Home » Posts tagged 'qe'

Tag Archives: qe

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

The Fed is Lying to Us

The Fed is Lying to Us

“When it becomes serious, you have to lie”

The recent statements from the Federal Reserve and the other major world central banks (the ECB, BoJ, BoE and PBoC) are alarming because their actions are completely out of alignment with what they’re telling us.

Their words seek to soothe us that “everything’s fine” and the global economy is doing quite well. But their behavior reflects a desperate anxiety.

Put more frankly; we’re being lied to.

Case in point: On October 4, Federal Reserve Chairman Jerome Powell publicly claimed the US economy is “in a good place”. Yet somehow, despite the US banking system already having approximately $1.5 trillion in reserves, the Fed is suddenly pumping in an additional $60 billion per month to keep things propped up.

Do drastic, urgent measures like this reflect an economy that’s “in a good place”?

The Fed’s Rescue Was Never Real

Remember, after a full decade of providing “emergency stimulus measures” the US Federal Reserve stopped its quantitative easing program (aka, printing money) a few years back.

Mission Accomplished, it declared. We’ve saved the system.

But that cessation was meaningless. Because the European Central Bank (ECB) stepped right in to take over the Fed’s stimulus baton and started aggressively growing its own balance sheet — keeping the global pool of new money growing.

Let’s look at the data. First, we see here how the Fed indeed stopped growing its balance sheet in 2014:

And we can note other important insights in this chart.

For starters, you can clearly see how in 2008, the Fed printed up more money in just a few weeks than it had in the nearly 100 years of operations prior.

 …click on the above link to read the rest of the article…

Central Banks Are Just Getting Warmed Up

Central Banks Are Just Getting Warmed Up

According to all central banks, one of the main problems they are called to solve is that countries cannot reach their inflation target of (close to but below) 2 percent. Even their religious trust in the long-discredited Phillips curve cannot explain why price inflation is low in many countries despite historically low unemployment rates. Nonetheless, central banks still enjoy immense credibility. It’s common to hear such sentences as “never bet against the Fed,” the “ECB has big bazooka primed”… and all market participants monitor each public meeting to understand what the next policy could be and how they should be positioned when it arrives.1

To reach the inflation targets and “stimulate the economy,” central banks regularly meet to devise ever-new stimulus programs, and do not despair when, inevitably, the one-off unconventional interventions quickly become the new normal. For example, the world-famous Quantitative Easing (QE) was supposed to be a one-time emergency response to the 2008 crisis, except it has now become one of the many tools of regular monetary policy, and a key component in market demand for financial assets. An undesired but perfectly predictable side effect of QE is that it allows governments to increase their spending without care for the deficit, and still pay negative interest rates in real terms, so no discipline is imposed, except for some empty promise to reduce the deficit some time in the future, if the opportunity comes. Several Western countries have embarked in QE, some in many consecutive rounds, but there is no mention of a reverse-course, an eventual, opposite Quantitative Tightening (QT). Only the United States have tried QT, and the Fed has even announced that they were on a stable and data-driven process back to normalization, to try to maintain their reputation of scientific management of the monetary aggregates.

 …click on the above link to read the rest of the article…

QE for the People

QE for the People

Myrmikan’s May letter discussed how the Fed had already begun to ease nancialconditions, though the method was so subtle that few understood what the central bank was doing.

Banks are required to keep required reserves at the Fed. Banks that nd themselves with a de cient reserve level have to borrow reserves from those with excess reserves,and the interest rate they pay is called the fed funds rate. The fed funds rate thereby sets the minimum level of funding for the banking system. The Federal Reserve used to set this rate through open market operations: buying Treasuries would add reserves to the banking system and lower the fed funds rate (and vice-versa).

Historically, reserves earned no interest, and so, before 2008, banks maintainedas few reserves as possible—they could always buy a Treasury bill with any excess cash. After the Fed ooded the banking system with reserves during the 2008 panic, banks found themselves with excess reserves, which peaked at $2.7 trillion. The Fedsets the general reserve requirement at 10%, which means the banking system couldhave added $27 trillion of credit to the economy. In fact, certain classes of assets (suchas Treasuries, mortgage-backed securities, etc.) have risk weightings that allow banks to hold as little as 2% reserves against them, which enables 50 times leverage on suchassets (which is how, for example, Citicorp was able to be levered up 48:1 in 2007).

In order to keep trillions of levered up credit from crashing into the economy, the Fed began paying interest on excess reserves (IOER). Given the level of excessreserves, the Fed could no longer use open market operations to manipulate the fedfunds rate.

 …click on the above link to read the rest of the article…

“Not A QE” Begins: Fed Start Buying $60BN In Bills Per Month Starting Next Week

“Not A QE” Begins: Fed Start Buying $60BN In Bills Per Month Starting Next Week

Just one day after we laid out what Goldman’s revised forecast for the Fed’s “NOT A QE” will look like, which for those who missed it predicted that the Fed would announce “monthly purchases of about $60BN for four months, split across Treasury bills and short maturity coupon Treasuries, in order to replenish the roughly $200bn reserve shortfall and support the pace of growth in non-reserve liabilities”, the Fed has done just that and moments ago – well ahead of consensus expectations which saw the Fed making this announcement some time in November – the US central bank announced it would start purchasing $60BN in Bills per month starting October 15. This will be in addition to rolling over “all principal payments from the Federal Reserve’s holdings of Treasury securities and the continued reinvestment all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month.”

In short, the proposed schedule is virtually identical to the one Goldman “proposed” yesterday, one which sees the Fed purchase a grand total of $100BN or so in TSYs the near term, and one which is meant to “engineer a one-off level shift of roughly $200bn over the course of four months.

But wait there’s more, because just as today’s surprising spike in repo use suggested, mere “NOT A QE” may not cut it, and just in case, in order to provide an “ample supply of reserves”, the Fed will continue with $75BN in overnight repos and $35 billion in term repos twice per week, “at least through January of next year.”

 …click on the above link to read the rest of the article…

We Finally Understand How Destructive Negative Interest Rates Actually Are

We Finally Understand How Destructive Negative Interest Rates Actually Are

We are in the midst of a strange economic experiment. Vast quantities of negative-yielding debt are currently sloshing around the global economy. While the amount of negative-yielding bonds has dropped recently from a mind-boggling number in excess of $17 trillion, reinvigorated central bank easing across the globe ensures that this reduction is only temporary.

We are slowly starting to understand how destructive negative interest rates actually are. Central banks control short-term interest rates in an economy by setting the rate banks receive on their deposits, that is, on the reserves they hold at the central bank. A new development is the control central banks now exert over long-term rates through their asset purchase, or “QE” programs.

Banks profit from the interest rate differential between “lending long” but “borrowing short”. Essentially, the difference between lending and deposit rates determine a bank’s profitability. However, with today’s very low interest rates, this difference becomes almost non-existent, and with negative rates, inverts completely.

When a central bank pushes rates to negative, banks need to pay interest on the reserves they hold there. But they are not relieved of the obligation they have to pay interest on customer deposits, who are understandably reluctant to pay interest on money they place at a bank. Consequently, the whole earnings logic of banking goes haywire if banks are required to pay interest on loans and receive interest on deposits. As profit margins of banks are squeezed, profitability falls and lending activities suffer.

However, the problems created by negative interest rates do not stop there. In 2008, an influential article describing the economic malaise in Japan after the financial crash of the early 1990s found that instead of calling-in or refusing to refinance existing debts, large Japanese banks kept loans flowing to otherwise insolvent borrowers.

 …click on the above link to read the rest of the article…

Fiat Money Cannibalization in America

Fiat Money Cannibalization in America

An Odd Combination of Serenity and Panic

The United States, with untroubled ease, continued its approach toward catastrophe this week.  The Federal Reserve cut the federal funds rate 25 basis points, thus furthering its program of mass money debasement.  Yet, on the surface, all still remained in the superlative.

S&P 500 Index, weekly: serenely perched near all time highs, in permanently high plateau nirvana. [PT]

Stocks smiled down on investors from their perch upon what Irving Fischer once called “a permanently high plateau.”  As of the market close on Thursday, the Dow Jones Industrial Average held above 27,000, the S&P 500 above 3,000, and the NASDAQ above 8,000.  401k accounts, to the delight of working stiffs of all ages, origins, and orientations, are swollen beyond expectations.

Below the surface, however, the overnight funding market was subject to much weeping and gnashing of teeth.  Sometime between Monday night and Tuesday morning the overnight repurchase agreement (repo) rate hit 10 percent. Short-term liquidity markets essentially broke.

After several technical glitches, the Fed executed its first repo operation in a decade – $53 billion – to keep the interbank funding market flowing.  Zero Hedge documented the chaos real time.  

This was followed up with additional repo operations on Wednesday and Thursday – at $75 billion a pop, and both oversubscribed.  Perhaps Fed repo operations will be a daily occurrence, at least until the Fed launches QE4.

US overnight repo rate – as Fed chair Jerome Powell remarked: “Funding pressures in money markets are elevated this week”. Evidently, nothing escapes his eagle eyes. [PT]

At the same time, the effective federal funds rate – the upper range limit of the federal funds rate – continues to push above the rate the Federal Reserve pays on excess reserves (IOER).  In other words, the Fed’s primary tool for price fixing credit markets is not behaving according to plan.  Greater Fed intervention will be needed to keep things in line.

 …click on the above link to read the rest of the article…

These Are The Banks Where The Fed’s $1.4 Trillion In Reserves Are Parked

These Are The Banks Where The Fed’s $1.4 Trillion In Reserves Are Parked

Over the past few days there has been much confusion over the repocalpyse that shook the overnight funding market, and just as much confusion over the definition of reserves which some banks were unwilling to part with, other banks were desperate for, and in the end both Powell and the former head of the NY Fed’s markets desk admitted that Quantitative Tightening had been taken too far, and the total amount of reserves in the system was too low and will be increased (welcome back QE).

Yet while the book has yet to be written on the causes for last week’s shocking move higher in repo rates, which sent general collateral as high as 10%, a record print in a time of $1.4 trillion in excess reserves, we can shed some clarity on the definition of “reserves.” While there is a universe of semantic gymnastics when it comes to explaining what reserves are, the  most basic definition is quite simply “cash”, however not cash in circulation but rather cash (and deposits) held in the bank’s account with the Federal Reserve (which the US central bank’s name comes from).

This means that there should be a de facto identity between the total amount of cash in the US banking system and the amount of total (minimum required plus excess) reserves. Sure enough, if only looks at the Fed’s weekly H.8 statement, which lists the “Assets and Liabilities of Commercial Banks in the United States“, and adds across the various banking cash aggregates in the US, what one gets is precisely the total amount of reserves.

 …click on the above link to read the rest of the article…

Peter Schiff: Why the Fed Won’t Be Able to Rescue the Economy the Next Time Around

Peter Schiff: Why the Fed Won’t Be Able to Rescue the Economy the Next Time Around

Peter Schiff has been saying that the Federal Reserve is going to take interest rates back to zero and launch another round of quantitative easing in order to reinflate the bubble economy after the next crash. The central bank successfully pulled this off after the 2008 crisis. By dropping rates to zero and holding them there for nearly a decade, and running three rounds of QE, the Fed has reinflated the real estate bubble, blown up a bond bubble and pumped up the stock market. But Peter said it’s not going to work the next time around. Instead, Fed monetary policy will tank the dollar and lead to an inflationary recession.

So, why can’t the Fed pull off another rescue? Peter explained why he thinks it’s not possible during an interview on the Tom Woods Show.

Peter admitted he didn’t think the Fed could rescue the economy in 2008.

I underestimated the ability of the Fed to get away with quantitative easing and for the world to basically accept this and to enable this.”

So today, we have even bigger bubbles than we did in 2006-2007.

The question is — the Fed did it before, can it do it again? Peter said he wouldn’t bet on it.

I would not want to bet that is possible given the enormity of the problem now.”

Peter said you just have to consider the sheer amount of intervention that would be necessary to reinflate the bubbles once they pop the next time.

 …click on the above link to read the rest of the article…

Stunning Consensus Emerges: Fed May Announce Launch Of QE In Just A Few Hours

Stunning Consensus Emerges: Fed May Announce Launch Of QE In Just A Few Hours

It was back on August 6, in an article titled “Forget China, The Fed Has A Much Bigger Problem On Its Hands“, where we explained why in response to the coming dollar funding shortage and liquidity crunch (we warned about this month’s repo crash over a month ago), we first said that Fed will likely resume QE as soon as the fourth quarter. Needless to say, with the Fed having only just cut rates for the first time in over a decade just a week earlier, others looked at us funny, even though just two days later we got the clearest sign yet that the Fed was indeed contemplating QE when we described a very odd email we received from a Fed researcher in “When You Get An Email Like This From The Fed, It May Be Time To Panic.”

In any event, virtually no ‘serious’ Wall Street analyst predicted that QE would be on traders lips in the immediate future, and certainly nobody predicted the coming “dollar funding storm”, which we warned readers about just last Friday.

Fast forward to today when one analyst after another is scrambling to “predict” that today, with its repo operations woefully inadequate to calm the storm that has gripped the funding markets and the dollar shortage, the Fed may go so far as to expend its balance sheet by announcing the launch of permanent open market operations, i.e., the monetization of bonds.

Just please don’t call it QE.

ECB Restarts QE, Lowers Deposit Facility Rate to -0.5%

 …click on the above link to read the rest of the article…

US Equity Futures Trade Near All Time High After ECB Goes All In

US Equity Futures Trade Near All Time High After ECB Goes All In

If it was Powell’s intention to have the S&P trade at an all time when he cuts rates by another 25bps next Wednesday, he achieved it.

S&P futures rose alongside Asian and European stocks as shares globally headed for a third weekly gain and a six week high as markets cheered signs of progress in US-China trade talks and the ECB’s just launched open-ended QE. Treasury yields climbed, with the US 10Y rising as high as 1.81%; the dollar slipped while the yuan rose and pound soared on easing no-deal Brexit fears.

 The resurgent risk appetite was largely the result of renewed trade war optimism after President Trump said on Thursday he was potentially open to an interim trade deal with China, although he stressed an “easy” agreement would not be possible.

Following a muted Asian session where many markets in the region were closed, we saw a groggy start in European trading after Bloomberg reported that most core European nations did not want to restart the ECB’s money printing program, the main bourses eventually traded well in the green, as basic resources and auto sectors outperformed, adding to what was already set to be a fourth straight week of gains.

“We have quite an interesting reaction to the ECB meeting with the sense of the pushback from the core countries, and that essentially that the ECB has now thrown its last cards in,” said John Hardy, head of FX strategy at Saxo bank. “It looks like we are also getting to some pretty interesting levels for yields. If the consolidation continues, at some point you have to question whether the easing (from the central banks) is actually there.”

…click on the above link to read the rest of the article…

Aussie Reserve Bank, Considering “Extreme Measures”, Admits “We’re Almost Out Of Ammo”

Aussie Reserve Bank, Considering “Extreme Measures”, Admits “We’re Almost Out Of Ammo”

At least one reserve bank globally is starting to ponder the question that many central banks across the world will soon inevitably be asking: what happens if we cut to zero and the economy continues to falter?

This has led Australia to start considering QE, following in the footsteps of a world full of central bankers all offering each other as much confirmation bias necessary to continue to walk down the path of eventual economic destruction.

In Australia, the reserve bank has cut to 1% and “nobody expects them to stop cutting,” according to News.com.au. The bank released this chart days ago, showing that market is expecting further cuts. 

The average of all expectations is for the market to fall to 0.37% by September 2020. That exact outcome is described as “unlikely”, but the RBA could have rates at 0.25% or 0.5% by then. That would only leave room for one or two more cuts before rates are at zero.

Then what? Destroy your currency and print your way out of your problems. 

Apparently convinced that economies only exist as permanent booms now, the RBA said last week that it would begin a program similar to QE in the United States, wherein the central bank would buy financial assets in exchange for cash. The RBA is considering buying Australian government bonds.

“We could take action to lower the risk-free rates further out along the term spectrum,” said the RBA Governor.

Justifying this nonsense, the article then gives the quintessential example of how QE bond buying works in practice:

Bonds are how the government borrows. Here’s how it works in simplified terms:

The government offers to sell a piece of paper that says, “Australia will pay you back a million dollars in 10 years” (a 10-year bond).

Someone buys that for, let’s say, $900,000.

 …click on the above link to read the rest of the article…

Can the Fed really Control the Economy?

Can the Fed really Control the Economy? 

QUESTION: This whirligig talk of whether the Fed cuts rates by 25 or 50 basis points is carnival-level absurdity. Does the Fed have the “pretense of knowledge,” as F.A. Hayek, said, that they can regulate the economy like turning up or down the thermostat? I know you don’t agree with this, Martin, but then, Wall St. trades on daily sentiment not ideology.

TM

ANSWER: I understand the theory, but where it is seriously flawed is the idea that people will borrow simply because you lower rates. More than 10 years of Quantitative Easing, which has failed, answers that question. The way the Fed was originally designed allowed it to stimulate the economy by purchasing corporate paper directly, which placed it in a better management position. Buying only government paper from banks who in turn hoard the money fails. As Larry Summers admitted, they have NEVER been able to predict a recession even once.

The Fed lowered rates during every recession to no avail just as the ECB has moved to negative rates without success. The central banks are trapped and they are quietly asking for help from the politicians which will never happen.

Peter Schiff: If You Understood What This Means, You Would Be Buying Gold as Fast as You Can

Peter Schiff: If You Understood What This Means, You Would Be Buying Gold as Fast as You Can

Gold has risen to six-year highs in recent weeks as the Federal Reserve has pivoted back toward an easy-money monetary policy. Markets widely anticipate a Federal Reserve interest rate cut this week and the economy appears to be slowing.

Peter Schiff recently appeared on RT Boom Bust to explain why he believes this is the beginning of a much bigger long-term rise in the price of gold. And it’s not just because the Fed is cutting rates.

In fact, they are going to cut rates next week and this is going to be the first step on the road back to zero. And the Fed is also going to return to quantitative easing. But we just found out that Donald Trump is cutting a deal with a Democrats to basically throw out any progress Republicans made back in 2011, thanks to efforts of the Tea Party, to at least try to rein in the increase in government spending. So, they’re throwing caution to the wind. We are going to see deficits going through the roof over the next several years, and that’s even without the recession, which I believe is coming and which is going to make them much, much worse.”

Consider that in the midst of what is supposed to be a strong economy, we’re already seeing record-setting deficits. As Peter pointed out, bigger deficits mean more money-printing and that means more inflation.

All of this is very bullish for gold … If you understood what all of this means, you would be buying gold as fast as you can.”

 …click on the above link to read the rest of the article…

The Fed’s Dangerous Game: A Fourth Round of Stimulus in a Single Growth Cycle

The Fed’s Dangerous Game: A Fourth Round of Stimulus in a Single Growth Cycle

The longer the signals in capital markets go haywire under the influence of “monetary stimulus,” the bigger is the cumulative economic cost. That is one big reason why this fourth Fed stimulus — in the present already-longest (but lowest-growth) of super-long business cycles — is so dangerous.

True, there is nothing new about the Fed imparting stimulus well into a business cycle expansion with the intention of combating a threat of recession. Think of 1927, 1962, 1967, 1985, 1988, 1995, and 1998.

This time, though, we’ve seen it four times (2010/11, 2012/13, 2016/17, 2019) in a single cycle. That is a record. Normally, a jump in recorded goods and services inflation, or concerns about rampant speculation, have trumped the inclination to stimulate after one — or at most two — episodes of stimulus.

Also we should recognize that the length of time during which capital-market signaling remains haywire, is only one of several variables determining the overall economic cost of monetary “stimulus.” But it is a very important one.

Haywire signaling is not just a matter of interest rates being artificially low. Alongside this there is extensive mis-pricing of risk capital. Some of this is related to the flourishing of speculative hypotheses freed from the normal constraints (operative under sound money) of rational cynicism. Enterprises at the center of such stories enjoy super-favorable conditions for raising capital.

There are also the giant carry trades into high-yielding debt, long-maturity bonds, high-interest currencies, and illiquid assets, driven by some combination of hunger for yield and super-confidence in trend extrapolation. In consequence, premiums for credit risk, currency risk, illiquidity, and term risk, are artificially low. Meanwhile a boom in financial engineering — the camouflaging of leverage to produce high momentum gains — adds to the overall distortion of market signals.

 …click on the above link to read the rest of the article…

Markets are being Lulled into a False Sense of Accommodation

Markets are being Lulled into a False Sense of Accommodation

Those who take an interest in the actions of central banks will know that the advent of Brexit and Donald Trump’s presidency has seen the direction of monetary policy gradually change in both the UK and the U.S.

Since the EU referendum, the Bank of England have raised interest rates twice, after initially cutting them and implementing a new round of quantitative easing in the aftermath of the vote. The first rate hike in November 2017 came over a decade since the bank last increased rates in July 2007.

A month after Donald Trump was confirmed as the 45th American president, the Federal Reserve raised rates for only the second time in nine and a half years. Since Trump’s inauguration, they have gone on to hike a further seven times, and over the course of eighteen months (starting late 2017) the Fed have rolled off over $600 billion in assets from its balance sheet.

As the Fed continue to roll off assets until their balance sheet ‘normalisation‘ programme ends in September, the sentiment amongst traders is that the central bank will soon begin a course of rate cuts in order to stave off the threat of a recession as the prospect of a full blown trade conflict with China and other nation states gathers momentum.

A similar sentiment can be found in the UK over Brexit. With the British economy stagnant and manufacturing and construction sectors in decline, there exists an expectation that the Bank of England will ultimately reverse course if an economic downturn takes hold.

 …click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
Click on image to purchase