about behaviour and consequence is sad, not just personally but because it throws your intellect off at every turn.

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A few hundred billion in QE is a joke if that is all they do. The US economy is dying from a lack of money.. something like 27 million unemployed and underemployed. Factories shutting down for lack of demand, power plants going dark.

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Btw my estimate shows the fed balance sheet will ultimatley have to expand to 15 trillion. To facilitiate commerce up to the potential of the modern industrial machine.

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These guys will make up anything as part of the output gap to rationalise the money printing. I think it was Krugman who once wrote that all of people's acquired skills contribute to the gap so if millions of mortgage brokers are suddenly unemployed his assumption is not that those skills were misallocated but we just need some massive stimulus so they can continue to contribute to the economy.

Ya and if other industries are expanding and picking up those millions who were misalocated that is the economy functioning well. But if they just become permanently unemployed and are joined by millions of others from all sectors of the economy.. it points to a severe output gap.

Ordinarily the output gap was easy to fix. Simply lower base interest rates. The problem is now they are at the 0 bound. So the next step is helicopter drop of printed cash.

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Btw my estimate shows the fed balance sheet will ultimatley have to expand to 15 trillion. To facilitiate commerce up to the potential of the modern industrial machine.

You have economics completely **** about face. Companies exist to service consumer demand, not the other way round.

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You have economics completely **** about face. Companies exist to service consumer demand, not the other way round.

Well they can't service consumer demand if citizens are flat broke and unemployed.

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All this effort, manipulation and - according to scepticus - rape and all because of the concept of a state-mandated monopoly on currency.

If there was a free market in currency there would be none of this; absolutley no reason to compel people to empty their bank accounts by fining for them, no reason to require a banking sysetm for anything other than provision of safe storage, and no reason to QE except the real one - that the State is a greedy black hole of wealth destruction that just won't stop until you make it.

Edited by bogbrush

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and you think helicoptering trillions will solve that?

Since realistically the average Brit or American is not going to start making more money at their job.. the only way to close the gap is to helicopter in money in increasing amounts until the gap closes.

Down the road as production rises yet more, bigger helicopters have to be used. Its sad an dystopian in many ways, which I think is why so many people repel at these ideas. More and more people material well being depends on far off politicians whims. They decide to pay for their health care and housing and food, and give them spending money. Or they work for the state in some non-job and could be downsized at any time with no realistic chance of replacing that income.. stressful.

Look at how many families would not be able to afford health care and dental if Mr. State wasn't picking up the tab.

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  • 261 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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