Link Three months ago, as part of our ongoing explanation of what happens next to the Fed's balance sheet (which is now established as official canon in advance of the December 12th FOMC, when Bernanke will effectively announce QE4 consisting of $40 billion in MBS and $45 billion in unsterilized TSY purchases as we predicted the day QE3 was announced), we said that "the Fed will continue increasing its 10 Yr equivalents by roughly 12% (of the total market) per year, for at least the next 3 years, at which point it will own 60% of the entire Treasury market. It means that the Fed will monetize all gross long-term issuance every year for the next 3 years." Most looked at the bold sentence without it registering just what it means. Perhaps, now that the "serious" media has finally taken on the topic of applying a calculator to the one driver of all marginal risk demand, it will register a little better. In a Bloomberg story titled, appropriately enough "Treasury Scarcity to Grow as Fed Buys 90% of New Bonds" we read that "the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt itâs purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co." Actually that's incorrect and it is more like 100%. What is however 100% correct is what the bolded means in plain language: it is now accepted that the Fed will outright monetize all gross US issuance. Let us repeat this sentence for those who just had flashbacks to Adam Fergusson's "When money dies." The Fed is now monetizing practically all net new debt. So what did the Chairman say about this absolutely certain eventuality back in 2009 to Congress... <iframe width="420" height="315" src="http://www.youtube.com/embed/n6qo2S84r5w" frameborder="0" allowfullscreen></iframe> Our only question: was the Chairman simply lying under oath? And finally, because it appears it takes the MSM between 3 and 36 months to catch up to Zero Hedge, there is another relevant question that we posed 3 months ago: Another way of visualizing this is how many assets as a percentage of US GDP the Fed will hold on its books. Currently, this number is 18%. By the end of 2013, the Fed's historical flow operations will be accountable for 24% of US GDP. Why is this important? Simple: when the time comes for the Fed to unwind its balance sheet, if ever, the reverse Flow process will be responsible for deducting at least 24% of US GDP at the time when said tightening happens. If ever. Hence no unwind. We are confident to state this, just as we were confident with our other forecast from three months ago: What Bernanke implicitly, and in one week explicitly, has announced is that it now takes $85 billion in monthly Flow injection from the Fed just to keep the market from collapsing. Oh, yes, and the market still has to surpass the highs seen the day after QEternity was announced.
I read that yesterday, plus all the comments. I know my pea brain will never understand what is happening, but this won't stop me from asking questions. So here's my question. What the difference between what the fed is doing and the stimulus programs? Both are dumping money into the economy.
I am highly doubtful this is a doomsday scenario like everyone is forecasting. I thought the S would hit the fan after Lehman and we are still managing.
In spite of what we sheeple are told, Lehman was a pimple on an elephant's butt compared to the hole we're digging..
In order for the government to spend money into any stimulus program, they must first pay for it by issuing debt. In a normal economy, the government goes out to the debt market and issues debt, and the market tells them what interest rate it wishes to be reimbursed for in order to lend the United States the money. The market charges an interest rate relating to the belief of several factors - perceived inflation rate during the term of the debt (10 years, 30 years, etc) and risk of being paid back (ie, how much debt does the issuing party have already)? If rates are higher than desired, the issuer can say "you know what? It's too expensive to raise this money." Choices must be made on spending. Under the current situation with the Federal Reserve endless QE program, the Fed is printing money (out of thin air) to purchase our own debt. This is great for the Treasury, as it can issue as much debt as it wants and the Fed prints money to cover it. The US doesn't have to worry much about interest rates. We're financing our own debt. By doing this, however, we dump tons of currency into the system, making each existing dollar that much more worthless. Prices rise (commodities, stocks, assets, as people flee currency for something tangible) and purchasing power declines. The politicians are bailed out. Stimulus money makes it's way into the economy, albeit in a much less efficient manner than could be done if the private sector did it. Federal Reserve printing just goes to the banks. The banks actually buy the debt FOR the Fed, and then turn around and sell it to the Fed minus a nice commission for doing it. In this situation, the banks get the benefit of the QE. We're devaluing our currency and bailing out the banks at the same time.
You can doubt all you wish. All we have done is put off the day of reckoning. But like any can kicking exercise, the more you kick, the heftier the price at the end.
I have no idea how anyone can look at the macro fundamentals and be excited. Sure the corporate profits are good, but at a huge cost to the rest of the economy. There is one and only one reset that has any chance, cut government. I don't think even that will work much, demographics says we are in big trouble.
Delusion, really. Most people don't quite grasp what is going on, and some just flat out want to admit it. Every time I see a post on how well the economy is doing, it makes me laugh. The Federal Reserve is pumping $85B or just over $1 Trillion into the economy every year, and all we're getting is this meager 1.5% performance as we sink ever deeper into the debt hole. Record people on food stamps. Foreclosures and bankruptcy. Significant food/energy inflation. Unemployment in double digits (real unemployment). Sure, there are some bright spots here and there, but for $1T a year, shouldn't things be a bit better? That's supposed to make me want to invest? Hire? What a fucking joke. The Keynesian clowns would like you to believe we can grow our way out of this somehow.
I recognize your question is loaded (as always), but I'll answer anyway - because I try not to dodge. Hyperinflation, in comparable terms to Zimbabwe or Wiemar is not what I think happens. The public would never stand for it. But real, double digit inflation is the eventual end - unless we allow debt to be wiped clean via some sort of strategic default. Some commodities are already in double digits. Some food items in the grocery store are there. Printing has to overcome deleveraging before real, high inflation can manifest itself.