of course it is different this time "With interest on reserves in place, combined with what will likely be a continued balance sheet recession / debt deflation cycle for the next decade, there is no risk to all of this fiscal-stimulus-free money printing." yours is a ten year forecast that the velocity of money will not increase,when other economic forecasters cannot accurately predict the next quarter. at least in japan during the deflation the stock market crashed. now america blessed with excepionalism and with manifest destiny, both of which i teeterly believe in, has a 3rd leg deflation with a booming record market, inflation unadjusted. life is not that rosy.
Of course they can. The dollar has a real as well as a nominal value. If the Fed's net assets can purchase 100X widgets today, and only X widgets tomorrow, then it has lost 99% of its value. Holding bonds to maturity does not prevent losses from default or inflation. Cost basis is irrelevant. All net worth is calculated based on today's likely fill price. If you bought something for free, then Bill Gates bids 1 billion and you refuse to sell, then it's worth nothing again, you just lost a billion dollars. Future income or purchasing or financing ability is also irrelevant. If you just lost a billion dollars, then you lost a billion dollars, even if you are still stinking rich, and even if you then make 100 billion tomorrow. Expanding the balance sheet ad infinitum has political and economic consequences, namely reducing the value of the dollar significantly, and reducing its usefulness as a national and global currency, and there is a very real and hard limit on how far that can be done before the Fed is prevented by its political masters (or hyperinflation) from doing it anymore, or even forced/ordered to go into reverse. At that point, market to market losses both past and future become significant.
When you have a market participant that prints out of thin air the money it uses to trade, what does it mean exactly when they have a trading loss. Is it not simply printing a bunch of money and shipping it into the trading counterparty reserve account?
I think a correction of 10% in the SP500 would make worse hiring, consumer confidece, consumer spending, gdp and lower the cpi. US is below target cpi. That FED graph of Cpi vs Gdp scares the fed in my opinion. Gdp rolls off hard into recession as cpi decreases, hence the 2% target. I cant beleive , that the FED beleives , that present metrics are sustainable if they taper by say 50%. I think QE continues and inflaion is their choice over defalation. I there a way out? Is this a Ray Dalio beautiful de-leveraging where interest rates are less thn GDP and governments, consumers and financial systems de-lever. Doesnt look like that at all. Qe forever.
the US policymakers are no different then those in other countries. it is controlling the masses while protecting the upper class. it works till it doesn't work. as usual look at argentina.
The Fed's portfolio is not marked to market which is ironic given that Bernanke said they are not monetizing the debt because they are buying with the intention to sell down the line. Any bank would be forced to keep the bonds in the 'trading' portfolio (as opposed to the hold to maturity book) and mark them to market, the Fed doesn't. Beyond the ethical debate of whether this is deception or not I don't think it means anything given that the Fed has unlimited liquidity and thus presents no default risk. There is inflation risk of course but I believe that is blown out of proportion by lots of pundits
I imagine the biggest (or one of the biggest) pathway of this base money into the economy right now is through the Fed's MBS buying program: Fed -> MBS/Agency debt -> Fannie Mae/Freddie/etc -> Bank/Lender -> Borrower (not really...) -> House seller. I believe this is probably the most effective form of easing in that it actually ends up in seller's hands and increases real money supply out there. Problem (or not?) is it ends there, as the seller of the home then pays down debt (destroys money), puts money in bank (money goes nowhere as bank does not re-lend enough, evidenced by excess reserves. look at JPM for example), saves/invests/spends it (no multiplier, just 1x increase in aggregate money). Banking is the only way to multiply $$. If the Fed keeps paying interest on reserves, asserting more direct control over rates and money, they really can do a better job in controlling aggregate money than every before. That means less leverage in banking, and less pronounced booms and busts. What happens in this 'new normal' is the banking system shrinks and the Fed's balance sheet increases to offset. All the Fed has to do is keep calibrating the rate of easing against money destruction to keep the price level the same. Kind of brilliant I think, and amazing the public isn't giving more credit to the Fed/Bernanke for keeping prices so stable given the turmoil we've seen. The natural pressure without the Fed's action right now would be towards deflation. My angle is that the investing public has their eye on the wrong ball: taper and decreasing of easing is deflationary, thus lower rates are in our future. The only way to reverse this is force more $$$ in the public's hands in a dramatic way. That's what fiscal stimulus is for (combined with what the Fed is doing), and we clearly have no appetite for more of that. So what do we have left? We'd have to reverse the trend towards over-regulation of financing/banking, as well as get rid of interest on reserves receipts from the Fed to give banks more incentive to take risk... None of this is on the horizon. Financial crisis is still in the rear-view mirror. I think we can still see higher prices on food and energy, but for supply/demand reasons, not monetary reasons, in the face of all of this. Look at natural gas versus oil, or corn, etc for examples of low prices being very possible in the face of all this new money. All because in aggregate, money is pretty stable (amazing, isn't it, in the face of $85B per mo).
I agree with that, i.e. eventual lower rates, though the current trend is still toward higher rates and more losses at Pimco, Doubleline, and followers of economists such as Gary Shilling. For now, investors fear the taper, thus driving rates higher. http://blogs.wsj.com/moneybeat/2013/08/02/gundlachs-doubleline-fund-suffers-580-million-outflow/