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The Federal Reserve's shock decision last month not to reduce its support for the U.S. economy was a "relatively close call" for policymakers, according to minutes of the meeting that also suggested there was still broad support to trim bond-buying this year.

Since last month's meeting, the outlook for scaling back bond purchases has grown cloudier.

A budget battle in Washington hit a stalemate and forced a partial government shutdown that started this month, threatening economic growth and depriving the Fed of official economic data to drive its decisions.

The minutes of the Fed's September 17-18 meeting, released on Wednesday, clearly showed top officials were concerned their decision to keep buying $85 billion (53.2 billion pounds) in bonds each month could muddle their messaging with investors who largely expected a reduction.

Bernanke hoping to cover his own ar$e and to claim he wanted to taper but was over-ruled? Soon it won't be his problem.

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Is Janet Yellen the Federal Reserve's 'fall gal'?


And here is where you have to worry that she's being lined up as the "fall gal" (I don't think that's a sexist descriptor, but I am counting on you to put me right).

Because phasing out the extraordinary, exceptional attempts to reduce the cost of money - the hallmark of the central banks of the major rich economies since the crash of 2008 - is fraught with dangers.

So is she getting the job as she's going to have to keep the plates spinning otherwise she's going to have to clean up the mess when tshtf?

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... the announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee’s willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy...the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market... it was noted that if the Committee did not pare back its purchases in these circumstances, it might be difficult to explain a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties.... postponing the reduction in the pace of asset purchases would also allow time for the Committee to further discuss and to implement a clarification or strengthening of its forward guidance for the federal funds rate, which could temper the risk that a future downward adjustment in asset purchases would cause an undesirable tightening of financial conditions.


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  • 2 weeks later...


American employers created fewer jobs in September than forecast, raising expectations that the US Federal Reserve will keep pumping money into the world’s largest economy at the same rate for several months yet.

Stock markets rose on Tuesday as investors bet that the central bank would keep on buying bonds at the rate of $85bn a month until next year, and potentially even increase that figure to help fuel America’s still-fragile economic recovery.

America added 148,000 jobs in September, according to delayed figures from the US Labour Department – far short of analysts’ forecasts of 180,000 jobs, and the 193,000 extra jobs created in August. The increase was also well below the average increase of 181,000 jobs a month which America has seen since the start of the year.

If only they could flood America with even more money they'd ensure everyone had a job?

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The Federal Reserve can avoid unprecedented losses by never selling mortgage-backed securities from its record $3.84 trillion balance sheet, according to updated estimates by Fed economists in Washington.

The Fed every month is purchasing $85 billion in Treasuries and mortgage-backed securities in a program aimed at fueling economic growth and combating unemployment, which was 7.2 percent in September.

If interest rates quickly rise, the value of its holdings may plunge, prompting losses that may jeopardize its annual remittance to the U.S. Treasury. The central bank turned over a profit of $88.4 billion last year.

Chairman Ben S. Bernanke in June announced the Fed was abandoning a plan to eventually sell mortgage debt as part of efforts to reduce the balance sheet. The central bank instead plans to let the securities mature. The Fed, which funds its operations with interest income from its bond holdings, currently holds $1.4 trillion in mortgage bonds.

Just genius. If we never sell we'll never make a loss.... Although what happens if the people stop paying is the Fed just going to ignore those?

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Factory output rose less than forecast in September and contract signings for U.S. home purchases fell the most in three years, showing the economy was having trouble gaining traction before the government shutdown.

The 0.1 percent advance in manufacturing followed a revised 0.5 percent gain in August that was smaller than initially estimated, figures from the Federal Reserve showed today in Washington. Pending sales of previously owned homes slumped 5.6 percent in September, the fourth straight month of declines, the National Association of Realtors reported.

QE success.

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The political brinkmanship that saw America’s economy grind to a halt this month will likely delay the Federal Reserve's taper of its massive bond-buying programme until 2014, the central bank suggested on Wednesday.

Policymakers at the Fed voted to maintain the $85bn-a-month bond buying programme. Though the Fed did not mention the 16-day government shutdown in its monthly monetary policy statement, it hinted at a weaker growth outlook due to the continued battle over how to control America's debt pile. The Fed also raised concerns about the US housing market and repeated that the automatic, across-the board spending cuts known as the "sequester" were crippling the economy.

"The recovery in the housing sector slowed somewhat in recent months,” the Fed said after the conclusion of its two-day meeting. “Fiscal policy is restraining economic growth."

No surprises really, although love the concern over the all important housing market.

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Larry Summers Admits The Fed Is In A Liquidity Trap

I recently wrote an article entitled "What Is A Liquidity Trap & Why Is Bernanke Caught In It?" wherein I discussed the definition of a liquidity trap as:

"A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in the general price levels."

Importantly, this evidence is mounting that the Federal Reserve has now become trapped within this dynamic. The boost in asset prices caused by the increased levels of liquidity in the system has benefited the wealthy while doing little to jumpstart the real economy. As I stated previously:

"However, the real question is whether, or not, all of this excess liquidity and artificially low interest rates is spurring economic activity? To answer that question let's take a look at a 4-panel chart of the most common measures of economic activity - Real GDP, Industrial Production, Employment and Real Consumption."

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That can't be right - millions of average Americans are still in deep doo doo re housing.

No, it can't be - can the rich buying in New York have driven things up so much?

I had a look elsewhere, the graph above looks to be bo-lax.

see here:


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In the 1977 Eagles song, Hotel California, a luxury hotel appears inviting and offers a tired traveller comforting relief from his journey. It turns out to be something of a nightmare, however, and he finds that "you can check out anytime you like, but you can never leave".

Does that sound a little bit like QE and the Fed? The FOMC signalled its intention to check out of QE at its June meeting, but by September, it found it could not leave. The backup in yields that the announcement had sparked, together with worries about fiscal fisticuffs in Washington, was damaging an already not-very-vigorous recovery and hurting confidence. So, the Fed took a rain check. Is that not just like QE1 and QE2, the scheduled ends of which had to be reversed within relatively short periods?

The question now is whether or not we should expect repeated market obstacles to a QE3 exit.


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Fed to Test Banks for Interest Rate Rise, Housing Collapse

The test suggests Fed officials remain concerned that banks might still rely too heavily on single or weak counterparties to hedge potential losses on assets and other commitments, a trend that contributed to the 2008 financial crisis. Banks have argued in past years that they can mitigate risks by purchasing protection such as credit-default swaps from counterparties.

Goldman Sachs and other firms had purchased protection from New York-based insurer American International Group Inc., allowing them to subtract the CDS on their books from their reported subprime mortgage debt holdings.

When prices of mortgage securities started falling in 2008, AIG was required to post more collateral to its CDS counterparties. It ran out of cash doing so, and the U.S. government took over the company. If AIG had collapsed, what the banks saw as a hedge of their mortgage portfolios would have disappeared, leading to billions of dollars in losses.

Credit Risk

The Fed, seeking to reduce the chance that one failing company would topple others, proposed in December 2011 to cap how much counterparty credit risk a bank could have with any systemically important trading partner. The limit would be 10 percent of regulatory capital.

The proposal has been stuck in limbo without being finalized after heavy lobbying by banks. JPMorgan, Citigroup and Morgan Stanley (MS) were among lenders arguing that the limit was poorly constructed, overstated risk and would restrain the economy. It could cut U.S. economic growth and destroy 300,000 jobs, Goldman Sachs warned last year.


In the “severely adverse” scenario, the unemployment rate peaks at 11.25 percent, stocks fall nearly 50 percent and U.S. housing prices decline 25 percent while the euro area also sinks into recession. Developing economies in Asia also experience a “sharp slowdown,” the Fed said.

In an “adverse” scenario, banks will be tested against global flight from long-term debt that pushes the U.S. economy into a recession, with unemployment rising to 9.25 percent. The yield on the U.S. 10-year Treasury note jumps to 5.75 percent by the end of 2014, and corporate bond and mortgage rates also rise.


Is somebody going to stress test The Fed? Didn't it buy a few MBS?

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Even if the Fed realises it is in a liquidity trap they probably will carry on regardless IMPO - more printing.


Are we in a liquidity trap?

From my very first post on this forum, March 2005:

The removal of the principle of personal responsibility has led to a willingness (and demand) for compensation for whatever ill may befall an individual, regardless of his or her actions. It seems inevitable to me therefore that there will be tremendous pressure this time round to bail out debtors at the expense of savers and those with capital. Whether this manifests itself through inflationary monetising, mandatory debt forgiveness or 'emergency' wealth taxes is a matter of debate. The end result would be that those who have saved and not been irresponsible would be sacrificed to save the herd (and the skins of the central bankers and politicians).

Hopefully the above is still the least likely result, primarily because debt deflation is an animal which once released is almost impossible to control. However the likes of Ben Bernanke believe that this time round they can beat the liquidity trap, and in keeping with all intellectual economists, deep down he's itching to be put to the test so that he can immortalise his financial credentials.

In September 2007 I started a thread to revisit my first post. From the OP:

In the light of the past few weeks' events, I think the mist is now gradually lifting as the central banks move their chess pieces across the board. As I suspected when I made that first post, the political pressure to avoid a deflationary resolution to the global credit boom, combined with the eternal fear of repeating what is now considered to be gross mismanagement of monetary policy by the Fed during the Great Depression, has led to a the current mentality of providing liquidity to markets at whatever cost. No one can be allowed to suffer, savers and borrowers alike. Nobody must lose.

So, on the face of it, it seems like we're heading down the inflationary road. Banking institutions will be bailed out, distressed borrowers will be supported, and the good and great in the investment banking community will socialise their losses on to a compliant and spiritless middle class.

Or will they? Although from an investment perspective I've tried to hedge my bets to cater for any eventuality, deep down I've always believed that the outcome of the past decade's lunacy would be a deflationary one. Perhaps surprisingly, that belief has strengthened, not diminished. Why? Because I think despite all their theories and analysis the CBs are indeed walking headfirst into a classic liquidity trap. Each kneejerk drop of interest rates to stave off today's liquidity problems is drawing them remorselessly towards the impotency of 0% interest rates. At that point they are royally screwed (although Bernanke doesn't think so, but you have to read his academic papers to understand why).

Cut interest rates even further and we just get bigger bubbles and greater wealth inequality. Raise them and the house of cards comes tumbling down (pun intended).

Yeah, we look pretty trapped to me – but then we did in 2003 as well. The central banks keep doubling down.

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We have come across a recent article at Bloomberg that discusses the philosophical roots of Janet Yellen's economics voodoo. This seems in many ways even more appalling than the Bernanke paradigm (which in turn is based on Bernanke's erroneous interpretation of what caused the Great Depression, which he obtained in essence from Milton Friedman).

Janet Yellen, so Bloomberg informs us, was a student of the Keynesian James Tobin at Yale, the economist whose main claim to fame these days is that a tax is named after him. Tobin, like other Keynesians, was an apologist for central economic planning, which made him eligible for the central bank-sponsored Nobel Prize in Economics. He was undoubtedly a man after the heart of the ruling class. It is therefore not a big surprise that one of his students gets to run the Federal Reserve, which is one of the main agencies, if not the main agency, by which the rule of money power and central economic planning are perpetuated. It should be noted that the inflationist who runs the central bank of Argentina, Mercedes Marco del Pont, was also trained in Yale. Marcos del Pont once asserted sotto voce in a speech that the enormous ongoing plunge in the purchasing power of the Argentine peso was not a result of her incessant massive money printing. Since she didn't deign to explain what actually causes it then (foreign speculators perhaps? Just guessing here…), it presumably is just a case of 'sh*t happens'. This just as a hint as to what can be expected from economists trained at Yale.


“Fed Vice Chairman Yellen laid out what she called the “Yale macroeconomics paradigm” in a speech to a reunion of the economics department in April 1999.

“Will capitalist economies operate at full employment in the absence of routine intervention? Certainly not,” said Yellen, then chairman of President Bill Clinton’s Council of Economic Advisers. “Do policy makers have the knowledge and ability to improve macroeconomic outcomes rather than make matters worse? Yes,” although there is “uncertainty with which to contend.”

Yellen is going to do a marvellous job if she believes she's more clever than the market......

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See, I didn't study under a Nobel Prize winner at Yale and maybe that is why to me it looks less than ideal to be running a US$680 million budget deficit and then to compound that with US$1 billion of QE for the year...

Still the S&P has been making record highs recently

I find myself more aligned with the assessment on the burning platform


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Three Federal Reserve officials who vote on policy this year signaled the Fed may press on with easing for some time to reduce the jobless rate and push up inflation toward the central bank’s 2 percent target.

“Monetary policy in the United States is likely to remain highly accommodative for some time,” Fed Governor Jerome Powell said yesterday in a speech in San Francisco. Boston Fed President Eric Rosengren backed further easing to “achieve full employment within a reasonable forecast horizon,” while James Bullard of the St. Louis Fed said in an interview on CNBC he wants the Fed to “meet our goals,” singling out inflation.

Printy printy to create jobs... I think they need to call in John Law.

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Printy printy to create jobs... I think they need to call in John Law.

I've said it before...the US is an interesting place. 52 states, men with guns, lots of scope for a lot of trouble.....worst case scenario if they had monetary collapse there could be an almighty problem for them and for the rest of the world.

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I've said it before...the US is an interesting place. 52 states, men with guns, lots of scope for a lot of trouble.....worst case scenario if they had monetary collapse there could be an almighty problem for them and for the rest of the world.

I think you will find there are 50 states in the usa with Hawaii being the 50th state.

Edited by gf3
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