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Everything You ‘Know’ About The Fed Is Wrong


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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.

Not misconceptions, the same bought off press that peddled nafta and free trade, ARM mortgages, debt and all the destruction that went with it and sold it as as positive news.

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Stockman explains the Fed. No economic recovery, just asset price inflation followed by another bust.

Thanks for posting, but not really. Sadly the argument is cut off just when they are scratching the surface. Stockman appears to be a gold standard proponent (yawn)

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.

I agree that the argument that QE hasn't affected the stock market is not overly convincing, but I think the points about the oil price and so on are very much on the button. Oil peaked at $147 prior to the economic crisis and has not gone past that despite the money printing.

Thanks for that, I will take a look.

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.

I believe it is wrong to argue that the primary reason to do QE was to fund the deficit. QE came in, IMHO, to stabilise the economic situation and lower the interest rate yield across the board. Of course, this has meant that the government can borrow at exceptionally low rates - indeed, everyone can borrow at low rates.

Pretty much everything in that article is completely wrong. Money is not credit, so that's the first point destroyed.

Money is not credit? Are you sure? What is it then if not credit.

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

Interesting, could you expand your points about Kennedy?

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.

I would be very interested to heard of the yen bond markets being closed. Do you have a link?

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I agree that the argument that QE hasn't affected the stock market is not overly convincing, but I think the points about the oil price and so on are very much on the button. Oil peaked at $147 prior to the economic crisis and has not gone past that despite the money printing.

You're wrong about oil prices too. 2008 was a blow-off top, the average price has been much higher since. The all-time high in sterling and euros was established in 2012.

http://www.icaew.com/~/media/Files/About-ICAEW/What-we-do/economic-insight/econinsightmay2012fig3new/ec3.ashx?w=352&h=290&as=1

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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.

Price of oil has fallen (nearly by half) since July '08 in nominal terms, despite 'money printing'

It's more or less impossible to stop pumping oil or store it like most other assets.

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You're wrong about oil prices too. 2008 was a blow-off top, the average price has been much higher since. The all-time high in sterling and euros was established in 2012.

http://www.icaew.com/~/media/Files/About-ICAEW/What-we-do/economic-insight/econinsightmay2012fig3new/ec3.ashx?w=352&h=290&as=1

You don't think Chinese demand as they switched to an infrastructure bubble post 2007 to be anything to do with it?

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Thanks for posting, but not really. Sadly the argument is cut off just when they are scratching the surface. Stockman appears to be a gold standard proponent (yawn)

You keep playing the man. That's sure to win people over.

I agree that the argument that QE hasn't affected the stock market is not overly convincing, but I think the points about the oil price and so on are very much on the button. Oil peaked at $147 prior to the economic crisis and has not gone past that despite the money printing.

Or declined much from it despite an ongoing global recession. Amazing to look back to 10 year or so when oil was $15!

Money is not credit? Are you sure? What is it then if not credit.

Money doesn't have private counterparty risk and doesn't get destroyed. Its a non expiry zero dividend treasury note of sorts. I agree they are near fungible in calmer times.

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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.

Most of the population would regard the balance of their bank account to be money. By your definition it is not. That can be a fair definition, but it is at odds with most peoples understanding on money. Yes your bank owes you your bank balance but they have a debt to you that is all, so in that sense there is no money in there.

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http://www.marketwat...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

Hello Fa Fa,

Thanks for your post.

OK, so to answer each of your points (with a UK bias in terminology):

Point 1

I'm not going to argue too much with this, yes the BOE directly control M0 (bank notes and central bank reserves) via printing of bank notes (backed by the purchase of interest bearing instruments) and through interest rates on reserves.

The BOE only have indirect control over broad money or M3 (via interest rates on reserves) and since the financial crisis the term "pushing on a string" has been used to describe the breakdown of the effect that lowering interest rates has had on encouraging new lending (or in monetary terms the money multiplier).

However, In terms of my perception of the thrust of your arguments (i.e. money printing does not have adverse affects) this is really besides the point, and is just a mechanical description of our monetary system, which I've answered and expanded upon for the benefit of any readers who might be a little fuzzy on such terms.

Points 2, 3 & 4

I shall answer these arguments together as they are closely related.

Firstly in the wake of the crisis of 2008, without government intervention we would have seen a short sharp period of deflation, as some banks failed and depositors savings were wiped out with them i.e. a sharp contraction in M3.

What happened instead of course was that the BOE printed money (among other things) to purchase government bonds on secondary market, which in turn allowed the government to run a large deficit over several years.

All of which have of course rather successfully stopped additional bank failures, stopped prices from falling further, and over the course of the next few years and repeated stimulus (money printing to the total of £375 Billion so far) has re-inflated prices, including both oil and the stock market (I'm not going to debate why stocks have risen further than oil prices, the inflation of prices doesn't occur uniformly).

To re-iterate the money printing has caused inflation, but just enough re-inflate prices to approximately were they were before the financial crisis started (speaking in very broad terms).

To re-inforce this point and to answer your specific question regarding the absence of hyperinflation so far, if we look at historical examples (namely all the hyperinflations in the last 250 years), they were almost always preceeded by governments financing a budget deficit in excess of 20-30% of expenditure (often much higher), for several years, via money printing.

To make absolutely clear, the UK, US, etc. are simply not printing enough money to cause hyperinflation (given the deficits being financed), and given historical precedent this should not be considered unusual, or a failure of some economic theories, and the vindication of their alternatives (Modern Monetary Theory being one example).

That's not to say however, that the government stimulus, despite the limitation of it's scope (by comparison to other hyperinflationary episodes) so far is not harmful. I've written about this extensively before in a previous debate with you, although to summarise, the government stimulus and subsequent re-inflation, so far, has skewed prices such that the malinvestment that began in the last decade, still continues(worse, resources are being directed away from new businesses and squandered on wasteful enterprises that should have ceased), further people are not incentivised to save adequately from which will begin a true recovery by the investment in better means of production.

Edited by GradualCringe
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Also, in support of my assertion that the current governent stimulus is harmful, I would also ask you to look at the UK's GDP figures since 2008 (as skewed and as flawed as the measure of GDP is), the economy has flat lined despite £375 Billion of QE, and the government running deficits in excess of most western governments (i.e. the manipulation of prices has stopped the re-allocation of resources, allowed excessive debts to remain, and hindered saving, all of which would support a true recovery).

Edited by GradualCringe
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snip...

To re-inforce this point and to answer your specific question regarding the absence of hyperinflation so far, if we look at historical examples (namely all the hyperinflations in the last 250 years), they were almost always preceeded by governments financing a budget deficit in excess of 20-30% of expenditure (often much higher), for several years, via money printing.

To make absolutely clear, the UK, US, etc. are simply not printing enough money to cause hyperinflation (given the deficits being financed), and given historical precedent this should not be considered unusual, or a failure of some economic theories, and the vindication of their alternatives (Modern Monetary Theory being one example).

Hello GradualCringe.

I am intrigued that you seem to think it takes 20-30% deficit printing as a prerequisite for hyperinflation. Do you have evidence for this? Page 3 here:

http://www.imf.org/external/pubs/ft/fandd/2003/06/pdf/reinhard.pdf

shows a table where Argentina ran single-digit deficit/GDP for years before a hyper, and so too for Peru.

I am now concerned with what happens to that deficit if the fed do stop printing.... In one estimate I saw, the interest cost alone on the US national debt (now ~$17Tr, 105% GDP) will eat up nearly $1Tr per year! I think that's conservative.

http://www.zerohedge.com/news/2013-05-01/feds-qe-exit-will-more-quadruple-interest-costs-us

But more problematic is that even with CBO's rather conservative estimates of the growth in US debt over the next decade the USD cost of financing will explode from around $205bn (based on TBAC data) to over $855bn. Still convinced the Fed can exit smoothly?

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Hello GradualCringe.

I am intrigued that you seem to think it takes 20-30% deficit printing as a prerequisite for hyperinflation. Do you have evidence for this? Page 3 here:

http://www.imf.org/e...df/reinhard.pdf

shows a table where Argentina ran single-digit deficit/GDP for years before a hyper, and so too for Peru.

I am now concerned with what happens to that deficit if the fed do stop printing.... In one estimate I saw, the interest cost alone on the US national debt (now ~$17Tr, 105% GDP) will eat up nearly $1Tr per year! I think that's conservative.

http://www.zerohedge...terest-costs-us

But more problematic is that even with CBO's rather conservative estimates of the growth in US debt over the next decade the USD cost of financing will explode from around $205bn (based on TBAC data) to over $855bn. Still convinced the Fed can exit smoothly?

Like efverything else in economics, there are no hard and fast rules as to IF you will get a hyperinflation or not.

What causes it may be nothing to do with total deficit....something else could happen, for example, a sudden sentiment change towards the £, by the hurd or by attack, then the £ can become worthless...worthlessness is hyperinflation.

If there were formulas for all the outcomes, we wouldnt need to argue about it.

There is truth in the Maths though.....exponentials always kill, and spending more than your income by 2% ( the target inflation rate) is an exponential...the system is set to hyperinflation, when the reason given is to provide growth.

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Hello GradualCringe.

I am intrigued that you seem to think it takes 20-30% deficit printing as a prerequisite for hyperinflation. Do you have evidence for this? Page 3 here:

http://www.imf.org/e...df/reinhard.pdf

shows a table where Argentina ran single-digit deficit/GDP for years before a hyper, and so too for Peru.

I am now concerned with what happens to that deficit if the fed do stop printing.... In one estimate I saw, the interest cost alone on the US national debt (now ~$17Tr, 105% GDP) will eat up nearly $1Tr per year! I think that's conservative.

http://www.zerohedge...terest-costs-us

But more problematic is that even with CBO's rather conservative estimates of the growth in US debt over the next decade the USD cost of financing will explode from around $205bn (based on TBAC data) to over $855bn. Still convinced the Fed can exit smoothly?

The deficit figures I possess are expressed in terms of % of expenditure, the Reinhart paper you are referencing I believe expresses the deficit as a % of GDP, which would make for a much smaller percentage.

Certainly the figures I possess for both Argentinian and Peruvian hyperinflations in the late 1980s indicate that they were running deficits as a percentage of expenditure greater than 20%.

* EDIT * N.B. My data sources for Argentina and Peru have their root in the "International Financial Statistics Monthly Reports" from the IMF.

Edited by GradualCringe
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Like efverything else in economics, there are no hard and fast rules as to IF you will get a hyperinflation or not.

What causes it may be nothing to do with total deficit....something else could happen, for example, a sudden sentiment change towards the £, by the hurd or by attack, then the £ can become worthless...worthlessness is hyperinflation.

If there were formulas for all the outcomes, we wouldnt need to argue about it.

There is truth in the Maths though.....exponentials always kill, and spending more than your income by 2% ( the target inflation rate) is an exponential...the system is set to hyperinflation, when the reason given is to provide growth.

The deficit figures I possess are expressed in terms of % of expenditure, the Reinhart paper you are referencing I believe expresses the deficit as a % of GDP, which would make for a much smaller percentage.

Certainly the figures I possess for both Argentinian and Peruvian hyperinflations in the late 1980s indicate that they were running deficits as a percentage of expenditure greater than 20%.

It's not a formula as such, rather a high degree of correlation given the historical evidence.

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The deficit figures I possess are expressed in terms of % of expenditure, the Reinhart paper you are referencing I believe expresses the deficit as a % of GDP, which would make for a much smaller percentage.

Certainly the figures I possess for both Argentinian and Peruvian hyperinflations in the late 1980s indicate that they were running deficits as a percentage of expenditure greater than 20%.

It's not a formula as such, rather a high degree of correlation given the historical evidence.

Indeed, History will help us to see what could happen....It probably also shows other Countries in similar circumstances that DIDNT hyperinflate.

I agree we arent printing enough today to cause a Hyperinflation by that alone....as was posited on this site some years ago by EDM, the aim would be to counter the deflation with it.

The issue is that we are choosing winners and losers.....

QE should be causing riots on the streets as it is going to hit the poor MUCH harder than POLE TAX ever would have. But of course, our Politicians rarely illicit feelings of rage, ( Brown and Blair excepted), the current lot just being nice non entities....

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I have basically returned to the thread out of politeness due to your considered response, but I am not sure what I can say that I haven't already said that would add anything meaningful to the debate. The point isn't whether QE gives harmful effects (whether or not it is harmful would be due to your personal point of view) but whether it is giving the effects commonly stated and whether this is sustainable. To those who believe it is not sustainable, I'd argue the numbers appear to say no.

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The deficit figures I possess are expressed in terms of % of expenditure, the Reinhart paper you are referencing I believe expresses the deficit as a % of GDP, which would make for a much smaller percentage.

Certainly the figures I possess for both Argentinian and Peruvian hyperinflations in the late 1980s indicate that they were running deficits as a percentage of expenditure greater than 20%.

It's not a formula as such, rather a high degree of correlation given the historical evidence.

Oh, thanks I had not spotted it was a % of expenditure.

Personally, like Bloo Loo, I think hyper is more tied to a currency event (i.e. repudiation) than the numbers themselves.

I also feel we have passed over the threshold where market-set interest rates (as opposed to Fed/BoE rigging) would cripple the economy, so we are now 'addicted' to printing.

It will be a cold, cold day in hell....

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I have basically returned to the thread out of politeness due to your considered response, but I am not sure what I can say that I haven't already said that would add anything meaningful to the debate. The point isn't whether QE gives harmful effects (whether or not it is harmful would be due to your personal point of view) but whether it is giving the effects commonly stated and whether this is sustainable. To those who believe it is not sustainable, I'd argue the numbers appear to say no.

I'm not sure if you've noticed, but I've provided numbers that show there is a clear limit to how much money printing can occur before a hyperinflation occurs (i.e. governments financing a deficit of greater than 20-30% of expenditure through money printing), an event which is in no way sustainable (have you read the historical accounts of hyperinflations)?

Also, and I'm sure you've seen the figures for the UK, which despite all the talk of austerity has been running hefty deficits (not greater than 20-30% of expenditure to make clear, and therefore just enough to re-inflate prices after the initial deflation starting in 2008), and GDP has flat lined.

Do you think these numbers are wrong?

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I have basically returned to the thread out of politeness due to your considered response, but I am not sure what I can say that I haven't already said that would add anything meaningful to the debate. The point isn't whether QE gives harmful effects (whether or not it is harmful would be due to your personal point of view) but whether it is giving the effects commonly stated and whether this is sustainable. To those who believe it is not sustainable, I'd argue the numbers appear to say no.

Until central bank balance sheets have returned to normal sizes and short term funding rates are at normal levels (say CPI + 1.5%), I think that it is too soon to declare victory. I don't think that we will know the results of the QE experiment for another 5 years or so.

There is a view that all that has been done so far is replacing a private sector bubble with a public sector bubble which is eventually going to burst even more spectacularly. Public sector bubbles have a much longer lifecycle and build up much larger imbalances than private sector bubbles. Roubini puts is well : http://www.cnbc.com/id/100698405

The Federal Reserve's commitment to loose monetary policy is likely to lead to asset and equity bubbles in the next two years which could be worse than the previous crisis, renowned economist Nouriel Roubini said in an opinion piece for Project Syndicate.

Roubini, co-founder and chairman of Roubini Global Economics famously dubbed Dr Doom for his accurate prediction of the 2008 financial crisis, wrote earlier this week that "the problem is that the Fed's liquidity injections are not creating credit for the real economy, but rather boosting leverage and risk-taking in financial markets."

"The issuance of risky junk bonds under loose covenants and with excessively low interest rates is increasing; the stock market is reaching new highs, despite the growth slowdown; and money is flowing to high-yielding emerging markets," he added.

According to Roubini, a slow exit from the Fed's quantitative easing (QE) policy would be similar to 2004, when the central bank began to slowly raise rates. Between June 2004 and December 2007, the Fed raised rates in 25 basis point increments. The gradual rate hikes were blamed for keeping monetary policy accommodative for too long and worsening the housing bubble.

On Wednesday, the Fed held fast to its ultra-accommodative monetary policy after its policy meeting because of what board members described as an economy weakened by fiscal policy. The Fed will continue to buy $85 billion a month in bonds under its QE3 program.

According to Roubini, the Fed's program and that of similar programs from other central banks have far-reaching consequences with the troubled euro zone periphery even gaining from the increased liquidity.

Roubini said that even when interest rates begin to rise, which he predicts will be in 2015, it will be slow and steady.

But Roubini doesn't prescribe an alternative. Instead, he said, that moving too quickly "would crash asset markets and risk leading to a hard economic landing."

According to him, markets should be braced for turmoil once monetary tightening starts and further turbulence once tightening is finished.

"The exit from the Fed's QE and zero-interest-rate policies will be treacherous: Exiting too fast will crash the real economy, while exiting too slowly will first create a huge bubble and then crash the financial system. If the exit cannot be navigated successfully, a dovish Fed is more likely to blow bubbles."

—By CNBC's Shai Ahmed; Follow her on Twitter @shaicnbc.

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Indeed, History will help us to see what could happen....It probably also shows other Countries in similar circumstances that DIDNT hyperinflate.

I agree we arent printing enough today to cause a Hyperinflation by that alone....as was posited on this site some years ago by EDM, the aim would be to counter the deflation with it.

The issue is that we are choosing winners and losers.....

QE should be causing riots on the streets as it is going to hit the poor MUCH harder than POLE TAX ever would have. But of course, our Politicians rarely illicit feelings of rage, ( Brown and Blair excepted), the current lot just being nice non entities....

There are three equivocal exceptions in the dataset I possess (Poland 1989, Yugoslavia 1990, Turkmenistan 1995), however, every other hyperinflation was preceeded by the goverment financing large deficits through money printing (out of a dataset of 30 hyperinflations).

I completely agree that the government picking winners and losers to the degree that they have is not good a thing, particularly through something insiduous as inflation (because it isn't clear what's occurring).

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There are three equivocal exceptions in the dataset I possess (Poland 1989, Yugoslavia 1990, Turkmenistan 1995), however, every other hyperinflation was preceeded by the goverment financing large deficits through money printing (out of a dataset of 30 hyperinflations).

I completely agree that the government picking winners and losers to the degree that they have is not good a thing, particularly through something insiduous as inflation (because it isn't clear what's occurring).

very interesting..

I have no datasets...but I see a pattern in your post....money printing.

the issue is that Money printing is always heralded as a solution to a money "shortage". Obviously, to cure a shortage, you produce more.

The mistake is that the "produce more" they choose is money...not something of value which can be monetised. Of course, it never works, as money is simply a means of exchange, and they devalue the means of exchange by the very act of printing...Of course, the initial effect is the banks suddenly have more money....sadly, the people dont, so they cant borrow more unless incentivised...

the other effect is, as you say, that Government can "stimulate" the economy by spending more....£10 for a spanner, £100 for a light bulb..etc etc.

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very interesting..

I have no datasets...but I see a pattern in your post....money printing.

the issue is that Money printing is always heralded as a solution to a money "shortage". Obviously, to cure a shortage, you produce more.

The mistake is that the "produce more" they choose is money...not something of value which can be monetised. Of course, it never works, as money is simply a means of exchange, and they devalue the means of exchange by the very act of printing...Of course, the initial effect is the banks suddenly have more money....sadly, the people dont, so they cant borrow more unless incentivised...

the other effect is, as you say, that Government can "stimulate" the economy by spending more....£10 for a spanner, £100 for a light bulb..etc etc.

Absolutely not, money printing and government ownership of the means of production will not solve the underlying problem of scarcity of time, energy, and raw materials in comparison to that which can be imagined or desired by ambition.

Also, going back to the point regarding hyperinflation, I don't think we need to fear the current crop of central bankers (specifically in terms of hyperinflation, that's not to say we aren't in a pickle and haven't been complicit in causing other crappy problems) as such (they are by and large academics and will undoubtedly have had access to the same historical and economic information that I've been able to find), I think a turning point in ths respect, would be the election of demagogue type politicians with a mandate to "pave the streets with gold", and who think it can be done with a grand plan and control of the printing press, and not the rigour of honesty, toil, and hard work.

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