Just like with the banking system, the Fed's great white hope is that, given time, deleveraging in the private sector happens through retained earnings (i.e. increasing equity), rather than through asset disposals. Then the Fed balance sheet can gradually go away. Of course, that would require a) some aggregate demand somewhere (read China and rest of EM); and, b) that the US becomes a net exporter to places where this demand is to be found. Both adjustments are extremely painful and clearly have stalled recently (which is yet another bugbear to scare Big Ben).
If you knew that the Fed balance sheet would never go down from current levels ever again, how would one profit from this?
Well, I guess sell long-dated US rates vol, but I think we may be late to this party... There might also be some games to play arnd what bonds the Fed owns too many of (and thus can't buy, according to their own rules) vs which ones it can still buy. But, I guess, the simplest of them all is to just buy the Eurodollar strip as far as your eye can see. Someone was doing just that today, btw. Doing greens-golds flatteners (specifically, H3-H5, not massive size). Talk about reach for yield .
Ok. Yes, in theory QE can work. In theory the Fed could deposit $1M in every citizen's bank account. In theory, the President could issue an executive order removing one zero from everyone's mortgage balance and adding one zero to everyone's checking accounts. In theory, Congress could pass a law that says that any asset that changes hands must do so at a price higher than the last time it changed hands. I guess the question should be, can QE work without destroying society as we know it, which is essentially what Bernanke is advocating in his example. We'll see if Bernanke actually follows through on any of this madness, which would likely cause a monetary holocaust. My guess is that he would be removed and/or jailed if he tries. You say the Japanese central bankers are incompetent. Does this mean you think American central bankers are competent? Greenspan and Bernanke are quite good at blowing bubbles and then trying to paper over their collapse. As far as managing an economy to real, non-bubble growth, not so much.
Thats why its so crucial to monitor M2, up to this point despite all of the cries from Peter Schiff the Fed has done little to bring the monetary destruction of society, matter of fact nominal GDP had the first decline in a long-time back during the LEH depression. M2 Yoy it has very little growth, if anything the Fed is under doing stimulus, it will probably continue to be this way as they are not confident in their forecasts and love to wait for more evidence. The choice isn't between 100% inflation and -10% deflation, they are gunning for some kind of middle ground, if they make a mistake it will mean 4-5% inflation for a while, some kind of 1970's repeat or 0-1% Japan type outcome, although I believe they will try to err to the upside, so I believe the former is more likely If monetary destruction happens it will happen because expectations got out of control for wrong reasons Yes, I believe Fed officials are competent, just a little slow. I dont believe Greenspan created a bubble as the long-end of the curve lost its correlation with the fed funds rate while he was hiking(The so called Conundrum), he did make it bigger than otherwise with 1% rates, but the housing bubble would have occurred anyway. It was a global event that happened in a number of countries
Well then you're delusional in regards to this matter. Greenspan's legacy will be as one of the most incompetent and dangerous government officials in our nation's history. Forget the housing bubble. His legacy resides in two main factors: 1. He was a supposed free market libertarian who was as enamored of central planning as the most devoted Soviet commissar. 2. The Greenspan put which ultimately led our economy and markets into unimaginable disaster. I don't want to hear any crap that it was a worldwide phenomenon. The US Central bank during Greenspan's tenure was de facto the world's Central Bank. Paul Krugman couldn't have done as much damage as Greenspan.
One of the few groups that seem to get what is going on "Hong Kong-based Gavekal, meanwhile, asks whether the Fed went far enough. In its Wednesday note, Gavekal research house: Since the end of March, the Fedâs outstanding credit to the private sector has begun a slow path of contraction â and the recent policy change does not change this one bit; it simply now reinvests in claims on the public sector. The result is that the Fedâs balance sheet and the monetary base will not contract as previously destined, but if neither commercial bank lending nor velocity is stimulated, this preservation of base money will do nothing to counter the decline of Fed credit to the private sector⦠and thus nominal GDP growth will be hampered. That is why, in Gavekalâs view, the Fed âmay soon have to buy more claims on the private sectorâ. It concludes: All in all, we have our doubts that this move alone will be enough to keep the US out of a deflationary environment. Perhaps this is why the yen (the worldâs favorite currency during deflationary scares) is so strong today, while the euro has already given up yesterdayâs gains. The Fed may need to do more; namely, it may need to buy more private-sector debt." I'm not sure they what they mean by 'claims on the private sector', but I agree with the general sentiment. It cant possibly be that the FOMC is not aware of this, it just that it seems that they keep trying to mislead investors in order to keep expectations from going up but I believe if Bernanke is on a lie detector that works he would concede that more QE will be needed
Yeah, Kaletsky is pretty good, but he's somewhat of an "enfant terrible" and, as such, prone to grand pronouncements.
Well, we have a great experiment right now. I believe the ECB will endup turning the EU in a some kind of Japanese economy, meanwhile the Fed will get aggressive at some point and reverse that. We will see whos right
I have no idea what the folks there mean by this "2. Money is not increasing either because of the massive government deficits. While private sector gross savingsâa product of personal savings and undistributed corporate profitsâhave surely improved over the last year, they have been overwhelmed by the soaring deficits in Washington. The result is that the net national savings rate is below zero. No money saved, no increase in moneyâ¦sometimes, itâs just that simple." It seems that he claims government deficits can decrease the money supply(or multiplier), I have no idea how they reached that conclusion