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Qe Tapering Impact

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The end QE will reduce money into the financial system and it seems that this may cause a fall in equity markets and pms with the dollar getting stronger. Just throwing it out there to discuss possible cause and effects.

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I can't see the Fed continuing to taper under Yellen. She has a reputation as being even more of a monetary activist than Bernanke. I think Bernanke only started tapering to deflect the blame from himself in future - he can say that he started tapering but Yellen stopped it

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one advantage that two tapers has delivered is the ability to reinstate them without it being any worse than it was

that could happen if there was a slip up in the recovery

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Petrol and commodities to fall. Even though the tapering is very gradual, you need an ever expanding supply to create bubbles, so the effect may be surprisingly large. But I think the negative real interst rates are probably what have really created the mess. If we had normal rates, then the bakns would have had to use their free money to invest more rationally, rather than just runnign after one speculative bubble after another.

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I can't see the Fed continuing to taper under Yellen. She has a reputation as being even more of a monetary activist than Bernanke. I think Bernanke only started tapering to deflect the blame from himself in future - he can say that he started tapering but Yellen stopped it

what's a monetary activist? does it mean...crock?

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what's a monetary activist? does it mean...crock?

I just meant she's a proponent of using very loose monetary policy to boost the economy - even more than Bernanke.

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The US and UK government (and their central banks) want to create the impression that they aren't printing money like there's no tomorrow as everyone knows what happens with large amounts of money printing (look no further than Zimbawe and Weimer). But they also like QE because it funds the deficit. As the buying of government debt lowers the interest rate on new debt. So they have contradicting aims:

  1. Keeping the value of the currency high (£ or $).
  2. Printing lots of money to fund government deficit.

To achieve both aims they have to be unstraight forward and not entirely honest about their motives in any statements they make.

They will things like say:

  • A low value pound is good for the economy.
  • We are going to reduce the money printing for QE
  • It is a temporary measure that will end soon
  • We are going to taper QE when unemployment falls below 7%.

They also fiddle inflation indexes by picking the lowest one. Filling them with high tech goods (memory sticks, blu-ray players, flat screen TVs etc.) that will only go down in price. The US totally excluded food and energy costs from its inflation measure as they were "too volatile".

I know that the only thing they are looking at when it comes to reducing any QE is the deficit but I also know they will never admit that this is the case as printing money to directly finance government debt is against the law and QE is little different from this. I can also tell you this, QE is not going to end any time soon.

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House price crash.

US banks recapitalised (by QE), lot of bad debts shifted off books at fair-to-good prices global investor malinvestment appetite whetted by QE illusion years. Pulled in a lot of investors/capital into market, malinvesting at topped out prices.

Survival of the intelligent. Low base rates held, but buyer side demand falling away, bringing about lower asset/trophy asset prices. Loads of fresh bank lending on lower asset/investment prices, by more dominant US banks and other market participants.

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QE is disinflationary, that's why it's being scaled back.

Has it helped create/maintain financial asset bubbles? Yes. Has it contributed to commodity price inflation? Probably. Is food cost inflation understated by TPTB? Unquestionably.

But has QE led to inflation/demand growth the economy proper? No. No. No!

Quarterly+PCE.PNG

Edited by zugzwang

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QE is disinflationary, that's why it's being scaled back.

Has it helped create/maintain financial asset bubbles? Yes. Has it contributed to commodity price inflation? Probably. Is food cost inflation understated by TPTB? Unquestionably.

But has QE led to inflation/demand growth the economy proper? No. No. No!

Quarterly+PCE.PNG

zugzwang , You are so wrong it is in fact the complete opposite of what you say.

One of the reasons for bringing in QE is because it's inflationary. There is certainly no way it reduces the rate of inflation.

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zugzwang , You are so wrong it is in fact the complete opposite of what you say.

One of the reasons for bringing in QE is because it's inflationary. There is certainly no way it reduces the rate of inflation.

This could be playing out slowly, or set for a lot more tightening soon enough. Perhaps QE reduces inflation as consumers and businesses paralysed to make investment decisions, not spend, uncertain of policy action... more QE or taper.

Though he wouldn’t admit it, Bernanke met his match in 2011. The consumer balked at attempts to stimulate aggregate demand via inflationary policy of negative real interest rates, and ever since, has been raising real interest rates by reducing inflation through lower aggregate demand. This is perhaps the most unappreciated yet significant market development since the financial crisis.
Since 2006, money supply has increased by about $2 trillion. But velocity fell faster than the money supply increased as households reduced spending and increased saving — the saving rate is now over 5 percent — and banks and businesses hoarded cash.

http://economix.blogs.nytimes.com/2011/08/16/its-the-aggregate-demand-stupid/

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zugzwang , You are so wrong it is in fact the complete opposite of what you say.

One of the reasons for bringing in QE is because it's inflationary. There is certainly no way it reduces the rate of inflation.

On the contrary. That chart - the US treasury's preferred measure of inflation - shows that after four years of QE, US inflation is now less than 1%. The lowest quarterly measure of inflation since 2009 before any of the QE purchases had even begun!

Now US stock market prices are a different matter, and house prices too, to a lesser degree: This is where the QE cash has been driven. To their credit, some members of the Fed have already warned about asset price bubbles getting out of control again.

In short, QE hasn't worked. The too-big-to-fail institutions are even bigger than before. Stocks are dangerously overextended (UK house prices too, of course). Bernanke has bought up so much residential MBS that he's begun to crowd out the market. Bankers and rent seekers have profited at the expense of the working poor, pushing up rents and energy costs and squeezing demand out of the wider economy. Full-time job creation has been woeful.

This is why QE is being scaled back and the initiative shifted instead to stimulating the economy by putting up Federal wages over there and the minimum wage over here.

.

Edited by zugzwang

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In short, QE hasn't worked.

Basically I agree with what you have written but I'd argue the primary purpose of QE was to save the elites and keep the system intact. That has been broadly successful, and only now are they realizing they may have to throw more of a bone to the little people as they are not going to get the growth they need with QE alone as it only boosts one part of the money supply.

Edited by FaFa!

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Basically I agree with what you have written but I'd argue the primary purpose of QE was to save the elites and keep the system intact. That has been broadly successful, and only now are they realizing they may have to throw more of a bone to the little people as they are not going to get the growth they need with QE alone as it only boosts one part of the money supply.

what, the MMT disconnect doesnt work in reality?...from FAFA!?

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what, the MMT disconnect doesnt work in reality?...from FAFA!?

What does 'work' though?

It was always going to be hyperinflationary depression or deflationary default.

There is no solution where everyone comes out intact.

Only they cant accept that because as meddling bureaucrats they cant accept they cannot alter this truth. They feel they need to 'do' something, even if logic says whatever they do wont matter.

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zugzwang , You are so wrong it is in fact the complete opposite of what you say.

One of the reasons for bringing in QE is because it's inflationary. There is certainly no way it reduces the rate of inflation.

It will do if it depresses the velocity of money.Whilst you can't ascribe the drops in velocity over the last five years solely down the QE,it does seem a little more than a coincidence.

US M1 velocity

M1V_Max_630_378.png

post-37037-0-11986100-1391354977_thumb.png

Edited by Sancho Panza

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zugzwang , You are so wrong it is in fact the complete opposite of what you say.

One of the reasons for bringing in QE is because it's inflationary. There is certainly no way it reduces the rate of inflation.

QE is certainly not working in the real economy then, hence the need to stop doing it?

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On the contrary. That chart - the US treasury's preferred measure of inflation - shows that after four years of QE, US inflation is now less than 1%. The lowest quarterly measure of inflation since 2009 before any of the QE purchases had even begun!

Now US stock market prices are a different matter, and house prices too, to a lesser degree: This is where the QE cash has been driven. To their credit, some members of the Fed have already warned about asset price bubbles getting out of control again.

In short, QE hasn't worked. The too-big-to-fail institutions are even bigger than before. Stocks are dangerously overextended (UK house prices too, of course). Bernanke has bought up so much residential MBS that he's begun to crowd out the market. Bankers and rent seekers have profited at the expense of the working poor, pushing up rents and energy costs and squeezing demand out of the wider economy. Full-time job creation has been woeful.

This is why QE is being scaled back and the initiative shifted instead to stimulating the economy by putting up Federal wages over there and the minimum wage over here.

.

The US has removed food and energy costs from its inflation index. Both of which have gone up well above the quoted rate of inflation. In the UK the rate of inflation has been above target for as long as QE has been in place and only for 1 month has come down to the target (2%). It's hard to understand how you could give all this low inflation BS from just one month when over 40 months have been over target. So what you are saying is complete BS. The living standards of people in the UK have been battered by rising costs (inflation) and low pay rises. QE has funded the deficit by providing the government with loans at an extremely low rate of interest; and it's this that's the main reason for QE. The government was in a position where it could not pay the interest on its debt and QE was the only way to reduce interest on new debt (the deficit). The only way QE will taper to any significant degree is when the deficit is lowered by a significant degree.

Edited by JonathanR

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The US has removed food and energy costs from its inflation index.

Amidst all the hoopla surrounding the Federal Reserve's announcement yesterday of long term policy, the Fed statement was very clear that the relevant measure is the deflator for personal consumption expenditures, which is the broadest measure of prices in the economy. The Fed made a fundamental policy change in moving away from the concept of core Consumer Price Index which excludes food and energy, as its key inflation measure. Their exact words were,

"The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate targets."

The concept of core CPI was invented in the early 1970s by then-Fed Chairman Arthur Burns to allow for an easier monetary policy in the face of rapidly rising oil and food prices. The economic argument for this new concept of inflation was that it avoided transitory elements driving the inflation rate. However, as we all know energy prices have risen inexorably higher over the past four decades.

Thus the Fed's experiment with unusually low interest rates for a very long time could run aground if it triggers another commodity price bubble as it did last year. If the 2 percent target is for real, the Fed could very well be tested sooner than it would like.

The flip side of the policy change is that housing is weighted far lower in the consumption deflator than it is in the Consumer Price Index. Thus the incipient inflation in rents will be downplayed in the new measure. Perhaps the Fed is fearful that rising rents would make it difficult to maintain its zero interest rate policy going forward. Time will tell.

The quote is from Jan 2013

http://www.usnews.com/opinion/blogs/economic-intelligence/2012/01/26/federal-reserve-abandons-core-consumer-price-index

Core CPI doesn't have energy or food - looks like they changed to one that does.

In the UK the rate of inflation has been above target for as long as QE has been in place and only for 1 month has come down to the target (2%).

It was comfortably above 2% before QE too

2us8rxd.png

QE has funded the deficit by providing the government with loans at an extremely low rate of interest; and it's this that's the main reason for QE.

You are totally ignoring QE's role in propping up the banks, but ok.

The government was in a position where it could not pay the interest on its debt

Really?

and QE was the only way to reduce interest on new debt (the deficit).

True.

The only way QE will taper to any significant degree is when the deficit is lowered by a significant degree.

20u4p6e.png

2mhilg8.png

And for the record - you'll note the US almost never runs a surplus

1044xl1.png

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The US has removed food and energy costs from its inflation index. Both of which have gone up well above the quoted rate of inflation. In the UK the rate of inflation has been above target for as long as QE has been in place and only for 1 month has come down to the target (2%). It's hard to understand how you could give all this low inflation BS from just one month when over 40 months have been over target. So what you are saying is complete BS. The living standards of people in the UK have been battered by rising costs (inflation) and low pay rises. QE has funded the deficit by providing the government with loans at an extremely low rate of interest; and it's this that's the main reason for QE. The government was in a position where it could not pay the interest on its debt and QE was the only way to reduce interest on new debt (the deficit). The only way QE will taper to any significant degree is when the deficit is lowered by a significant degree.

You misunderstand me. I'm not suggesting that core inflation isn't above trend, in fact the exact opposite! Fuel, energy and food costs have risen sharply, so too have rental costs in the South East, far in excess of wage inflation. A greater fraction of our income is being consumed every month on these essentials which leaves proportionally less for everything else, hence the plethora of shuttered premises and 70% reductions in every high street. CPI is a measure of total inflation that integrates both essential and discretionary spending. You can argue that the basket + weighting are unrepresentative, and perhaps they are, but the lack of aggregate demand in the broader economy suggests to me that inflation is still very subdued.

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And for the record - you'll note the US almost never runs a surplus

1044xl1.png

The US dollar serves two purposes, one as a domestic currency, the other as global reserve currency. Often these interests conflict, but no reserve currency issuer can run a surplus for very long since this would starve the world of liquidity. The current, dramatic reduction in US current account deficits should therefore be viewed with alarm - it suggests that dollar demand has collapsed and the global economy is slowing sharply.

Edit for sense.

Edited by zugzwang

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UK and US 10 year govt bond yeilds are falling (well, for the last month) in spite of taper. Is this a renewed sign of deflation, or just 'noise' on a general upward trend (since last May)? Seems a bit perverse that bond prices would fallrise when the CB slows its bond purchases but could it be that markets anticipate deflation now, i.e. the fed has thrown in the towel in fighting it.

edit: fall meant to be rise there

Edited by gimble

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Interview with Yellen in a recent edition of Time magazine:

"There is a view that the asset purchases that have taken place have only benefitted the top 10%, but that simply isn't the case... A housing recovery gives people the confidence to spend, creating jobs, so it's in everyone's interest to have a robust property sector"

Not 100% word for word, but close enough.

:ph34r:

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UK and US 10 year govt bond yeilds are falling (well, for the last month) in spite of taper. Is this a renewed sign of deflation, or just 'noise' on a general upward trend (since last May)? Seems a bit perverse that bond prices would fallrise when the CB slows its bond purchases but could it be that markets anticipate deflation now, i.e. the fed has thrown in the towel in fighting it.

edit: fall meant to be rise there

Taper caper from last May was probably overdone + core PCE failing to respond (probably) + temp 'risk off' bond trade so far in 2014

(remember all those posts on here before Xmas when 10yrs were 3%? - Usually a contra-indicator)

Edited by R K

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