Fed to buy $500 billion in US debt

Nice try. US companies are reporting 20-30 % profit increases this quarter. US companies are refinancing at record low yield levels. They are abundant with cash !

The reason why US companies are NOT HIRING is NOT BECAUSE OF LACK OF LIQUIDITY / APPROPRIATE MONETARY POLICIES BUT BECAUSE OF STRUCTURAL - STRUCTURAL - STRUCTURAL global imbalances.

You CAN NOT FIGHT these imbalances with IMBECILE monetary policy.

If a Chinese manufacturer is producing at 50 % lower costs - what are you going to do ? Let the USD depreciate 50 % ?

Bullsh1t !

You need to sit down with G20 and put pressure on China to finally let the yuan strenghthen. And that´s exactly what´s happening right now !

The alternative is punishment on China imports.

 

He's not an expert unless he lived through it.

 

QUANTITATIVE EASING: “THE GREATEST MONETARY NON-EVENT”

"There is perhaps, no greater misunderstanding in the investment world today than the topic of quantitative easing. After all, it sounds so fancy, strange and complex. But in reality, it is quite a simple operation. JJ Lando a bond trader at Goldman Sachs has eloquently described QE:

“In QE, aside from its usual record keeping activities, the Fed converts overnight reserves into treasuries, forcing the private sector out of its savings and into cash. This is just a large-scale version of the coupon-passes it needed to do all along. Again, they force people out of treasuries and into cash and reserves.”

Some investors prefer to call it “money printing” or “stimulative monetary policy”. Both are misleading and the latter is particularly misleading in the current market environment. First of all, the Fed doesn’t actually “print” anything when it initiates its QE policy. The Fed simply electronically swaps an asset with the private sector. In most cases it swaps deposits with an interest bearing asset. They’re not “printing money” or dropping money from helicopters as many economists and pundits would have you believe. It is merely an asset swap.

The theory behind QE is that the Fed can reduce interest rates via asset purchases (which supposedly creates demand for debt) while also strengthening the bank balance sheet (which entices them to lend). Unfortunately, we’ve lived thru this scenario before and history shows us that neither is actually true. Banks are never reserve constrained and a private sector that is deeply indebted will not likely be enticed to borrow regardless of the rate of interest. On the reserve argument the BIS explains in great detail why an increase in reserves will not increase borrowing:"

"In addition, there is one great irony in all of this misunderstanding. The hyperventilating hyperinflationists and those investors calling for inevitable US default are now clinging to this QE story as their inflation or default thesis crumbles before their very eyes. The new hyperinflationist theme has become a story of “if this, then this, then THIS!” – the ludicrous 3 step investment thesis that the economy will become so fragile that the government will pile on with more stimulus, which will worsen matters and force them to stimulate further which will then result in hyperinflation and/or default. Most investors have enough trouble predicting what the next event will be – connecting the dots two or three steps down the line is not only ill-advised, but is hardly even worthy of consideration….Let’s just call a spade a spade – the inflationistas have been wrong and the USA defaultistas have been horribly wrong."

Overnight Reserves into Treasuries.
Overnight reserves is all the extra reserves that banks have at the end of the business day. Sometimes banks give loans with this money to other banks overnight with these reserves, but has to be payed back the next day before the start of the business day plus interest. The overnight market involves the shortest term loan. Anything less than a year.

The fed takes that cash from the overnight reserves and buys U.S. Treasuries with it. Forces you and I out of our savings and cash at the banks into U.S. Treasuries so that they can fund the governments nonsense.

Then when the bond matures they force the issue again, force the U.S. Treasury back into cash and into reserves.

The only problem is this is supposed to help banks make loans. The Bank of Japan proves this doesn't work. The only thing that happens is the tax payer is screwed over by interest again. We are left paying for the interest on the U.S. Treasuries. So they are using our deposits and savings to tax us. Which in reality is just like stealing our savings and taxes. This is what happens when people decide to spend and not save. You can't win against the banks. They will get your money one way or the other.

http://pragcap.com/quantitative-easing-the-greatest-monetary-non-event

 

As recently as 2007 that $500 billion would have financed the entire annual deficit. What I don't understand is why anyone wants to buy a bond that the Fed can buy for free.

 

Why would you call them imbalances?

Maybe the US hegemoney of before was the imbalance which is now being corrected.

The US population is what, 5% of global population yet it used 25% of global oil production?

How is that an example of a world in balance, a world we need to return to?

Unless ofcourse you are of the opinion you don't care about balance in the global system, you just want the US to come out on top.

In that case I can see why you would like action being taken.

 

I respect your opinion, but in reality it could be that living through a momentous event is an experience quite apart from the kind of work and study needed to acquire an in depth knowledge of the event and all of the factors that shaped it..

 

I think that your belief that Bernanke has approached his analysis of the Great Depression from a purely academic stance is quite naive. The more realistic rationale for Bernanke's appointment was the simple fact that he went out of his way to show his willingness to embrace the most aggressive and potentially disastrous policy responses "in the event" of a severe recession/depression (which everybody knew was in the near future after they staved off a full blown event in the 2000-02 setback).

But then again arguing about the Fed and what they should or should not do is akin to debating whether or not the arsonist who both started and extinguished the fire is worthy of admiration.

 

You'll be surprised to learn that I agree with you. Consistency of policy must certainly have been a primary consideration in appointing Bernanke. Your final paragraph asks a very good question? We don't really know what disagreements Greenspan and Bernanke may have had, one assumes that Bernanke was a rubber stamp, but do we know that? He is certainly more open and less obfuscating than was Mr. Greenspan.

My main point was that whether you agree with Bernanke's approach or not, he is clearly not an idiot. And his academic background makes him more suited than others to lead the Fed at this time. While no one could creditably argue that Fed policies, especially under Greenspan, were not a major contributor to the current mess, it is wrong to ignore the role that fiscal reality plays in forcing perhaps untenable monetary actions on the Central Bank. I think fiscal policy, in the long run, to be even more important than monetary policy in putting the country back on the right track, simply because an unsustainable fiscal policy can not be corrected by monetary policy alone. In fact a country's monetary policy is a hostage of fiscal reality.

Possibly the light of history will prove Fed's current policies misguided. We will never know, however, if letting more major institutions go under, and letting natural market forces run their course, would have been a better choice. But we might someday be able to say with some confidence that the latter choice could not have been worse.

The jury is still out.