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Everything You ‘Know’ About The Fed Is Wrong

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http://www.marketwatch.com/story/everything-you-know-about-the-fed-is-wrong-2013-04-24?pagenumber=1

1. Money printing increases the money supply

The Fed does not control the money supply; they control base money (or inside money), which is a small fraction of the broader money supply. In our fractional reserve system, the banks (loosely defined) control the other 90% or so of the money supply (a.k.a. outside money). And the banks have not been lending. This is why the money supply has not grown rapidly in response to years now of QE.

2. QE is ‘pumping cash into the stock market’

The truth is, little of this money finds its way into the stock market. When the Fed implements QE, they are buying low-risk U.S. Treasurys and agency mortgages from the market, mostly from banks. About 82% of the money the Fed has injected since QE started has been re-deposited with the Fed as excess reserves. With the remaining 18%, banks have tended to buy other fixed income assets of a slightly riskier nature — moving out on the risk spectrum for a bank doesn’t mean jumping into equities, especially given the near-death experience that most of them have just experienced.

Of course, not all of the U.S. Treasury bonds (USTs) and mortgage-backed securities (MBSs) injected into the economy were purchased from banks. And some of the money does end up in equities. But, really, not all that much. The other big holders of USTs/MBSs who have been selling to the Fed for the most part have fixed-income mandates too, and they are also unlikely to take the cash from the Fed and cross over into equities with it.

So, the natural question is why — if the above is true — have equities gone up so much in response to QE? The simple answer? Psychology and misconception.

By taking an aggressive stand, the Fed signaled a positive message to markets: “I’ve got this.” The confidence that the Fed would do everything it could to protect our economic downside stabilized animal spirits. Then it slowly but surely enabled risk-taking to re-engage. The fact that so many people believe that the Fed would be “pumping money into the stock market,” and because so many buy into the “don’t fight the Fed” aphorism (notwithstanding September 2007 to March 2009), the effect of the Fed’s message was that much more powerful.

In short, this largely psychological effect on markets — one that I had initially underestimated — bought time for household balance sheets to heal and is allowing fundamentals to catch up somewhat with market prices.

3. QE will create runaway inflation

“Yet” has become the favorite word of the inflationistas. As in, “Oh, it’ll come, just hasn’t yet.” And the magnitude of that expected inflation has been dialed down from “hyperinflation” to “high inflation.” But some continue to hang on. The most extreme inflationistas insist that it is here now and the Fed is cooking the books. The reality, of course, is the Fed has nothing to do with the compilation of U.S. inflation statistics, which is done by the Bureau of Labor Statistics.

Moreover, for those who are worried that all departments of government are conspiring against the American people, you would also have to believe the Massachusetts Institute of Technology is in on it, too. MIT runs the Billion Price Project, a means of testing, using broad-based Internet price sampling techniques, the extent to which the government’s measure of CPI reflects reality.

But, there really has been no inflation, even with rounds of QE and interest rates stuck at zero. What we have learned in this crisis has driven home the points that the lending and borrowing that drive the money supply are more sensitive to risk appetite than they are to the price of money.

Is it possible that this will end in a bout of inflation? Yes. But the odds are lower than consensus had been thinking and they are dropping fast, as inflation continues to be well anchored and people come to understand better how the transmission mechanism of monetary policy actually works.

4. QE is the reason we have high oil/gasoline prices

This very deeply held view is just as deeply mistaken. As the chart here shows (http://image.minyanville.com/assets/FCK_Jan2011/images/LisaCatchApril2013/Fed_oil.gif), post crisis/post QE, oil prices on average (red line) have gyrated around $80 to 90 per barrel with no ascending trend. The ascending trend came well before we knew what QE even was, in the 2002-2007 period. And the most rapid phase of its rise took place as the Fed was raising rates from 2004-2006.

Paying high prices makes all of us angry, and it feels good to have someone to lash out at, but, alas, reality disagrees.

What, then, caused the rise in the price of oil? In brief, the rise of China after it joined the WTO in 2002 and investor allocations to commodities as a “new asset class,” with trend followers, speculators, and prop desks front-running the pack. Remember this was a period in which leverage was building and speculative juices flowing full steam.

In any event, it’s pretty clear it was not a result of the Fed and QE.

5. QE has debased the dollar

Good luck convincing people this hasn’t been the case. This is an excellent example of repeating a falsehood until it becomes accepted as true.

Again, roll tape…

This chart (http://image.minyanville.com/assets/FCK_Jan2011/images/LisaCatchApril2013/Fed_dollar.gif) shows the trade-weighted broad-dollar average. It, much like the oil chart referenced above, shows all the action took place before QE and the crisis. From 2002 to 2007, the Big Dollar, as currency specialists like to call it, depreciated some 20%. And the fastest depreciation came…that’s right, when the Fed was raising policy rates. Since the crisis oil has been roughly unchanged, with gyrations suspiciously similar to those of oil.

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in which case there is no reason to have a limit on it right? Why doesn't the govt simply qe all it's spending needs.

You know qe is about funding a govt that can't afford to borrow any more at a prevailing market rate (sans qe)?

The banks go along with it as it gets to front run the operation and make a sizeable skim which it invests in stawks, hence the index goosing.

Inflation comes from govt spending, or more appropriately the borrowing that the govt does which it never really pays back and rolls over and increases ad infinitum. Don't forget MMTers and the Krugman of this world are keen to tell us that without govt borrowing we couldn't have savings/there would be no money.

So the govt has been borrowing, and now lending to itself rather a lot of money no? l believe the debt saturation and near death levels of velocity have kept a lid on this and maybe leverage controls and high interest rates will stop this money causing havoc but we will all need high inflation if a debt jubilee is not on the cards to free us from the grip of death.

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Nice propaganda, straight from the horse's mouth. Tell it to the family with the cheap mortgage that pays for shopping, utilities, petrol and has savings in the bank. If its all wrong, why don't they put interest rates up.

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RB predicted deflation for ages, and in property this has happened a bit, they can get away with QE in a deflationary environment as it doesn't show, but they are now addicts. It will be interesting to watch it go to rat s**t once they are in an inflationary environment, IE how do you QE if there is a run on the pound? ;)

If that run is after the next GE look out for 20% plus inflation and gold into orbit.

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http://www.marketwatch.com/story/everything-you-know-about-the-fed-is-wrong-2013-04-24?pagenumber=1

1. Money printing increases the money supply

2. QE is ‘pumping cash into the stock market’

3. QE will create runaway inflation

4. QE is the reason we have high oil/gasoline prices

FaFa, you have reached new lows.

1.

Money printing increases the base money. Low interest rates, Funding For Lending, ... also have influence on M2, M3,... So yes, all that is missing is the "animal spirits" to borrow. The moeny is there, just waiting. It will not be removed, as that will entail selling Government Bonds into a rising interest-rate market.

2.

http://www.zerohedge.com/news/2013-04-25/central-banks-join-herd-openly-buying-stocks-record-amounts

Central Banks Join The Herd, Openly Buying Stocks In Record Amounts

When tin-foil-hat wearing digital dickweed blogs first suggested that Central Banks were actively buying stocks, the mainstream media scoffed at the idiocy and un-independence of such an idea. However, it is clear the central banks themselves are now not only actively buying stocks but are activley encouraging it and propagandizing their efforts to lever this last policy tool left in the toolbox.

As Bloomberg reports, 23% of central bankers surveyed said the bank owns shares and plans to buy more. From the Bank of Japan to the Bank of Israel and with the SNB and the Czech National Bank now at over 10% allocation of reserves to stocks, is it any wonder there is an inexorable bid under the 'free' markets.

I can't be bothered to go on.

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You know qe is about funding a govt that can't afford to borrow any more at a prevailing market rate (sans qe)?

No, that's not correct. QE is an asset swap designed to keep interest rates down. That may benefit the government, but it has effects in the private sector too.

Nice propaganda, straight from the horse's mouth. Tell it to the family with the cheap mortgage that pays for shopping, utilities, petrol and has savings in the bank. If its all wrong, why don't they put interest rates up.

Sorry, didn't understand that

Doesn't really undermine what the article said, does it? That the QE isn't going into stocks, but the action of QE alters risk perception of investing in stocks (i.e. QE creates a low to zero risk environment)

The Japanese are expressly doing QE to raise inflation. Perhaps they don't understand how it works? :P

The article is talking about runaway inflation/high inflation. If 2% is high inflation for you, I want what you are smoking.

FaFa, you have reached new lows.

1.

Money printing increases the base money. Low interest rates, Funding For Lending, ... also have influence on M2, M3,... So yes, all that is missing is the "animal spirits" to borrow. The moeny is there, just waiting. It will not be removed, as that will entail selling Government Bonds into a rising interest-rate market.

2.

http://www.zerohedge.com/news/2013-04-25/central-banks-join-herd-openly-buying-stocks-record-amounts

Central Banks Join The Herd, Openly Buying Stocks In Record Amounts

I can't be bothered to go on.

I have reached new lows? From someone who joined 1 1/2 weeks ago? Long time lurker are we?

I am sorry to hear that you cannot be bothered to go on, as it sounds as if you believe reserves create loans? Do you believe reserves create loans?

Opening post is based on nonsense. I can't be bothered to go on.

Yes, yes. But as you never engage in debate and what little you say doesn't make sense (i.e. claiming to spend all your fiat on gold but then stating you can jump in at $1000 which implies you must have cash reserves) I cannot say I care much.

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It's just that all the points have been debated on HpC for the best part of 4-5yrs already. And like the gold thread, there is just a bit of fatigue with going in circles the whole time. It's just wearing.

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No, that's not correct. QE is an asset swap designed to keep interest rates down. That may benefit the government, but it has effects in the private sector too.

I have reached new lows? From someone who joined 1 1/2 weeks ago? Long time lurker are we?

I am sorry to hear that you cannot be bothered to go on, as it sounds as if you believe reserves create loans? Do you believe reserves create loans?

Believe what you want to regarding QE being asset swaps or funding deficits, but IRs would be a lot higher now for sure. What it has enabled is the low-cost funding of deficits that put us out over the edge of a cliff. One IRs rise, we are toast.

Yes, joined recently. Watched for over 10 years. So suck it, mate.

Reserves do not create loans. The "money" is there- meaning the "high powered" CB money used as reserves to create the loans. The reserves are there. All that is missing is the "animal spirits" to increase M3,4... and they will come eventually. What I am saying is that the CB has created the reserves and those won't be going anywhere. Thus, the M3.,M4.. expansion will come. When, who knows. But it will be a firestorm.

Oh, and Central Banks ARE buying equities openly.

http://www.bloomberg.com/news/2013-04-24/central-banks-load-up-on-equities-as-low-rates-kill-bond-yields.html

Right, now I REALLY am not going to go on from here. Your points are flawed.

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It's just that all the points have been debated on HpC for the best part of 4-5yrs already. And like the gold thread, there is just a bit of fatigue with going in circles the whole time. It's just wearing.

So your point is the thread isn't interesting to you. So what would you like me to do? Ask your personal permission before posting? You are not obliged to come here, or read posts or respond.

Believe what you want to regarding QE being asset swaps or funding deficits, but IRs would be a lot higher now for sure. What it has enabled is the low-cost funding of deficits that put us out over the edge of a cliff. One IRs rise, we are toast.

I certainly agree that without QE interest rates would be a lot higher. I don't see the article saying they wouldn't. By what mechanisms will IRs rise?

Yes, joined recently. Watched for over 10 years. So suck it, mate.

Err, ok.

Reserves do not create loans.

Ok

The "money" is there- meaning the "high powered" CB money used as reserves to create the loans. The reserves are there. All that is missing is the "animal spirits" to increase M3,4... and they will come eventually. What I am saying is that the CB has created the reserves and those won't be going anywhere. Thus, the M3.,M4.. expansion will come. When, who knows. But it will be a firestorm.

No, I think you are contradicting yourself. You are clearly saying that reserves create loans. Why link reserves with animal spirits and expansion if not? Doesn't make sense

Thanks for that. The point is that QE is not going into stocks in a meaningful manner, the real driver is the private sector sentiment.

Right, now I REALLY am not going to go on from here. Your points are flawed.

Why are you getting so angry? I don't see how the points are flawed and I am failing to see how you are arguing against them adequately.

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Promises of money <> money.

If you break a promise, then something hasn't been done. Printing up the money doesn't mean that said something magically gets done either. Instead, you end up with more money and still no more done => inflation.

Considering broad money (credit/promises) as an equivalent to narrow money (cash/central bank electronic money) is simply incorrect. They are both categorised as 'money', but they are quite different beasts.

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No, that's not correct. QE is an asset swap

snip

please name the two assets.

in particular, please tell us when one of the assets makes its first appearance in existence and from where it gained its value?

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Points 2, 3, 4, and 5 are most definitely nonsense.

The argument being put forward assumes that returns on different asset classes are completely unrelated, which is a laughably untenable assumption. It's irrelevant if banks have or have not been investing QE funds directly into the stock market, because pension funds and other investors most certainly have been investing in equities as they look to replace the yield lost on Treasuries and other bonds.

I know that US CPI hasn't risen that much, but as an American expat, what I've seen of inflation on intermittent trips back to the US has been astounding. I spent this past Christmas in the US and did the shopping for Christmas dinner. For eight people, the total cost was more than $1000 for the ingredients alone. I like to eat well, but that was ridiculous, and it wasn't truffles and foie gras that I was buying (especially as the latter is now illegal in the land of the free) but a standard Christmas dinner. Pre-credit crunch, I wouldn't have spent anywhere near half that much for a similar meal. Claiming that CPI has held steady at 2% just seems incredibly difficult to believe.

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No, that's not correct. QE is an asset swap designed to keep interest rates down. That may benefit the government, but it has effects in the private sector too.

Yes i is correct. QE is an "asset swap"... yeah its called swapping newly printed money (from BOE) for new treasuries the government wants to sell to continue its spending beyond tax receipts. Of course it depresses interest rates because suddenly the bankers aren't the only buyers in town.

(Don't bother waving your hand and telling me the BOE doesn't buy the treasuries. Using the primary dealers as middle men to obfuscate the process doesn't make it less obvious, unless you are wilfully trying to misrepresent the situation)

Note the BOE recently cancelled interest on the treasuries it purchased with QE money so the pretence that QE is anything other than funding a govt, THAT WOULD NOT OTHERWISE BE UNABLE TO DO SO, is a nonsense.

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Yes i is correct. QE is an "asset swap"... yeah its called swapping newly printed money (from BOE) for new treasuries the government wants to sell to continue its spending beyond tax receipts. Of course it depresses interest rates because suddenly the bankers aren't the only buyers in town.

(Don't bother waving your hand and telling me the BOE doesn't buy the treasuries. Using the primary dealers as middle men to obfuscate the process doesn't make it less obvious, unless you are wilfully trying to misrepresent the situation)

Note the BOE recently cancelled interest on the treasuries it purchased with QE money so the pretence that QE is anything other than funding a govt, THAT WOULD NOT OTHERWISE BE UNABLE TO DO SO, is a nonsense.

The BoJ has done a good job for the Fed, as has the BoE. Moreover, all the central banks use essentially the same few commercial banks as primary dealers. Ultimately it's one vast pool of liquidity.

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One of the main reasons for QE is to fund the government deficit.

Creating a false market for government debt means it will sold and the yield of the bonds will be artificially low.

I can't see any indications that the deficit will be bought under control and for this reason I can see no end to QE.

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Pretty much everything in that article is completely wrong. Money is not credit, so that's the first point destroyed. Zero percent interest rates make very low stock yields viable investments, there goes number two. Price of oil takes care of number three. The price of oil has increased from about 30 dollars per barrel before money printing to whatever it is now, number four. Printing money is the very definition of debasement which takes care of the last of the author's misconceptions.

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One question I had is if there is an example where central banks creating money to buy assets did not result in high inflation? For example Kennedy adopted similar policies and look at the 1970s

Interest rates will rise when the government is the only buyer of government debt. We are starting to see signs of this in japanese bond markets (a quadrillion yen market) which was closed several times due to large volatility due to massive government purchases and massive private sector sales not happening at the same time.

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  • 242 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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