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EJ
09-11-12, 08:34 PM
Election as Forcing Function - Part I: On Track for a Bond Market Panic


http://www.itulip.com/images2/OnTrackMEDwtmk.png

Railway behind Walden Pond, Concord, Massachusetts, August 2012

• No QE3 but the Fed throws Bill Gross a bone
• The world's largest public housing project
• When is a bond not a bond? When it's money.
• Who just bought a pile of gold?

CI: Hope you enjoyed your summer.
EJ: I did, thanks. Hope did too and took my advice from June to rest up. I'm expecting a long, cold winter.

CI: For this interview we'll cover the state of the U.S. economy, talk about the Fed and QE, gold, housing, and the state of household balance sheets here in Part I. In Part II we cover a smorgasbord of topics, ranging from the euro to Peak Cheap Oil and conclude with your ideas about how the 30 plus year bull market in bonds ends (aka the Janszen Scenario). We'll start with your June 2012 prediction for new QE3 until "The White of Their Eyes," that is, not until a clear and present crisis will the Fed act. That is absolutely contrary to the universal belief that QE3 will be announced on September 13th. Bill Gross has staked his reputation on a QE3 announcement today. Do you still expect the Fed to hold back on the 13th? Also, after languishing in the low $1,600 range all year gold finally broke above $1,700 last week. Is that just gold hoping for more cash from the Fed along with stock market investors after the jobs report came out?
EJ: Six out of ten dentists and economists say the gold price rise was caused by the announcement of bad US employment numbers. The markets interpreted the BLS report, on top of other data that show the U.S. economy slowing, as a virtual guarantee of a QE3 announcement on the 13th. As I explained back in June, it isn't going to happen. No Fed action before the election unless there is an acute crisis. In recent weeks the financial media has talked itself into a major announcement from the Fed on Thursday. I think Gross took the lead or has been the most outspoken. I think they are going to be disappointed. We may get a minor tweak to policy, like an extension of an existing program, but nothing new. However, the impact of that disappointment will not be the same for the stock market as for the gold market because stock prices and gold prices moved at different times and for different reasons over the past two weeks. Gold will move but not as much as stocks. Keep in mind that short-term forecasting is not my forte, but that's how I see it.

CI: Gold did not rise on September 4 on QE3 hopes?
EJ: The problem with the theory that a bad jobs numbers report was the gold price rise catalyst is that if that were the case the dollar (USD) price of gold should have risen more than the euro (EUR) price because a promise by the central bank print more money should cause the dollar to weaken relative to the euro (EUR), which had recently strengthened versus the USD anyway because of the ECB’s promise to buy euro bonds until the cows come home to ease the euro zone liquidity crisis. Instead gold went up in both EUR and USD in equal amounts at the same time.


http://www.itulip.com/images2/goldEUR-USD090112-090912wtmk.png

The theory that last week’s US jobs numbers were the news that moved gold doesn’t jibe
with gold's jump in both USD and EUR.

http://www.itulip.com/images2/goldEUR-USD010312-090912wtmk.png

Overall the USD and EUR price of gold have been tracking closely all year,
although the dollar price of gold diverged somewhat from the euro gold price in May.


CI: If not the promise of QE3 then what made gold go up in dollars and euros that day?
EJ: Before I answer that and give you my theory on that, as our man Finster frequently reminds us, thinking of the gold price in terms of currencies is the wrong way to think about gold. Gold, as the only commodity held as a currency reserve by global central banks, is the base currency against which all government issued currencies are valued. Gold gives central banks essential liquidity in times of loss of confidence in government issued currencies. The question is not how many ounces of gold you can buy with 10,000 USD or 10,000 EUR but how many units of each currency are needed to buy an ounce of gold. This may seem like a meaningless rhetorical distinction but the difference is important.




http://www.itulip.com/images2/goldEUR-USD070599-090912wtmk.png

Looking at the chart above we can see that more and more units of all currencies have been needed to buy an ounce of gold since 2001 when we took our gold position. Every currency is weakening relative to the base currency, but not all at the same rate.

Now, you often hear it said that the USD as the least-worst currency. But this formulation, despite constant repetition, is incorrect. In reality the world’s two parallel currencies, the USD and EUR, are the two weakest among major currencies in terms of the number of units required to buy an ounce of gold. A parallel currency is one that is used by countries other than the issuer to settle international trade, such as when Japan buys oil from the Saudis and pays in USD or India buys oil from Iran and pays in EUR. For comparison purposes above, we show that the rupee was doing about as well as the EUR and USD until 2011 when it took a dive, but the rupee is not considered a major currency.

I’m repeating a point I’ve made before because it’s important from the standpoint of the Janszen Scenario. The world’s two parallel currencies, the USD and EUR, are weaker than non-parellel major currencies because the US and Europe are issuing too much money in the form of near zero interest rate bearing government bonds. When I say money rather than bonds I am referring to a side-effect of government bond price fixing that Milton Friedman and Anna Jacobson Schwaartz note in "World War II Inflation, September 1939 to August 1948 (http://www.nber.org/chapters/c11389.pdf)." It was the last previous period when the Fed and Treasury fixed bond prices.



In April 1942, the Federal Open Market Committee announced that it would keep the rate on Treasury bills, mostly 90-day maturities, fixed at 3/8 of one per cent per year by buying or selling any amount offered or demanded at that rate.




That rate was kept fixed until the middle of 1947. No such rigid commitment was made for other government securities but an effective pattern was established for them as well—ranging from roughly 7/8 of one per cent for certificates to 0.9 per cent for 13-month notes, 1.5 per cent for 4-1/2-year notes, and 2.5 per cent for longterm bonds.




The System bought whatever amount of these securities was necessary to prevent their yields from rising but did not commit itself to sell them freely in order to prevent yields from falling. The relatively fixed pattern of rates on government securities was the counterpart in World War II of the relatively fixed discount rate in World War I. The support program converted all securities into the equivalent of money.


One of many unintended consequences of the Fed and Treasury fixing Treasury bonds at high prices and low yields -- the Fed prefers the more polite term "yield curve shaping" -- is that this policy turns bonds into money. The implication of that is that these bonds, even long-dated bonds, are not treated by investors like bonds that are for the most part held to maturity. Instead these securities behave like cash. Not a problem when inflation expectations are low, but when inflation expectations rise the bonds that act like money are exchanged for assets that are more likely to preserve purchasing power.

CI: What happened in the 1940s after the war ended when the U.S. government stopped rigging the bond market?
EJ: In the 1940s the risk of a sudden selloff was far more limited than today for several reasons. First because most of the bonds were held domestically. Second the exchange rate was fixed at the time; the small portion of overseas UST holdings did not impact, nor where they impacted by, the exchange rate. Today that is not the case. Today a sell-off can become self-reinforcing with a rise in inflation expectations setting off a run on near zero interest rate bonds, causing the currency -- the dollar in the US case or the euro in the EU case -- to weaken, raising import prices, further raising inflation expectations, and so on. In response to this risk, central banks hedge declines in the value of EUR and USD reserves they hold as near zero interest rate bonds by buying gold to maintain the ratio of gold to USD and EUR low interest rate bond reserves.

CI: That's interesting, especially the part about how near-zero rate bonds are money, but how does this relate the recent pop in the gold price and QE3?
EJ: When central banks on net -- some are buying while others are selling -- increase gold reserves the number of units needed to buy an ounce of gold increases for all currencies and the price of gold rises in all currencies. As you’d expect, since the purchase results in a change in the gold supply the price remains at the new higher level, with some price changes at the margin, on an all-currencies basis until either the next net positive gold purchase rumor causes a further rise or the next net negative central bank gold transactions occur -- not any time soon. Since 2009 when central banks became net buyers, the gold price has made many such step function jumps in all currencies. A Fed policy hope driven price spike, on the other hand, doesn’t tend to hold.

CI: The jump in gold in all currencies last week was the result of gold investors around the world buying in all currencies not gold investors betting that the U.S. central bank will announce QE this week. A rumor of central bank buying moved the gold market?
EJ: Yes, in my opinion. We’ll know after the Fed doesn’t announce QE3 on the 13th. That said, the gold price will likely correct somewhat in sympathy with stock prices, but the decline should not be nearly as dramatic as for stocks. We shall see.

CI: Why is the financial media so dead set on the Fed announcing QE3 this week?
EJ: As I’ve said since June when guys like Bill Gross started to talk up the idea of QE3, the Fed has no intention of unilateral action unless there is a major crisis to provide political cover, not so close to elections, and not with so little dry powder left to cope with a new crisis. Yes, the economy is slowing down. Yes, the price level is trending in a way that if it continues will take the CPI below the Fed’s stated 2% goal. Nonetheless the Fed has to wait. Besides, QE1 and QE2 worked as expected. They inflated financial asset prices.

CI: Explain.
EJ: Another reason why the Fed is not contemplating full-on QE3 is because QE1 and QE2 worked as intended to reflate financial assets. Bernanke stated in a press conference back in June that QE helped the U.S. economy by reflating financial asset prices. I recommend readers read the transcript (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20120620.pdf) of his June 2012 press conference or watch below.



<iframe width="853" height="480" src="http://www.youtube.com/embed/5ma81tGvRp8" frameborder="0" allowfullscreen=""></iframe>


Here is his exchange with the Washington Post’s Zach Goldfarb.


ZACH GOLDFARB. Mitt Romney recently said that QE2 had a relatively little impact on the economy. He said that was in part because of the President’s policies, and he said that QE3 was unwarranted and could have negative effects. Do you agree that QE2 had little effect on the economy? Do you think the President’s policies have had an effect on the effectiveness of monetary policy? And do you think it’s appropriate for a presidential candidate to comment on the future path of monetary policy?

CHAIRMAN BERNANKE. Well, I’ll just say first that we think that both of the asset purchase programs, so-called QE1 and QE2, did have significant effects on asset prices and financial conditions. And although there were certain problems in transmission—for example, the housing market has not been as responsive as it’s been in some times in the past—we do think that they were both effective in providing support for the economy, and in particular, so called QE2 ended what looked to be an incipient deflation problem when we first introduced it.


When asked of QE1 and QE2 helped the economy, Bernanke replied that QE helped the economy by inflating financial asset prices. He did not say QE added jobs or help businesses. Here's why the Fed thinks inflating financial assets makes good Fed policy.



FINANCIAL WEALTH, AGGREGATE DEMAND DETERMINANT: (http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=financial+wealth,+aggregate+demand+determinant)

One of several specific aggregate demand determinants assumed constant when the aggregate demand curve is constructed, and that shifts the aggregate demand curve when it changes. An increase in financial wealth causes an increase (rightward shift) of the aggregate curve. A decrease in financial wealth causes a decrease (leftward shift) of the aggregate curve. Other notable aggregate demand determinants are interest rates, federal deficit, inflationary expectations, and the money supply.


The goal of QE1 and QE2 was to inflate the price of financial assets to repair the assets side of household balance sheets that was wrecked by the crash. Inflating financial assets increases aggregate demand via positive wealth effects. This is standard economic theory. Insofar as the goal was to reflate financial assets, QE1 and QE2 worked.


http://www.itulip.com/images2/HouseholdAssetsQ11955-Q22012wtmk.png

The financial assets of households have recovered to pre-crisis levels, but Tangible Assets, aka housing, remain depressed.

Household financial assets are now back to pre-crisis levels. So why launch a new round of QE, especially when fund managers like Bill Gross are publicly goading you into doing it?

CI: But did QE increase demand?
EJ: That's impossible to measure, but intuitively you can see that when households get quarterly statements from their investment firm and the balance is back to where it was before the crap hit the fan then they are going to tend to spend more money than they would if the statement told them they'd lost a pile of money. This helps explain why higher income household consumer spending has improved so much more than lower and middle income spending; lower and middle income households, if they have any assets, have them in real estate not in financial assets like stocks and bonds. QE is grossly regressive, but the Fed must figure it's better than nothing.

CI: What's your take on housing? Cover of this week's Barron's says the housing market is up.
EJ: To me the so-called mystery of the slow recovery is all about housing. Housing used to lead every recovery since the early 1980s. Home mortgages make up the vast majority of household liabilities. If they are not rising that means households aren't taking out new mortgages to buy homes as fast as they are paying off or defaulting on existing mortgages. The Fed can reflate financial assets by buying the bonds that underpin all asset prices. However, the Fed cannot reflate home prices. For all but the highest income groups, the crash has left US households with a collective $6 trillion hit to household assets and most of that is home values. So we have positive wealth effects for the rich and negative wealth effects for everyone else. Not too surprising, then, that the 99% versus 1% social split resonates with so many Americans. It wasn't only the crash but that combined with the regressive reflation measures that made a once unthinkable and un-American rich vs poor split in the centerpiece of campaign rhetoric.

CI: Can the U.S. economy recover without a housing recovery?
EJ: No, not the way the economy is currently structured, that is, around the Finance, Insurance, and Real Estate industries. As I said, every recovery since the start of the FIRE Economy in the early 1980s has been led by housing. The recovery from the 2001 recession was fueled by a housing bubble. Without a strong housing market the FIRE Economy cannot recover.

CI: What can be done? Can the housing market recover and the FIRE Economy take off again?
EJ: The problem is the time scale. At this rate the housing market will never recover because a new crisis is bound to come along to halt the recovery, such as it is, and set it back.

CI: What kind of time scale are we talking about.
EJ: Current course and speed, another 10 years. But I guarantee you there will be another recession before 10 years go by. Bottom line, the U.S. economy has to be restructured. The truly terrible problem for the U.S. is that the last restructuring was financed with Federal government spending. I'll get to that point in Part II when we talk about austerity measures in Europe versus the economic restructuring that the U.S. went through in the 1980s and Germany in the 1990s.

Two factors are keeping housing depressed, one on the credit availability side and the other on the housing demand side.

A broken home finance industry on the credit availability side keeps lending standards high even if mortgage interest rates are low. Again, it's a rich man's verus poor man's housing market. It's easy to get a loan to buy a home if you are one of the few who made it through the recession with a strong credit and employment history. Everyone else is having a hell of a time getting a mortgage. The reason for the broken home finance industry is visible in the persistently high mortgage delinquency rate. Hard to imagine but three years into the so-called recovery home owners go delinquent on more than $200 billion in loans every single quarter, that's up from an average of $15 billion per quarter from 1990 until 2005.


http://www.itulip.com/images2/MortgageDelinquencyQ11990-Q22012wtmk.png

Current course and speed, no return to historical delinquency rates until 2024.

Mortgage credit isn't going to loosen up until delinquency rates fall, and delinquency rates are not going to get better until the labor market improves. The improvement in the mortgage delinquency rate can only be as rapid as the rate of improvement in long term unemployment.


http://www.itulip.com/images2/AverageDurationUnemployment1940Aug2030wtmk.png

Current course and speed, no return to historical average duration of unemployment until 2026.

I think we're stuck with this screwed up home finance market for many years to come, which is why the Treasury threw in the towel week before last and gave up on the idea of ever privatizing Fannie Mae and Freddie Mac. There is no hope for a private secondary market for US housing until 2020 at the earliest.


Fannie and Freddie: The Walking Dead (http://www.bloomberg.com/news/2012-08-17/fannie-and-freddie-the-walking-dead.html)

By Deborah Solomon Aug 17, 2012

After nearly four years of a zombie existence, the U.S. Treasury Department finally pulled the trigger on Fannie Mae and Freddie Mac.

In revising the terms of the companies' bailouts, the Treasury is ensuring the mortgage giants never resume their heady roles as private companies. It's an ironic twist for Fannie and Freddie, which once employed armies of lobbyists to protect their status.

Under the new arrangement, the companies will not be able to keep a single dime of profit they earn -- the money will all flow back to the U.S. Treasury. The move, which also requires Fannie and Freddie to shrink their mortgage portfolios more quickly, is intended to hasten reform of the housing finance market, which is almost completely dependent on the U.S. government.


CI: If the housing finance market is almost completely dependent on the U.S. government, doesn't that make the U.S. housing market government dependent?
EJ: I refer to U.S. residential real estate as the world's largest government housing project. No surprise; I told Perter Warburton in 2008 that this was the inevitable outcome of the housing bubble.

After the credit market problem, the second and more daunting issue for the housing market is on the demand side, with employment and incomes. Before the housing bubble home prices correlated to regional incomes. One of the ways we identified the start of the bubble in 2002 (http://www.itulip.com/qc082002.htm) was that home prices had de-coupled from regional incomes. Incomes flattened out after the stock market bubble crashed and caused a mild recession, but that dip in incomes didn't impact home prices because the Fed got busy inflating a housing bubble. Then, after that bubble collapsed, home prices once again correlated to incomes. First housing prices tracked a collapse in incomes. Today they track a steady decline in incomes.


http://www.itulip.com/images2/HoungBubbleIncomes1987-2012wtmk.png

CI: The good housing news is that rise we see on your chart? And you are saying then that rise is temporary?
EJ: Without a rise in incomes across the board there will be no sustained housing recovery. Period. Instead we'll have an economy like that of any other third world country. Poor and middle income neighborhoods will get shabbier and wealthy neighborhoods will get more opulent. Add gates at the entrances and bars on the windows and the process of turning the US into a third world country is complete,

CI: You show QE as beefing up the assets side of the household balance sheet, for those who have financial assets. What about net worth overall?
EJ: Peak to trough we're talking about a $16 trillion decline in household net worth from $68 trillion to $52 trillion. As of Q2 2012 households made back $10 trillion of that; now its off $6 trillion from the peak.


http://www.itulip.com/images2/HouseholdNetWorthQ11955-Q22012wtmk.png

CI: From the chart above, household net worth is where is should be if the stock market and housing bubbles didn't happen?
EJ: Absolutely. That looks encouraging, but before we break out the champaign we have to consider the way it recovered. Big gains in financial assets on the asset side of the balance sheet, thanks to the Fed, contributed to the net but liabilities have staged an historic decline.

CI: You mean de-leveraging? Isn't that good?
EJ: Not the way our economy is structured it isn't. The portion of the increase in net worth is happening on the liabilities side of the balance sheet. It's not a huge number relative to $62 trillion in total net worth. It's only about $1 trillion but again it's all about the housing market. Most of the household liabilities number is home mortgages. We are seeing an historically anomalous decline in home mortgage liabilities as home owners continue to default and repay mortgages faster than they take out new ones. The chart below shows periods of de-leveraging of liabilities since the early 1950s. You can hardly make out any decrease at all. That all changed in 2007. We cannot call what is happening to the liabilities side of the household balance sheet "de-leveraging." It's collapsing. It's collapsing because the price of the collateral that backs the mortgages -- homes -- is collapsing.


http://www.itulip.com/images2/TotalLiabilitiesHouseholdswtmk.png

CI: That looks ominous.
EJ: But it's inevitable; as home prices fall so will mortgage debt.


http://research.stlouisfed.org/fredgraph.png?g=aB3

By the way, we've stopped using the Case-Shiller home price indexes that are so popular with most of the financial media. We prefer the index built of actual home sale transactions. It's more reliable even if it doesn't supply fodder for the endless debate about the bottom of the housing market. As you can see there are no bounces in the transactions data but a continuous decline.

CI: In one chart, what's the inflation picture? Rising or falling the rest of 2012?
EJ: Prices are heading into negative territory. The reason is that the dollar has been allowed to strengthen since Q4 2011.


http://www.itulip.com/images2/PricesJan2000-Aug2012wtmk.png

CI: I can't believe my ears. Are you forecasting deflation?
EJ: Don't worry, they'll think of something to reduce demand for dollars. It's not so hard to do when the world is swimming in them already. I'm expecting some kind of surprise policy move after the election. I don't yet know what they're planning to do but it will be novel. I'll let readers know if I can collect enough hints from enough contacts to figure it out.

CI: Sum it up for us.
EJ: Again, our economy structured around FIRE. Recovery all about real estate at this point. The home price index, the delinquency rate, household liabilities, and average duration of unemployment tell us everything we need to know about the state of the US economy. In sum:

1. The collapse of the housing bubble and resulting recession wrecked the market for home mortgage finance. Combined with high unemployment, housing has been eliminated as a driver of economic recovery.
2. Without the stimulus of the housing market unemployment will remain high and demand will remain weak.
3. QE can reflate financial assets but not home prices. For that we need declining unemployment and rising incomes first and a functioning mortgage finance market second.
4. QE can only stimulate demand by inflating financial assets to stimulate demand via positive wealth effects. It's regressive and its work has been done.
5. The one and only avenue for stimulus remaining with interest rates at zero is additional deficit spending.
6. Additional fiscal stimulus will further worsten the US fiscal position, cause the dollar to weaken, stimulate exports, raise commodity prices and prices in the economy.
7. But deficit reduction is an election platform for both candidates, so none until after the election. After the election, we will see more fiscal stimulus no matter which party is elected.

CI: So no QE3 and yes to more deficit spending after the election. Man, you really are a contrarian.
EJ: Not for the sake of being contrarian. I hope the data have made my case for me.

Where is all of this headed? In Part II we refine our thinking about the essential question of our time, once the historic government intervention in the UST market ends, then what? How will it end? What will end it? And, of course, when?

On Track for a Bond Market Crash - Part II: What will collapse the U.S. Treasury Bond market?



http://www.itulip.com/images2/FedBlowsUpBondMarket2012MED.jpg



If the above image above looks familiar that's because you have been reading this site for more than a decade and recall my November 1999 article published Bankrate.com titled “What will pop the Internet bubble? (http://www.bankrate.com/brm/news/investing/19991129f.asp?keyword=)” The image below led the article on iTulip.com.



http://www.itulip.com/sheepg5_low.gif


Investors await their fate on Wall Street: iTulip, 1999

Continued from: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen (http://www.itulip.com/forums/showthread.php/23521-Election-as-Forcing-Function-Part-I-On-Track-for-a-Bond-Market-Panic-Eric-Janszen)

Today the investor herd awaits its fate not in the stock market but in the market for U.S. Treasury bonds. In this section we explain how the herd got into this predicament and identify the three most likely events to set the herd running, that is, to trigger a U.S. Treasury bond (UST) and dollar (USD) crisis.


The UST market has been distorted by Fed and Treasury policy for more than 10 years. The correction will be far more severe than the 1994 UST correction that followed the Fed's first rate hike after the 1990 recession, an event that came to be known as The Great Bond Market Massacre, and the event that keeps the Fed up at night as it ponders a future exit from ZIRP.

The distorted UST market is popularly and erroneously referred to as a Treasury bond bull market or bubble and the process of distortion by the Fed and Treasury as "financial repression."

The correct term is price fixing. The market for the Treasury bonds of a country whose economy is stuck in an Output Gap Trap and kept afloat by borrowing cannot be called a "bull market" despite historically low interest rates. If corn prices increased for 20 years we'd call that a bull market in corn. If subsequently corn prices crashed and the government then stepped in to support corn prices at an even higher price than they were at before the crash, because the economy was running on corn, we would not call the resulting rise in corn prices a bull market in corn.

Of course, our economy doesn't run on corn. Since the crash it's been running on borrowed money. The borrowing is by issuance of UST.

The price fixing is in the form of the Fed buying a full range of maturities of government bonds. The predictable result of UST price fixing is an artificial and temporary shortage UST. As all bond prices follow government bonds, in effect the government is manipulating the entire credit market.

I dislike the term bubble to describe the result of this price fixing operation, the effect of the Fed and Treasury herding all of us en masse into a wealth destruction pit. The term "bubble" once had a specific meaning in the context of financial markets. It used to refer to a complex process of asset price inflation wherein a group of insiders engaged the greed instinct of the herd with an assist by government in the form of excessively cheap money and lack of enforcement of securities law but now refers to anything that appears extreme and temporary. Today you can read about a Justin Bieber bubble.

Are investors greedily piling into UST to get rich? Of course not. The word "bubble" doesn't mean anything anymore.

Rather than a bubble I think of the UST market as a cage which, after a decade of interest rate manipulation by government, is crammed to bursting with more or less the same herd as participated in the last two asset bubbles in ten years. To understand how this ends we first have to establish how we got into this mess in the first place.

(Editor's Note: We have done our best to edit this article for spelling and gramatical errors, but among its 18,200 words there will be some that are misspelled or in the wrong place. Please PM FRED with any you find. (http://www.itulip.com/forums/sendmessage.php?do=mailmember&u=174))



How did we get here?


It all started when the herd was lured into a stock market bubble in the early 1990s. The Greenspan Fed, long time readers will recall from articles here dating back to 1998, worried about the stock market bubble as early as 1994. That March "having very consciously and purposely tried to break the bubble and upset the markets in order to sort of break the cocoon of capital gains speculation," the Fed raised rates without warning and accidentally blew up the bond market. Per the FOMC meeting minutes from March 22, 1994 (pdf) (http://www.federalreserve.gov/fomc/transcripts/1994/940322Meeting.pdf), Greenspan says:



"When we moved on February 4th, I think our expectation was that we would prick the bubble in the equity markets. What in fact occurred is that, as evidence of the dramatic shift in the economic outlook began to emerge after we moved and long-term rates began to move up, we were also clearly getting a major upward increase in expectations of corporate earnings. While the stock market went down after our actions on February 4th, it has gone down really quite marginally on net over this period. So what has occurred is that while this capital gains bubble in all financial assets had to come down, instead of the decline being concentrated in the stock area, it shifted over into the bond area. But the effects are the same. These are major capital losses, which have required very dramatic changes in the actions and activities on the part of individuals and institutions."

"So the question is, having very consciously and purposely tried to break the bubble and upset the markets in order to sort of break the cocoon of capital gains speculation, we are now in a position—having done that and in a sense succeeded perhaps more than we had intended—to try to restore some degree of confidence in the System."


We delve into that event later in Part II because we think the most likely instigator of a bond market panic will be the same group that created the conditions for panic in the first place: the Fed. (more... $ubscription (http://www.itulip.com/forums/showthread.php/23612-On-Track-for-a-Bond-Market-Crash-Part-II-What-will-collapse-the-U-S-Treasury-Bond-market-Eric-Janszen?p=239513#post239513))

Editor's Note: Part II is not ready for publication as of Sept. 13, 2012 8AM EDT at the time Part I was moved from the staging area to the public forums. We are taking the usual step to publish Part I before Part II is ready due to the time-sensitive nature of material in Part I in order to publish EJ's prediction for no QE3 announcement today before Bernanke's speech. Subscribers will be notified by email as usual when Part II us ready. You may also receive notification by following EJ on Twitter (https://twitter.com/ejanszen).

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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LazyBoy
09-13-12, 10:27 AM
Missing word: "The US economy is like a "

agrawalp1
09-13-12, 11:14 AM
EJ, Thank your for timely article with Q3 or not announcement due very soon. Do you have any specific short idea to trade this announcement (may be Silver)?

Prazak
09-13-12, 11:44 AM
Lovin' the turns of phrase here:

In this conception of today's UST market we investigate one event that may occur to produce a panic that by the sheer force of the bodies inside the cage trying to get out causes the herd to suddenly bust the gate down and spill willy, nilly in all directions into the grounds while the keepers of the flock look on helplessly. In the second scenario the keepers by intention unlock the main gate, after carefully laying the groundwork, or so they think, convinced that by setting certain expectations of the keepers' future actions the terrified and yield-starved herd will exit in an orderly fashion, chattering and mumbling like a black tie crowd leaving a bad opera rather than screaming and turning over lit cars like a group of drunken, angry soccer fans who lost the match on the home field.

Inspired stuff. Thanks for making your forebodings so pleasurable to read. Hoping we don't get QE3 today for no other reason than not to delay the release of the rest of Part 2.<style id="_clearly_component__css" type="text/css">#next_pages_container { width: 5px; hight: 5px; position: absolute; top: -100px; left: -100px; z-index: 2147483647 !important; } </style>

bdryer
09-13-12, 11:54 AM
Here's my trade: Short the QQQ or buy September puts. Wait 2 hours after the announcement then convert the profits to GLD calls. You only have about 20 mins to decide.

Sept 14th QQQ 68 puts selling for $0.17 right now. If EJ is right it's a five-ten bagger

vt
09-13-12, 12:38 PM
So they are buying mortgage backed securities to the tune of $40 billion a month, possibly helping the housing market. Stocks popped at first and are moderating a bit. Gold up

Chomsky
09-13-12, 12:39 PM
So they are buying mortgage backed securities to the tune of $40 billion a month, possibly helping the housing market. Stocks popped at first and are moderating a bit. Gold up


So does this count as QE3, or just a tweaking of existing policies?

jpatter666
09-13-12, 12:43 PM
So does this count as QE3, or just a tweaking of existing policies?

From Seeking Alpha:
"Without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions." In addition to QE3 and extending the low rate pledge, Operation Twist will continue through the end of the year. Together, the actions are expected to increase the Fed's holdings of longer-term paper by $85B/month through year's end.

I read that as QE3.

staci_vay
09-13-12, 01:10 PM
Exaclty as you indicated EJ, they threw a bone to Gross. Extension of an existing program. The headlines read QE3. Once the news is fully digested, lets see what happens.

FRED
09-13-12, 01:13 PM
So does this count as QE3, or just a tweaking of existing policies?

EJ writes in:


We haven't quite decided yet. We are tending toward the assessment that I was wrong.

The stock market and global currency markets got exactly what they expected but the gold market got more.




http://www.itulip.com/images2/Gold_USD_SP500Sept091312.png



If we can call this QE3 then the post-mortem on the prediction will be enlightening. I'll defer to the opinion of our members.

Again it appears I have erred on the side of optimism. It is quite remarkable just how hard the Fed has to paddle just to stay in one place.

This accelerates our time table for a U.S. bond market crisis.

Osmose
09-13-12, 01:15 PM
Exaclty as you indicated EJ, they threw a bone to Gross. Extension of an existing program. The headlines read QE3. Once the news is fully digested, lets see what happens.

Not quite staci... Pretty much the opposite. Open ended qe with no limit and promise to buy more. MASSIVE qe

Osmose
09-13-12, 01:17 PM
Today is the day bond market died.

Chomsky
09-13-12, 01:19 PM
thanks FRED.

Btw, the link to part II, at the very bottom of EJ's article, is not enabled.

jk
09-13-12, 01:24 PM
just cross-posting my remarks after the fed's announcement from the fomc thread:

i am quite sanguine about this move. i just finished watching ray dalio's 1 hour interview at the council on foreign relations, posted yesterday.
http://www.cfr.org/business-and-fore...o-video/p28984 (http://www.cfr.org/business-and-foreign-policy/conversation-ray-dalio-video/p28984)
not a lot you won't know, but well organized thinking about the global deleveraging cycle we're in. he says the least painful way such a deleveraging is managed is via a combination of austerity, debt-restructuring and money printing, along with fiscal stimulus to maintain demand. he says he thinks it less likely that we'll have a recession soon than that we'll have a depression, a self-reinforcing deleveraging spiral, triggered by over-emphasis on austerity. he also says the ratio of total debt [public and private] to gdp in the u.s. has been slowly going down, and that nominal gdp must remain above interest rates or we're in the soup.

so -back to my own thoughts- this fed move is just the latest. there is no SOLUTION to our problems. it's more like a chronic illness- not to be cured but to be managed.

agrawalp1
09-13-12, 01:27 PM
Why I also feels it turns out to be Massive QE

vinoveri
09-13-12, 01:35 PM
just cross-posting my remarks after the fed's announcement from the fomc thread:

i am quite sanguine about this move. i just finished watching ray dalio's 1 hour interview at the council on foreign relations, posted yesterday.
http://www.cfr.org/business-and-fore...o-video/p28984 (http://www.cfr.org/business-and-foreign-policy/conversation-ray-dalio-video/p28984)
not a lot you won't know, but well organized thinking about the global deleveraging cycle we're in. he says the least painful way such a deleveraging is managed is via a combination of austerity, debt-restructuring and money printing, along with fiscal stimulus to maintain demand. he says he thinks it less likely that we'll have a recession soon than that we'll have a depression, a self-reinforcing deleveraging spiral, triggered by over-emphasis on austerity. he also says the ratio of total debt [public and private] to gdp in the u.s. has been slowly going down, and that nominal gdp must remain above interest rates or we're in the soup.

so -back to my own thoughts- this fed move is just the latest. there is no SOLUTION to our problems. it's more like a chronic illness- not to be cured but to be managed.

While I haven't watched the video and don't disagree that there is not a simple fix-all solution and further agree that WE are all in this together, I'm somewhat weary of the continuing meme that how it's being handled is that best (implied: "best for all"); we know that in fact it is best for those with access to the cheap money/credit and those with capital to leverage/invest and take advantage of speculation when the cost of money is zero. Financial Repression is certainly not good for most.


You may be interested in this - again CFR related - same old experts - Bob Rubin and Jim Baker - advising us how perilous our situation is and how we need to get the fiscal house in order - Very smart guys no doubt and were I ten years younger I'd be a true believer, but we know what happened, as Hudson and other have said - we bailed out the banks et al and now we have to a fiscal/currency problem that we are ALL going to sacrifice for. Why do we listen to th same folks who were at least in some part responsible for the situation we are in? Did Rubin and Baker warn of sub-prime, lax regulator standard etc. 8 years ago when it really mattered?
http://www.c-span.org/Events/Policy-Group-Looks-for-Common-Sense-Solutions-to-National-Debt/10737434032/

vt
09-13-12, 01:42 PM
Clearly the housing market is holding up recovery. A recession next year worsens conditions. What to do?

If I were the President (based on what I've learned from EJ, thank you) I would try to enact the following in coordination with the Fed after the election or inauguration of the new President:

1. Since the government owns Fannie and Freddie, move to get all mortgage rates down to 2.75% or less for 30 year mortgages even with no equity in the home. Also allow a buyer of a foreclosed home to assume this low rate mortgage. Guarantee support for the banking industry that owns this paper so a rise in rates doesn't kill them. Remember: the federal government has $16 trillion in debt and cannot afford interest rates to rise yet. Result: stabilize the housing industry as much as possible.

2. Continue to move towards longer term debt sales to replace short term debt of the government.

3. Once most homeowners have locked in low, long term mortgage rates and the government has also lengthened their debt maturity, start taking steps to inflate the economy. This is necessary to reduce the size of the debt versus GNP.

4. Bring back Glass Steagall. After housing recovers a bit lower the mortgage deduction to $500K and only allow it on the primary residence. This is part of unwinding FIRE with much more to follow.

5. We have to start the process of TECI. First start to defund and downsize many of the FIRE related government programs (except residential housing). Reform government pensions and benefits, and reduce federal employment by attrition. Next, start moving federal money to public- private partnerships to rebuild the energy, transportation, and communications infrastructure. The federal budget would not decline, but simply shift away from FIRE to TECI.

6. Devalue the dollar? Inflate somehow? At some point higher inflation will come,but recovery will be slow. Back to the future of the 70's except with interest rates on 30 year treasuries topping at 6% to 7%. This is the extent of the bond panic I see. Nonetheless, debt will be tamed by making it smaller via inflation and some debt forgiveness.

BadJuju
09-13-12, 01:50 PM
As someone that doesn't understand the market too well, I read into this as being a way to dangle the carrot and give nips of it to people. The 40 billion a month is a small taste of a bigger pie promise. Am I right in thinking this way?

we_are_toast
09-13-12, 01:57 PM
I'm having a problem getting too excited about this QE3. I'm not convinced that buying MBS's will necessarily translate to selling more houses. Interest rates are incredibly low now, and yet the new housing market is still lagging. There's a huge shadow inventory of existing housing that has to be cleared, and selling an exiting house doesn't translate to the same stimulus as selling a new house. Banks also have high requirements for down payments that may not change. It seems this may be up to the mortgage lenders as to how much stimulus this is actually going to be. If he had announced he was buying treasuries, and if congress cooperated with spending the additional money (very doubtful) it would have been immediate and big stimulus.

I'm betting against this rally lasting, but not too much.

Slimprofits
09-13-12, 02:00 PM
Today is the day bond market died.

<iframe width="420" height="315" src="http://www.youtube.com/embed/S-Xrlf3taEo" frameborder="0" allowfullscreen></iframe>

Slimprofits
09-13-12, 02:05 PM
They are reaching new comedic heights.


Front page of Bloomberg:

BREAKING NEWS Fed Officials Upgrade Economic Growth Outlook for 2013, 2014

ST
09-13-12, 02:15 PM
the definition of QE has become muddled in the media - no U.S. gov't debt being bought, yet its deemed QE

vinoveri
09-13-12, 02:16 PM
Hard to imagine but three years into the so-called recovery home owners go delinquent on more than $200 billion in loans every single quarter, that's up from an average of $15 billion per quarter from 1990 until 2005.

Seems like the debt deflation is proceeding more rapidly than I thought. Good news no doubt for all those investors waiting in the wings.
With $10trillion in outstanding mortgages and 25% underwater, does not this mean (assuming the underwater folks are defaulting) that in 3 years those loans will be written off.

Winners from the housing bubble: speculators, flippers, banks-lenders, brokers, etc.
Losers from popping bubble: those who bought at top and did not sell; savers since 2008 b/c of ZIRP
Winners from popping bubble: BANKS, new round of privileged investors who get to use the cheap money to buy up cheap RE and rent it out.

Jefferson's quote is particularly apt to describe the situation:
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."

rogermexico
09-13-12, 02:19 PM
EJ writes in:

We haven't quite decided yet. We are tending toward the assessment that I was wrong.

The stock market and global currency markets got exactly what they expected but the gold market got more.




http://www.itulip.com/images2/Gold_USD_SP500Sept091312.png



If we can call this QE3 then the post-mortem on the prediction will be enlightening. I'll defer to the opinion of our members.

Again it appears I have erred on the side of optimism. It is quite remarkable just how hard the Fed has to paddle just to stay in one place.

This accelerates our time table for a U.S. bond market crisis.


EJ, I am reminded here of a quote from Warren Buffett.

"You can only be as smart as your dumbest competitor"

He was talking about how hard it is to compete with a business competitor who is willing to behave irrationally (lose money) but I think the same thing must apply in Fed Kremlinology when trying to predict behavior.

A very smart analyst who is usually right can make the mistake of thinking the analysand is as smart and therefore as predictable as the analyst.....

This looks like reasonably big QE3 to me at first blush. I was about 70/30 biased in favor of some QE3 and positioned accordingly, but this seems bigger than I would have bargained for.

FRED
09-13-12, 02:45 PM
the definition of QE has become muddled in the media - no U.S. gov't debt being bought, yet its deemed QE

Technically it was QE:



Definition of 'Quantitative Easing' (http://Read more: http://www.investopedia.com/terms/q/quantitative-easing.asp#ixzz26NQCxCMb)

A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.

ST
09-13-12, 02:48 PM
Technically it was QE:


Definition of 'Quantitative Easing' (http://Read more: http://www.investopedia.com/terms/q/quantitative-easing.asp#ixzz26NQCxCMb)

A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.


ahhh...thanks for the clarification

xPat
09-13-12, 03:49 PM
We haven't quite decided yet. We are tending toward the assessment that I was wrong.


Noble of you to both take the risk of posting this only a few hours before the announcement with a bold call, then to have the character to openly admit to being wrong. But I wouldn't go quite so far as to say you (and I, with a very similar opinion expressed in another thread several days ago) were wrong. I don't see it that way at all.

We expected the Fed to throw the markets a bone, but no actual QE3. What we got was a bone (extension of twist) plus what we have to admit was in fact QE3. But $40bn/month isn't all that much. We were both wrong when we predicted no QE3 today, but not as wrong as the masses who predicted an announcement of a $2tn program.

Far more importantly, you (and I) have predicted a massive coordinated CB easing from several CBs at the same time. I still think that's what it's going to take, and I don't think we're done yet.

So we both got the call wrong on new QE today. Big deal. The more important question is what comes next, and when and how it comes. The Fed no longer has the opportunity to play games creating speculation about the next FOMC meeting. By doing this open-ended, they don't have any more ability to talk up markets on hopes of another announcement at the next FOMC. So we got the long-awaited QE3, and it wasn't all that big. Yes, I and I'm sure many other iTulipers lost a few bucks this afternoon betting on a different outcome. But now that QE3 is out of the bag, now what? I think the answer is that the fed is out of bullets until a crisis warrants a massive, coordinated global QE event. I think the pop in equities probably has a bit farther to run, but nothing like QE1 or QE2. I predict a roller-coaster ride to year end, and disaster in 2013.

xpAT

littleshark
09-13-12, 04:41 PM
Noble of you to both take the risk of posting this only a few hours before the announcement with a bold call, then to have the character to openly admit to being wrong. But I wouldn't go quite so far as to say you (and I, with a very similar opinion expressed in another thread several days ago) were wrong. I don't see it that way at all.

We expected the Fed to throw the markets a bone, but no actual QE3. What we got was a bone (extension of twist) plus what we have to admit was in fact QE3. But $40bn/month isn't all that much. We were both wrong when we predicted no QE3 today, but not as wrong as the masses who predicted an announcement of a $2tn program.

Far more importantly, you (and I) have predicted a massive coordinated CB easing from several CBs at the same time. I still think that's what it's going to take, and I don't think we're done yet.

So we both got the call wrong on new QE today. Big deal. The more important question is what comes next, and when and how it comes. The Fed no longer has the opportunity to play games creating speculation about the next FOMC meeting. By doing this open-ended, they don't have any more ability to talk up markets on hopes of another announcement at the next FOMC. So we got the long-awaited QE3, and it wasn't all that big. Yes, I and I'm sure many other iTulipers lost a few bucks this afternoon betting on a different outcome. But now that QE3 is out of the bag, now what? I think the answer is that the fed is out of bullets until a crisis warrants a massive, coordinated global QE event. I think the pop in equities probably has a bit farther to run, but nothing like QE1 or QE2. I predict a roller-coaster ride to year end, and disaster in 2013.

xpAT



You can argue that this was a "small" coordinated move. China is doing more stimulus, the ECB is conditionally buying debt, and FED is doing a smaller, openended QE3. It seems like they've dipped their toes back in. Nobody is "all-in" here, because nobody wants to be, but it does seem coordinated.

I do agree with the overall thesis.

metalman
09-13-12, 04:44 PM
You can argue that this was a "small" coordinated move. China is doing more stimulus, the ECB is conditionally buying debt, and FED is doing a smaller, openended QE3. It seems like they've dipped their toes back in. Nobody is "all-in" here, because nobody wants to be, but it does seem coordinated.

I do agree with the overall thesis.

ej tweeted qe3 lite...

BK
09-13-12, 04:47 PM
The commentary by Mr Bernanke was most enlightening. During the Q&A session you can sense the Bernanke FIRMLY believes that the Fed Actions today will cause Americans 401K investments to increase, their home values to increase, and this euphoria will lead to more shopping by Americans - which will naturally lead to higher employment. Wow!

Ben is so sure of himself and his ability to pull back liquidity when the time is right......... scary.

davidstvz
09-13-12, 04:47 PM
Jefferson's quote is particularly apt to describe the situation:
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."

I believe that is a fake quote. The word deflation didn't even exist until the 1920's.

wayiwalk
09-13-12, 04:53 PM
thanks FRED.

Btw, the link to part II, at the very bottom of EJ's article, is not enabled.

+1

Is the second part posted yet?

(Errr, never mind, I just noted the message at the bottom of the post that part II will appear later and subscribers will be given a heads up.....)

metalman
09-13-12, 04:53 PM
I believe that is a fake quote. The word deflation didn't even exist until the 1920's.

it is fake... (http://www.snopes.com/quotes/jefferson/banks.asp) but he did say banks are more dangerous than standing armies.

vinoveri
09-13-12, 05:05 PM
it is fake... (http://www.snopes.com/quotes/jefferson/banks.asp) but he did say banks are more dangerous than standing armies.

Thanks for the link. Stand corrected.
Pretty good quote nonetheless ... even if Hitler, Stalin and Pol Pot all said it.

The asset inflation (RE) inspired by cheap and free bank credit followed by bursting bubble and debt deflation in which foreclosed properties are now disposed in 1000+ unit chunks to investors who have direct or indirect access to Fed money is exemplary of the quote.

metalman
09-13-12, 05:36 PM
Thanks for the link. Stand corrected.
Pretty good quote nonetheless ... even if Hitler, Stalin and Pol Pot all said it.

The asset inflation (RE) inspired by cheap and free bank credit followed by bursting bubble and debt deflation in which foreclosed properties are now disposed in 1000+ unit chunks to investors who have direct or indirect access to Fed money is exemplary of the quote.

sickening... how these guys sleep at night... ;_PU

radon
09-13-12, 05:53 PM
EJ writes in:
We haven't quite decided yet. We are tending toward the assessment that I was wrong.

The stock market and global currency markets got exactly what they expected but the gold market got more.




http://www.itulip.com/images2/Gold_USD_SP500Sept091312.png



If we can call this QE3 then the post-mortem on the prediction will be enlightening. I'll defer to the opinion of our members.

Again it appears I have erred on the side of optimism. It is quite remarkable just how hard the Fed has to paddle just to stay in one place.

This accelerates our time table for a U.S. bond market crisis.



It is almost as if they read EJ's critique of the housing market and decided to stomp on the gas. Have Federal Reserve spies infiltrated Itulip headquarters?

Pity they didn't have time to read the part about crashing the bond market..........

ProdigyofZen
09-13-12, 05:59 PM
Speaking of Bernanke, from ZH.

If there was one absolutely must see moment exposing everything that is broken with the Fed's brand new policy of QE-nfinity, it was this exchange between Reuters' Pedro da Costa (https://twitter.com/pdacosta)and the Chairman. It explains, beyond a reasonable doubt, that the only goal the Fed now has is to reflate the stock market bubble to previously unseen levels, to focus on generating jobs although not for everyone but only for Wall Street, consequences be damned, because by the time the consequences arrive, and they will (just recall that subprime is contained) they will be some other Fed chairman's problem. Bernake's term mercifully runs out in January 2014.
From the official transcript:





QUESTION: My question is -- I want to go back to the transmission mechanism, because speaking to people on the sidelines of the Jackson Hole conference, that seemed to be the concern about the remarks that you made, is that they could clearly see the effect on rates and they could see the effect on the stock market, but they couldn't see how that had helped the economy.

So I think there's a fear that over time this has been a policy that's helping Wall Street, but not doing that much for Main Street. So could you describe in some detail, how does it really different -- differ from trickle-down economics, where you just pump money into the banks and hope that they lend?

BERNANKE: Well, we are -- this is a Main Street policy, because what we're about here is trying to get jobs going. We're trying to create more employment. We're trying to meet our maximum employment mandate, so that's the objective. Our tools involve -- I mean, the tools we have involve affecting financial asset prices, and that's -- those are the tools of monetary policy.

There are a number of different channels -- mortgage rates, I mentioned other interest rates, corporate bond rates, but also the prices of various assets, like, for example, the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they'll feel more -- more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they'll, you know, make a better return on that purchase. So house prices is one vehicle.

Stock prices -- many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend.

One of the main concerns that firms have is there's not enough demand. There are not enough people coming and demanding their products. And if people feel that their financial situation is better because their 401(k) looks better or for whatever reason -- their house is worth more -- they're more willing to go out and spend, and that's going to provide the demand that firms need in order to be willing to hire and to invest.
And there you have it.

askmes
09-13-12, 06:41 PM
As expected ZH is all over this. I find it interesting from the NYFed FAQ (http://www.newyorkfed.org/markets/ambs/ambs_faq.html) on what they will be purchasing:

What types of agency MBS will the Desk purchase?
Agency MBS purchases will likely be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market because these securities have greater liquidity and are closely tied to primary mortgage rates. The Desk may purchase other agency MBS if market conditions warrant. Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for purchase. These eligible assets include, but are not limited to, 30-year and 15-year securities of these issuers. Ineligible assets include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents.


For those knowledgeable of that market, how big is the monthly "Newly Issued MBS of 30-year and 15-year" for residential anymore or is that obvious that housing is just a Red Herring to print?

Another interesting piece from ZH on a Forecast of the Fed's Balance Sheet (http://www.zerohedge.com/news/feds-balance-end-2013-4-trillion) by the end of next year. It should ONLY hit $4 Trillion or an increase of $1.17 Trillion according to their math; not sure that qualifies as QE 3 lite-maybe QE 3 medium. I'll be interested (or speculatively hopeful) to see if the market sells off a tad as it digests this.

And my favorite:
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/09/CTRL%20p.png

vt
09-13-12, 06:45 PM
I had a bad feeling when CNBC started to doubt that the Fed would act in the 9 AM segment. I should have warned EJ and FRED;_FP

goadam1
09-13-12, 07:37 PM
I'm going to put on my tinfoil hat and get out the spitball gun.

A. Recent events in the middle east have forced Obama to soon take military action. A forewarned fed is front running the "downside" of this action.

B. European bankers have warned of a coming bank failure or an inability to save the eu union as is. The fed is front running.

C. A coup has happened or near happening in china. Those who are about to take power are unfriendly to the dollar position and will dump treasury bills regardless of money mad. The fed is trying to stimulate global demand in an attempt for stability. Also creating money at low rates creates liquidity now in the event of a bond crisis.

D. Bernake hates Romney and told him to kiss his t~bills.

sishya
09-13-12, 08:11 PM
ej tweeted qe3 lite...

It appreciate the humility for EJ to accept wrong so soon, in short term prediction about QE3,
But metalman you are wrong - this is not QElite but open ended QE^n.

Jim Rickards has been spot on this even though his dates slightly shifted by 2 months.
FOFOA was also right that US Govt will do QE, so long as Budget deficit > trade deficit. The reasoning being trade deficit is compensated by Foreigners buying UST or USDollar going down, but when budget deficit > trade deficit and growing, it will have to print via QE^n - this is a real bazooka. I fear Gold will run up even more than $3000/oz soon.

Mn_Mark
09-13-12, 08:16 PM
sickening... how these guys sleep at night... ;_PU

The problem is not businessmen and speculators and investors taking advantage of stupid goverment/Fed policies that make vast amounts of money available at below-market rates. The problem is that the public wants a government that promises it will fix everything, that will smooth the business cycle, eliminate unemployment, and guarantee never-ending prosperity. And the poor understanding of economics (and human nature) that is taught to the people who grow up to be Fed chairmen and Senate banking committee chairs, etc, etc. It is ridiculous to expect investors not to act in their own self-interest and take the free money that the government is handing out to them. The problem is not the takers. It's the handers-out and the ignorance of the population that put the handers-out in power. Blaming the businessment and grumbling about "how do they sleep at night" completely misses the point.

goadam1
09-13-12, 08:19 PM
sickening... how these guys sleep at night... ;_PU

I've been thinking about this in terms of how it effects my father and who he is demographically. He is 70. A little older than the retiring boomers. He is retired. He owns a house and a condo in Vegas. They are both underwater. Not too pretty. But lately he has been pulling money out of his thrift savings plan and spending it because it has grown with the market. He was able to get out of the house in a short sale because the market imropved enough and the bank was happy.

So I think there are a lot of people like him who benefit from the fed buying mortgage securities as a money pump into a corpse of an economy.

wayiwalk
09-13-12, 09:59 PM
anecdotal point - this all may be part of an orchestrated effort that has been in play/preparation for a few months or more. Part of the effort by the Fed to get some of the money that is sitting on the sidelines bank into circulation?

My business recently managed to open a line of credit, when we were rejected one year ago, and yet there has been minimal change in our cash position, A/R, and overall outlook (well, maybe in the last few months we've become somewhat more cynical).

The bank rep was clear that the bank was VERY anxious to get some business in, ie, that the bank had $$$$ to loan.

The same broker was also pushing for me to refinance my home mortgage. No surprise - he's a fairly aggressive salesman type....although not all bad.:D

What was most notable was that he actually asked if I wanted the 15 year fixed.

I don't know - I don't think in any past times I've ever financed or refinanced a home mortgage, the banker ever brought up the 15 yr mortgage in the first breath.....

....but certainly would fit in the "new class" of MBS....

metalman
09-13-12, 10:24 PM
I'm going to put on my tinfoil hat and get out the spitball gun.

A. Recent events in the middle east have forced Obama to soon take military action. A forewarned fed is front running the "downside" of this action.

B. European bankers have warned of a coming bank failure or an inability to save the eu union as is. The fed is front running.

C. A coup has happened or near happening in china. Those who are about to take power are unfriendly to the dollar position and will dump treasury bills regardless of money mad. The fed is trying to stimulate global demand in an attempt for stability. Also creating money at low rates creates liquidity now in the event of a bond crisis.

D. Bernake hates Romney and told him to kiss his t~bills.

any precedent for agressive fed action such as this 57 days from a potus election?

thriftyandboringinohio
09-13-12, 10:30 PM
Who gets the $40 B each month by selling MBS to the Fed?
Is the market widely dispersed, or can we expect a few huge concentrated sellers to get the benefit?

gwynedd1
09-13-12, 10:42 PM
http://finance.yahoo.com/echarts?s=VWEHX+Interactive#symbol=vwehx;range=5y; compare=;indicator=volume;charttype=area;crosshair =on;ohlcvalues=0;logscale=off;source=undefined;

Yes I think this will be about played out.
SEC yield 4.83%. I had averaged in at over 7% since the implosion. The sheep kept coming. The up side is increasingly not much.

goadam1
09-13-12, 11:15 PM
Not to my knowledge. But like any criminal investigation we ponder: means,motive and opportunity. What is the essential philosophical dislike of Romney. There have been an unusual number of public comments on the fed but I assume it is red meat rhetoric. Maybe there is a real distrust for Romney after picking ryan. Maybe Bernake truly fears his work and legacy will be ashes if the federal government belt tightens now.

Raz
09-14-12, 12:21 AM
The problem is not businessmen and speculators and investors taking advantage of stupid goverment/Fed policies that make vast amounts of money available at below-market rates. The problem is that the public wants a government that promises it will fix everything, that will smooth the business cycle, eliminate unemployment, and guarantee never-ending prosperity. And the poor understanding of economics (and human nature) that is taught to the people who grow up to be Fed chairmen and Senate banking committee chairs, etc, etc. It is ridiculous to expect investors not to act in their own self-interest and take the free money that the government is handing out to them. The problem is not the takers. It's the handers-out and the ignorance of the population that put the handers-out in power. Blaming the businessment and grumbling about "how do they sleep at night" completely misses the point.

Yes indeed, Pogo Possum had it right: "We have met the enemy, and they is us".

But I'm not sure Metalman meant the money takers as much as the money printers. Bernanke and his toads on the FOMC are despicable.

Slimprofits
09-14-12, 05:07 AM
Prices Surged for Producers in August (http://www.nytimes.com/2012/09/14/business/economy/wholesale-inflation-rose-1-7-in-august.html?_r=0)

The increase in prices received by farms, factories and refineries overshot economists’ expectations for a 1.1 percent advance. Energy prices, which had their strongest surge in three years, accounted for more than 80 percent of the rise in wholesale inflation.


http://graphics8.nytimes.com/images/2012/09/14/business/20120914_PPI_graphics/20120914_PPI_graphics-articleInline.jpg

Chris Coles
09-14-12, 06:21 AM
My take on this is slightly different to EJ in that I was most impressed with the tone of voice we heard, (late last night as a short item at the end of BBC TV's Newsnight), when Bernanke's voice sounded as though he was in deep fear.. to me it sounded like a frightened man talking. So my question is; is this new, (sort of), QE instead action taken out of fear of something we cannot easily see?

EJ opens with this statement: "No Fed action before the election unless there is an acute crisis."

I return to something that I placed on The Times, London web site a few weeks ago regarding that Dan Ammerman had posted his contention that the unemployment figures showing 8.3% unemployment were fiction. http://danielamerman.com/resources/SumDepress.html At the time, no one seemed to react; but over the last few days I keep hearing people say something to the effect that the figure for US unemployment is roughly 8% but that "they may be higher".

I also contended here on iTulip that the Fed seemed to be making economic decisions on figures that were wrong and in which case, they were being misled into making wrong policy decisions.

Is it at all possible that at last the Fed has wakened to the prospect of true figures for overall unemployment reaching 20% with near 50% of the 16 - 19 age group?

That the real unemployment figures are the "acute crisis"?

To me Bernanke sounded frightened. So what is the acute crisis? other than unemployment at depression levels about to be openly announced; perhaps before the election as an election ploy?

Bundi
09-14-12, 07:46 AM
EJ, I am reminded here of a quote from Warren Buffett.

"You can only be as smart as your dumbest competitor"

He was talking about how hard it is to compete with a business competitor who is willing to behave irrationally (lose money) but I think the same thing must apply in Fed Kremlinology when trying to predict behavior.

A very smart analyst who is usually right can make the mistake of thinking the analysand is as smart and therefore as predictable as the analyst.....

This looks like reasonably big QE3 to me at first blush. I was about 70/30 biased in favor of some QE3 and positioned accordingly, but this seems bigger than I would have bargained for.

Not to worry, Congress is very smart and oh so chaste what with the Tea Party influence and all.

goadam1
09-14-12, 08:18 AM
My take on this is slightly different to EJ in that I was most impressed with the tone of voice we heard, (late last night as a short item at the end of BBC TV's Newsnight), when Bernanke's voice sounded as though he was in deep fear.. to me it sounded like a frightened man talking. So my question is; is this new, (sort of), QE instead action taken out of fear of something we cannot easily see?

EJ opens with this statement: "No Fed action before the election unless there is an acute crisis."

I return to something that I placed on The Times, London web site a few weeks ago regarding that Dan Ammerman had posted his contention that the unemployment figures showing 8.3% unemployment were fiction. http://danielamerman.com/resources/SumDepress.html At the time, no one seemed to react; but over the last few days I keep hearing people say something to the effect that the figure for US unemployment is roughly 8% but that "they may be higher".

I also contended here on iTulip that the Fed seemed to be making economic decisions on figures that were wrong and in which case, they were being misled into making wrong policy decisions.

Is it at all possible that at last the Fed has wakened to the prospect of true figures for overall unemployment reaching 20% with near 50% of the 16 - 19 age group?

That the real unemployment figures are the "acute crisis"?

To me Bernanke sounded frightened. So what is the acute crisis? other than unemployment at depression levels about to be openly announced; perhaps before the election as an election ploy?


I agree. There is something we aren't aware of or it's about Romney/ryan.

metalman
09-14-12, 08:53 AM
The problem is not businessmen and speculators and investors taking advantage of stupid goverment/Fed policies that make vast amounts of money available at below-market rates. The problem is that the public wants a government that promises it will fix everything, that will smooth the business cycle, eliminate unemployment, and guarantee never-ending prosperity. And the poor understanding of economics (and human nature) that is taught to the people who grow up to be Fed chairmen and Senate banking committee chairs, etc, etc. It is ridiculous to expect investors not to act in their own self-interest and take the free money that the government is handing out to them. The problem is not the takers. It's the handers-out and the ignorance of the population that put the handers-out in power. Blaming the businessment and grumbling about "how do they sleep at night" completely misses the point.

not businessmen... the friggin fed. 1st the fed creates a housing bubble... lets one pack of fire boyz sell homes to poor slobs who can't afford them... convinces them they can afford them... encourages them to lie on mortgage applications, etc, etc... then bubble crashes... & per ej crashing... crashing... crashing... then the fed hands another pack of fire boyz... er, 'investors'... $$$ to buy the depressed properties off the poor slobs who lost them in foreclosure, etc... te whole mess caused by the fed's own policies!!!



'how does he sleep at night... this guy... ;_PUhttp://www.revolutionbox.org/images/smilies/bernanke_icon.png ))O

littleshark
09-14-12, 08:57 AM
To me Bernanke sounded frightened. So what is the acute crisis? other than unemployment at depression levels about to be openly announced; perhaps before the election as an election ploy?

I think it's Europe. Europe is a disaster. The Level 2 balances and the bad debts and the fact that any eurozone country's debt was considered reserves. The are also clueless over there as to how to fix it. I think the US and China, as bad a things are, feel like we have to help and the only way they know to help is to print.

I actually thought the US economy has been getting a little better, and I must say I'm impressed by the resolve that the CBs globally have shown in working together. I would have thought there would be trade and currency wars going on by now, but that could be coming if things don't get better, it's perkolating.

I think Bernanke and all his cronies in the CBs globally are so scared right now.......

bill
09-14-12, 09:19 AM
fire boyz... er, 'investors'... $$$ to buy the depressed properties off the poor slobs who lost them in foreclosure, etc... te whole mess caused by the fed's own policies!!!



....and rent back to poor slobs
http://www.businessweek.com/news/2012-09-10/fannie-mae-sale-of-florida-foreclosures-gets-96-percent-of-value


9-10-2012
Fannie Mae’s first auction of foreclosed homes to be managed as rentals sold for $78.1 million, or 96 percent of the properties’ estimated value, the Federal Housing Finance Agency said.
The purchase, of 699 homes in Florida, was the first to be completed in Fannie Mae’s auction of almost 2,500 repossessed properties in six states. The buyer was San Diego, California-based Pacifica Companies LLC, the FHFA said in a statement today. The homes had a total value of $81.5 million, including joint-venture financing from Fannie Mae, according to a transaction summary.
Investors are pouring money into single-family homes, seeking to capitalize on rising demand for rentals and real estate prices that have more than 30 percent from their July 2006 peak. Firms including Blackstone Group LP, Colony Capital LLC and Oaktree Capital Group LLC plan to spend about $8 billion buying foreclosed properties to rent, according to company statements and interviews.
“Seeing it traded at that high value means we’re probably going to see more pool sales coming,” Jim Warren, senior vice president of Tenant Access, a single-family rental management company based in Austin, Texas, said in a telephone interview.“Institutional money can aggregate a lot quicker. It’s easier to evaluate an entire pool than one property at a time.”
Deepak Israni, president of Pacifica, a property investment and management company that operates hotels and multifamily housing, didn’t immediately return a call seeking comment.
Winning Bidders

Fannie Mae, the government-sponsored mortgage company that owned 109,000 foreclosed properties as of June 30, offered the homes for auction in February. The other properties are in Georgia, Illinois, Arizona, California and Nevada.
The FHFA will announce the winning bidders of homes in other areas in the coming weeks after the transactions are completed, according to the statement. The 541 properties in Atlanta weren’t sold, the Washington-based agency said.
Colony, a Santa Monica, California-based investment fund headed by Tom Barrack, and Cogsville Group LLC, a New York-based company led by Don Cogsville, were the top bidders for other Fannie Mae portfolios, four people with knowledge of the transactions said in July.
Pacifica, which will manage the Florida properties, paid $12.3 million for its share in a joint-venture with Fannie Mae, which will get 90 percent of cash flow until it receives $49.3 million, according to the transaction summary. After that, Fannie Mae’s share will drop to 50 percent of cash flow. Pacifica will also receive 20 percent of gross rental income as a management fee. The deal restricts the value of the properties that can be sold to third parties for three years.
“The transaction is designed to promote home price stability, improve quality of housing stock and enhance rental inventory of markets by utilizing a rent-and-hold strategy,”according to the summary.

http://online.wsj.com/article/SB10000872396390443524904577649803756462974.html

9-13-2012 The central bank likely will be buying half of the $140 billion of the mortgage-backed debt that Fannie Mae, Freddie Mac and Ginnie Mae sell each month, said analysts at Nomura Securities. "There is no supply in this market," said Sreeni Prabhu, chief investment officer at Angel Oak Capital.

vinoveri
09-14-12, 09:21 AM
The problem is not businessmen and speculators and investors taking advantage of stupid goverment/Fed policies that make vast amounts of money available at below-market rates. The problem is that the public wants a government that promises it will fix everything, that will smooth the business cycle, eliminate unemployment, and guarantee never-ending prosperity. And the poor understanding of economics (and human nature) that is taught to the people who grow up to be Fed chairmen and Senate banking committee chairs, etc, etc. It is ridiculous to expect investors not to act in their own self-interest and take the free money that the government is handing out to them. The problem is not the takers. It's the handers-out and the ignorance of the population that put the handers-out in power. Blaming the businessment and grumbling about "how do they sleep at night" completely misses the point.

Agreed (with underlineded portion) however, keep in mind that that Fed is not acting in isolation; it is part of a larger system, e.g., banking cartel, which is part of a larger system including the Fed gov - lobbyist - and very interested business(wo)men.
Your portrayal of the businessman standing around being showered with unsolicited money and putting it to work may be applicable to those further downline the money-chain; however, the policies of the Fed and the gov are heavily influences if not controlled by very interested businessmen who seek and obtain an unfair advantage (broker-dealers in the case of the Fed).

Your point about the system and our collective responsibility for getting the government we deserve is well taken.

As an aside, how we can't see the insanity and blatant injustice of a system wherein, to give a simple and anecodatal example:
Fed anounces QE3 - all risk assets spike including commodities - do equities going up hurt me and every other average joe, no, but when Oil spikes, which means gasoline will follow, and other oil derivatives in time, it is a tax and theft.
Why should everyone have to pay nickel or a dime or more per gallon of gas next month b/c some Fed economist in DC arbitrarily says he going to create more money; short answer is it does not, but does benefit broker-dealers and others who have direct or near-direct access to that "free" money. This is a simple but not hard to understand example of transfer of wealth.

Oh I guess I could buy Goldman, Exxon, and ADM stock and make up the difference ... if I had the money :(

jpetr48
09-14-12, 09:27 AM
Though i did not listen to Bernanke interview, i visit FT web site and listened to one of their video interview commentaries. What was mentioned is Bernanke's mention of Michael Woodford book on Interest and Prices by Bernanke. Also mentioned was the shift between concern from price stability to unemployment and how Bernanke is attempting to target GDP growth thru further monetary easing. This all ties to what Eric has been discussing on Fed choice between unemployment and inflation and closing the output gap before the next downturn.

Do i believe all of a sudden Bernanke had an epiphany that the real unemployment rate is higher than 8.1%? No. I do think he understands the impact of permanent unemployment staying above 8% for awhile- way off from their target 5-6%. He also gets that we are one geopolitical event away from a shock to the markets. Could this be the hail mary pass before the end of the game? Time will tell.

pianodoctor
09-14-12, 09:43 AM
I wouldn't put weight on Bernanke sounding frightened, because that is how he usually sounds. He always gives the impression appearance of chronic stage fright, though I suppose it's possible it is a medical condition.

metalman
09-14-12, 10:01 AM
I wouldn't put weight on Bernanke sounding frightened, because that is how he usually sounds. He always gives the impression appearance of chronic stage fright, though I suppose it's possible it is a medical condition.

always with that quavering voice... can't wait to get off that stage...

shiny!
09-14-12, 10:18 AM
A simple question from someone who can't do math:

If the Fed is determined to print, why doesn't it simply give the money directly to The People? Or to small businesses? That would directly stimulate spending and employment, I would think. Not that I advocate this, but at least we'd get some use out of the money we'll all be on the hook for.

Slimprofits
09-14-12, 10:26 AM
A simple question from someone who can't do math:

If the Fed is determined to print, why doesn't it simply give the money directly to The People? Or to small businesses? That would directly stimulate spending and employment, I would think. Not that I advocate this, but at least we'd get some use out of the money we'll all be on the hook for.

How could the Fed do that? That sounds like something the FedGov would have to do.

aaron
09-14-12, 11:02 AM
A simple question from someone who can't do math:

If the Fed is determined to print, why doesn't it simply give the money directly to The People? Or to small businesses? That would directly stimulate spending and employment, I would think. Not that I advocate this, but at least we'd get some use out of the money we'll all be on the hook for.

I think the best way would be for the FED to buy (in conjunction with the treasury/Obama admin) all student loan debt and tear it up. That would be a great stimulus to the economy; about a trillion dollars. It would be fair to the students... they did not build this great FIRE economy that made college so expensive.

shiny!
09-14-12, 11:16 AM
I think the best way would be for the FED to buy (in conjunction with the treasury/Obama admin) all student loan debt and tear it up. That would be a great stimulus to the economy; about a trillion dollars. It would be fair to the students... they did not build this great FIRE economy that made college so expensive.

Brilliant.

gwynedd1
09-14-12, 11:20 AM
A simple question from someone who can't do math:

If the Fed is determined to print, why doesn't it simply give the money directly to The People? Or to small businesses? That would directly stimulate spending and employment, I would think. Not that I advocate this, but at least we'd get some use out of the money we'll all be on the hook for.

Most of the time only those not educated in economics can see these simple truths. It would fall under fiscal policy however. Did they ever try using this decision maker army? This is exactly what they should do but it should also be in conjunction with stopping the bad things we do. We should tax shift on petroleum to discourage its use for example. In other words, give people credit but force it away from conspicuous consumption.

jk
09-14-12, 11:20 AM
When central banks on net -- some are buying while others are selling -- increase gold reserves the number of units needed to buy an ounce of gold increases for all currencies and the price of gold rises in all currencies. As you’d expect, since the purchase results in a change in the gold supply the price remains at the new higher level, with some price changes at the margin, on an all-currencies basis until either the next net positive gold purchase rumor causes a further rise or the next net negative central bank gold transactions occur -- not any time soon. Since 2009 when central banks became net buyers, the gold price has made many such step function jumps in all currencies. A Fed policy hope driven price spike, on the other hand, doesn’t tend to hold.
but incr dollar supply – not just reduced gold supply- works too to raise gold prices





the Fed has no intention of unilateral action unless there is a major crisis to provide political cover, not so close to elections, and not with so little dry powder left to cope with a new crisis.

the fed STILL HAS DRY POWDER.

In the famous “making sure ‘it’ doesn’t happen here” paper, bernanke lists the following options:
1. Buy treasury paper [done],
2. Buy agency paper [did some, now doing more],
3. Lend indirectly through the banks to support purchases of “a wide range of private assets,“ “including , among others, corporate bonds, commercial paper, bank loans and mortgages deemed eligible as collateral.”
4. “Buy foreign government debt” [! Might help out draghi here!] he notes that this would in effect be direct intervention in the exchange rate of the dollar, i.e. “the sure way.”





And although there were certain problems in transmission—for example, the housing market has not been as responsive as it’s been in some times in the past—we do think that they were both effective in providing support for the economy, and in particular, so called QE2 ended what looked to be an incipient deflation problem when we first introduced it.
housing is the prime DIRECT transmission mechanism to the real economy, while financial assets are indirect. This is because interest rates directly affect affordability of mortgages, and so will impact house prices, housing turnover and home construction. Also note this is targeted at tangible, ans somewhat less at financial, assets. Also buying mbs is less regressive if it stimulates housing. Poz posted a quote from bernanke’s press conference in which he speaks of housing prices as part of the transmission mechanism.





We prefer the index built of actual home sale transactions. It's more reliable even if it doesn't supply fodder for the endless debate about the bottom of the housing market. As you can see there are no bounces in the transactions data but a continuous decline.
if the current market is only starter homes, the actual sales prices will decline because of changes in the mix of transactions. That tells us SOMETHING about what’s going on in the housing market. Case-shiller, iirc, is based on “same store” sales.





QE can reflate financial assets but not home prices. For that we need declining unemployment and rising incomes first and a functioning mortgage finance market second.
by lowering mortgage rates still further, the fed does what it can to support home prices. However, because of tight credit conditions, home “owners” trapped by underwater mortgages, large shadow inventory of homes yet-to-be foreclosed, and an uncertain job market, we can’t expect the housing market to pick up. As I’ve posted elsewhere, the main beneficiaries will be well-off home owners who can benefit from another round of re-fi’s. this is probably a somewhat less regressive wealth effect than pumping up the stock market.




Are Treasuries a bubble? I think we need to distinguish a greed bubble versus a fear bubble. Treasuries in part reflect artificial demand from the fed, but also the fear trade while the dollar is still seen as a safe haven. Gold has yet to experience its real greed bubble, but that will be followed by another “stage” to the rocket, a fear bubble.


Bond panic? Why can’t the fed tiptoe out of very low administered rates by continuing to administer them, but pushing them gradually higher, as they did after wwii? I suppose they are constrained by the dollar. In the scenario in which the market would price rates much higher than the fed allows, the dollar will be dropping sharply. Conclusion: you can trade off a bond panic for a dollar panic.




Coordinated easing? China and draghi’s printing promise is the current coordinated set.


Most important, again: The fed is NOT “out of bullets.”

ps. under current conditions, i think printing is a good idea, relative to the alternative. i blame the fed for its part in creating the current conditions, however.

terrygor
09-14-12, 12:14 PM
It not only appears to be QE, but QE with Bernanke's finger held down on the money printing button as he's warned he'll keep printing till unemployment improves significantly. Draghi also went " unlimited " and I suspect the Fed and ECB co-ordinated their strategies.

vinoveri
09-14-12, 03:02 PM
....and rent back to poor slobs
http://www.businessweek.com/news/2012-09-10/fannie-mae-sale-of-florida-foreclosures-gets-96-percent-of-value



http://online.wsj.com/article/SB10000872396390443524904577649803756462974.html


Check out this from Marc Faber where he points out the exact same thing (skip to 7:10 to hear this specifically)

Southernguy
09-14-12, 03:04 PM
How strange: QE on course but interest on 10 year T´s up a lot. I don´t understand.

ProdigyofZen
09-14-12, 03:07 PM
EJ writes in:

We haven't quite decided yet. We are tending toward the assessment that I was wrong.

The stock market and global currency markets got exactly what they expected but the gold market got more.




http://www.itulip.com/images2/Gold_USD_SP500Sept091312.png



If we can call this QE3 then the post-mortem on the prediction will be enlightening. I'll defer to the opinion of our members.

Again it appears I have erred on the side of optimism. It is quite remarkable just how hard the Fed has to paddle just to stay in one place.

This accelerates our time table for a U.S. bond market crisis.


Inflation expectations suggest 5% inflation is in the cards.....

http://www.zerohedge.com/news/inflation-expectations-suggest-5-inflation-cards

How are they going to raise rates if inflation rises to 5% within the next 3 to 6 months?

AlanMB
09-14-12, 03:25 PM
My opinion is that 10 year UST yields are up because the bond market is pricing in higher NGDP growth. This is one of the outcomes Bernanke hoped for with yesterday's announcement, and he has achieved it.

gvozden
09-14-12, 03:42 PM
A simple question from someone who can't do math:

If the Fed is determined to print, why doesn't it simply give the money directly to The People? Or to small businesses? That would directly stimulate spending and employment, I would think. Not that I advocate this, but at least we'd get some use out of the money we'll all be on the hook for.


The Fed said it will buy $40 billion of mortgages per month in an attempt to desperately foster a recovery in the real estate market. The purchases will be open-ended, meaning that they will continue until the Fed is satisfied that economic conditions, primarily in unemployment, improve.
Of course, this will also fail if they are buying mortgages from the bankers. Bankers will use this as a means to dump what they have been trying to get rid of all along, while it is not necessarily guaranteed to stimulate employment or housing prices. FED just created a dumping ground and golden parachutes for the bankers.

FED will never do anything to help 99% they are only concerned about 1%. It would be interesting to see when that will change if ever. As EJ has noted many times the only people that benefit from current policies are the connected ones.

Chris Coles
09-14-12, 03:51 PM
The Fed said it will buy $40 billion of mortgages per month in an attempt to desperately foster a recovery in the real estate market. The purchases will be open-ended, meaning that they will continue until the Fed is satisfied that economic conditions, primarily in unemployment, improve.


In the recent past we were told that China was a significant purchaser of Fanny and Freddie MBS paper; is it at all possible that China has made this market uncertain in a way that might spook the Fed?

Chris Coles
09-14-12, 04:00 PM
A simple question from someone who can't do math:

If the Fed is determined to print, why doesn't it simply give the money directly to The People? Or to small businesses? That would directly stimulate spending and employment, I would think. Not that I advocate this, but at least we'd get some use out of the money we'll all be on the hook for.

There is always the proposal I keep on plugging; to take $2.2 Trillion of dodgy paper, (originally proposed as £450 billion to create 6 million new jobs here in the UK), convert the dodgy paper into vanishing bonds and then use them as free enterprise equity capital to directly create 30 million new jobs right down at the grass roots. The money thus gets removed from the wrong end of the FIRE systems bank balances and is re-deposited back into the Main Street banks as new business banking deposits. http://www.chriscoles.com/page4a.html

FRED
09-14-12, 04:02 PM
How strange: QE on course but interest on 10 year T´s up a lot. I don´t understand.

EJ writes in:


It was QE technically but not the QE the markets were expecting.

This QE3 forecast (http://blogs.barrons.com/incomeinvesting/2012/09/12/rbs-treasury-selloff-less-likely-post-qe3-than-post-qe2qe/?mod=google_news_blog) was typical: "RBS looks for the Fed to announce open-ended asset buys, but to commit to buying at least $600 billion in Treasurys and MBS between October and March, and to announce it will keep buying both beyond March."

Instead it was limited to MBS only and was only $230 billion over six months rather than $600 billion with no additional Treasury bond purchases.

I'm calling it QE Lite.

By failing to commit to the full QE3 that markets expected, bonds sold off.




http://www.itulip.com/images2/QELiteBondswtmk.png



That did not happen after QE1 and QE2.

QE Lite was aimed at the housing market and at currency depreciation.

QE Lite succeeded in weakening the USD. That's why gold popped.




http://www.itulip.com/images2/GoldUSD091112-091412.png



A bigger bone for Bill Gross than I expected, but not full-on QE, either.

switters
09-14-12, 04:40 PM
Did I miss Part 2, or has it not been published yet? Maybe EJ is updating it based on Bernanke's comments yesterday?

jiimbergin
09-14-12, 04:46 PM
Did I miss Part 2, or has it not been published yet? Maybe EJ is updating it based on Bernanke's comments yesterday?
read the end of part 1 and you will see that Part 2 will be delayed.

seobook
09-14-12, 08:32 PM
The problem is not businessmen and speculators and investors taking advantage of stupid goverment/Fed policies that make vast amounts of money available at below-market rates. The problem is that the public wants a government that promises it will fix everything, that will smooth the business cycle, eliminate unemployment, and guarantee never-ending prosperity. And the poor understanding of economics (and human nature) that is taught to the people who grow up to be Fed chairmen and Senate banking committee chairs, etc, etc. It is ridiculous to expect investors not to act in their own self-interest and take the free money that the government is handing out to them. The problem is not the takers. It's the handers-out and the ignorance of the population that put the handers-out in power. Blaming the businessment and grumbling about "how do they sleep at night" completely misses the point.
If goldman (goldman) makes campaign contributions to president Obama & he make Hank Paulson (goldman) treasury secretary, then the treasury secretary (goldman) decides to bail out goldman (goldman) and those who wrote insurance products on fraudulent goldman contracts like AIG (flowing again to goldman) and give advanced insider info to hedge funds to trade on (goldman), one can hardly find fault with goldman (goldman).

Then again, maybe not.

Or, put another way, ...

http://2.polizeros.com/wp-content/uploads/2009/08/socialism-rich.JPG

It is intellectually dishonest to try to separate blame between government and the companies that leverage government to scam society when they are so intertwined that they function as a single entity.

The person who says "blame government & ignore the private parties" miss how the money from those private parties (and individuals from those private parties) undermine any semblance of democracy or rule of law when they create a system of justice that is "just us."

Why does the public want the government to fix everything? In part because the government has raped many of them & made them dependent on government. It is easy to hold oneself to high ideals when one is doing well, but most people who need to steal a loaf of bread to feed their children probably will. Individually most everyone on here is resilient enough to do well short of a whole collapse of society. But people here are on average gifted in numerous ways. Broader society is less well off: some people have pre-existing health issues, some married people who came with baggage (student loans or other such issues), some are trying to help a lot of extended family (an internal moral obligation to them ... when I was on a submarine one of my roommates would send money home to his parents than he kept to live on), some are not as smart (half of people have IQs that are below the median), and people are constantly fed propaganda that is aligned with the interest of grifters undermining society for self-gain.

The blame is mutual between government and FIRE. It isn't one or the other.

jtabeb
09-14-12, 08:48 PM
Inflation expectations suggest 5% inflation is in the cards.....

http://www.zerohedge.com/news/inflation-expectations-suggest-5-inflation-cards

How are they going to raise rates if inflation rises to 5% within the next 3 to 6 months?


Very Simple Grasshopper, THEY WON'T. They want a positive inflation rate (sorry should say a very negative real rate) and they want everyone to know about it. This is the mother of all asset price pumps (till we hit the wall again when gas hits$5-6 per gallon), then we get another ka. But, I think that after Obama gets re-elected, the bond market will not flinch. Over $1 T in defense cuts next year. The biggest Austerity in the US will be in the defense industry. Luckily, I think I'm in the only growth Industry in DOD right now. Just enough salve to goose the election, and then REAL pain next year as QE3 will not offset defense cuts. But till those cuts are announced IN DETAIL, yeah we got a rally in all risk assets, till may next year.

If I'm wrong and Romney wins, I think you are going to see a sell off on the risk side after the honeymoon rally, he's actively targeting Bernanke and pushing really hard for domestic austerity, (in all things OTHER than defense). Bond market will like that but risk assets won't. If Romeny succeeds in pushing through his domestic austerity agenda sans defense, dollar rallies strong, strong deflationary trend, dollar gets way overvalued and real economy grinds to a halt. And then we get a real no kidding big ka followed by big almost immediate poom. (Aka Argentina)


Assuming, of course, no IRAN strike, no unexpected crisis, and Draghi stays on the path of QE European style. As long as europe QEs at a slower rate than the fed, then we hit the wall first. Otherwise they do. But bottom line there is a recession coming hard core when gas breaks the $5 gallon thershold.

Lots of variables and ways for this to play out, my guess is May June next year if obama is re-elected, or if Romney wins (based on the end of the rally and gas crossing a threshold price)
Outcome seems the same, the only diff seems to be who will be left holding the bag in the White house when bad things happen.

Maybe I'm wrong and Romney is pandering to fiscal conservatives, but if he practices what he preaches, we are likely to hit the Big One (the one the bond market takes notice of) sooner than the Obama Scenario.

Obama = Gas Price driven demand destruction recession (inflationary)
Romney = Austerity led Super KA (followed immediately by Market driven POOM)

I actually think that the Romney path gets us on the Argentina Trajectory Faster than the Obama path.



Should have some clarity come November.

BadJuju
09-14-12, 09:24 PM
Hi, jtabeb!! Long time no see.

shiny!
09-14-12, 09:29 PM
Yeah, HI, jtabeb! Long time no hear. Glad you're back.

thriftyandboringinohio
09-14-12, 09:32 PM
Great to see you around again, jtabeb.
Over on another thread we're talking about buying and selling physical gold, you should give your take on that!

astonas
09-14-12, 11:23 PM
If goldman (goldman) makes campaign contributions to president Obama & he make Hank Paulson (goldman) treasury secretary, then the treasury secretary (goldman) decides to bail out goldman (goldman) and those who wrote insurance products on fraudulent goldman contracts like AIG (flowing again to goldman) and give advanced insider info to hedge funds to trade on (goldman), one can hardly find fault with goldman (goldman).

Then again, maybe not.

Or, put another way, ...

http://2.polizeros.com/wp-content/uploads/2009/08/socialism-rich.JPG

It is intellectually dishonest to try to separate blame between government and the companies that leverage government to scam society when they are so intertwined that they function as a single entity.

The person who says "blame government & ignore the private parties" miss how the money from those private parties (and individuals from those private parties) undermine any semblance of democracy or rule of law when they create a system of justice that is "just us."

Why does the public want the government to fix everything? In part because the government has raped many of them & made them dependent on government. It is easy to hold oneself to high ideals when one is doing well, but most people who need to steal a loaf of bread to feed their children probably will. Individually most everyone on here is resilient enough to do well short of a whole collapse of society. But some people have pre-existing health issues, some married people who came with baggage, some are trying to help a lot of extended family, some are not as smart, and people are constantly fed propaganda that is aligned with the interest of grifters undermining society for self-gain.

The blame is mutual. It isn't one or the other.

+1. And very well put, I should add.

jtabeb
09-14-12, 11:26 PM
Thanks all, appreciate the warm comments back. Took EJ's advice and tried to take the whole summer off from everything except for family, friends, and of course work.

Have to say it was great advice. Life's great when you put your head in the sand for a while (esp on a nice long vacation with the fam.). Unfortunately, reality seems to be the ever successful intruder on ignorant bliss. ;)

Well, it was fun while it lasted. But Big Ben seems to have brought reality crashing back down onto our collective heads.

Heads, Bernanke is successful in producing and inflation spike recession driven by commodity, food and energy prices.
Tails, We get a much sharper recession (aka Greece) via retrenchment driven by A new president's policy of Austerity for the Masses.

Pick your poison, but don't worry about which choice you make. Both are equally fatal even thought they accomplish their task via completely different pathways.

The really sad part is, that a biological organism is constrained by metabolic processes. Our Economy is not. BUT policy makers seem to to act as though it were (due to corruption, willful or genuine ignorance, incompetence, or some combination thereof). I fear that the forcing function necessary to propel the political will to action necessary to fix our problems will not develop enough potency to allow us to act in time before market driven forces impose change upon us.

I liked the republican health care reforms offered in place of obama care (common sense, trusted business principles), and find myself among the neoconservative hawks when it comes to active involvement (when possible) in efforts to oust Mid-East Dictators. But I find the platform lacking entirely on social issues of personal freedom (but you expected that from a little "l" libertarian leaning individual). I find the policy of privatized gains and socialized losses (Fed largess for the oligarchic financial sector, austerity for everyone else) with the attendant corruption of the political process antithetical to the principles of a free republic. (It must be nice to have the ability to use taxpayer derived bailout funds to lobby politicians to enact policies in YOUR own best interest which are in direct conflict with general welfare of 99% of society.)

I find the entire disgusting mess abhorrent.

In my admittedly simpleton view, capitalism should reward success and punish failure. But in our present crony-capitalist system, that existential pillar of capitalism is essentially removed and replaced instead by perverse inversion of that esteemed pillar.

(Of course, I also think that citizenship [and the vote] should be tied to service not birth right. Which is why I tell all my kids to "do what dad did" and fund their education through service to this still great nation. To me it is simply the difference between unearned entitlement vs. reward for personal sacrifice benefiting the entire social welfare of the nation. I believe that the former destroys the fabric of society, while the latter renews and strengthens the whole.) And, yes I am a fan of the book starship troopers, sue me.

Our society should be organized to maximize the productive talents of each member of society, and every individual is responsible in turn, for the contributing to the success of society. That should be the social contract. ( I really love the facebook founder that renounced his citizenship to avoid tax liability on his capital gains even though it was THIS society that enabled him to reach such levels of success in the first place.

We all play (weather we like it or not) in the same football stadium. Now ideally, government should build the stadium, maintain the stadium, ensure the up-keep of the stadium, be responsible for the just enforcement the rules of the game governing the players on the field, and ensure that the stadium is kept safe (and provide for all the necessary support structures to accomplish these tasks). I also have to agree with Dr. Hudson that the government CAN set the objective of the game, and also the rules. The desirability and necessity of that last characteristic of government FADES, as the preceding objectives are achieved. But It MUST necessarily increase when we are diverging rather than converging on these common objectives. Neither party seems to be willing to put the politics of ideology aside for the sake of persuing the greater societal good. (With good reason, of course. They would loose). It is truly terrible to realize that we are in a negative feedback loop, that will run to it's disasterous logical conclusion if nothing is done to break the causal chain AND THAT SIMULTANEOUSLY, the present structure of the societal reality that we find ourselves in, is behaving as the forcing function to impede this essential change.

(And yeah, I'm talking about all of it -resource constraints, crony capitalist wealth polarization with attendant capture of the political and media process, etc. You know the descent from first world to third world society... all that stuff we know and talk about here).

Hmmm. After a rant like that I think it's time for me to take another break. See you all in another 3 months this xmas after the election. Talk to you then.

V/R

JT

astonas
09-15-12, 12:23 AM
Welcome back, jtabeb. And thanks for chiming in with such a great summary!

Chris Coles
09-15-12, 02:25 AM
Welcome back, jtabeb. And thanks for chiming in with such a great summary!

+1. Very well put and much appreciated.

jiimbergin
09-15-12, 06:46 AM
Hi, jtabeb!! Long time no see.

+1

porter
09-15-12, 08:23 AM
EJ writes in:



QE Lite was aimed at the housing market and at currency depreciation.




How do they expect this will this help the housing market? Or even unemployment?

jneal3
09-15-12, 08:53 AM
If goldman (goldman) makes campaign contributions to president Obama & he make Hank Paulson (goldman) treasury secretary, then the treasury secretary (goldman) decides to bail out goldman (goldman) and those who wrote insurance products on fraudulent goldman contracts like AIG (flowing again to goldman) and give advanced insider info to hedge funds to trade on (goldman), one can hardly find fault with goldman (goldman).

Then again, maybe not.

Or, put another way, ...

http://2.polizeros.com/wp-content/uploads/2009/08/socialism-rich.JPG

It is intellectually dishonest to try to separate blame between government and the companies that leverage government to scam society when they are so intertwined that they function as a single entity.

The person who says "blame government & ignore the private parties" miss how the money from those private parties (and individuals from those private parties) undermine any semblance of democracy or rule of law when they create a system of justice that is "just us."

Why does the public want the government to fix everything? In part because the government has raped many of them & made them dependent on government. It is easy to hold oneself to high ideals when one is doing well, but most people who need to steal a loaf of bread to feed their children probably will. Individually most everyone on here is resilient enough to do well short of a whole collapse of society. But people here are on average gifted in numerous ways. Broader society is less well off: some people have pre-existing health issues, some married people who came with baggage (student loans or other such issues), some are trying to help a lot of extended family (an internal moral obligation to them ... when I was on a submarine one of my roommates would send money home to his parents than he kept to live on), some are not as smart (half of people have IQs that are below the median), and people are constantly fed propaganda that is aligned with the interest of grifters undermining society for self-gain.

The blame is mutual between government and FIRE. It isn't one or the other.

High-bandwidth. +n

Mn_Mark
09-15-12, 09:25 AM
If goldman (goldman) makes campaign contributions to president Obama & he make Hank Paulson (goldman) treasury secretary, then the treasury secretary (goldman) decides to bail out goldman (goldman) and those who wrote insurance products on fraudulent goldman contracts like AIG (flowing again to goldman) and give advanced insider info to hedge funds to trade on (goldman), one can hardly find fault with goldman (goldman).



Then again, maybe not.

Or, put another way, ...

http://2.polizeros.com/wp-content/uploads/2009/08/socialism-rich.JPG

It is intellectually dishonest to try to separate blame between government and the companies that leverage government to scam society when they are so intertwined that they function as a single entity.

The person who says "blame government & ignore the private parties" miss how the money from those private parties (and individuals from those private parties) undermine any semblance of democracy or rule of law when they create a system of justice that is "just us."

Why does the public want the government to fix everything? In part because the government has raped many of them & made them dependent on government. It is easy to hold oneself to high ideals when one is doing well, but most people who need to steal a loaf of bread to feed their children probably will. Individually most everyone on here is resilient enough to do well short of a whole collapse of society. But people here are on average gifted in numerous ways. Broader society is less well off: some people have pre-existing health issues, some married people who came with baggage (student loans or other such issues), some are trying to help a lot of extended family (an internal moral obligation to them ... when I was on a submarine one of my roommates would send money home to his parents than he kept to live on), some are not as smart (half of people have IQs that are below the median), and people are constantly fed propaganda that is aligned with the interest of grifters undermining society for self-gain.

The blame is mutual between government and FIRE. It isn't one or the other.

There is no doubt that powerful, connected people in business use their connections with their revolving-door friends in government to get bailouts and other perks that the average slob has no chance at.

So, where does the blame lie for this? How was it possible for this to occur? Is it the fault of the powerful, connected people who use their connections to protect themselves from loss? Everyone wants to protect themselves from loss. If there is a "legal" way to do that - to get your friends in government to bail you out - then I think it is human nature for people to take advantage of that. Would it be nicer if those folks just went bankrupt and didn't take advantage of their connections and power to save themselves? I suppose, but I don't think that's how people actually behave.

My diagnosis of the problem is that the federal government has grown in power to the point where it was possible for a Treasury Secretary and a Fed Chairman and some congressmen to have the ability to use the people's money to bail their powerful friends out. I don't think that would have been possible before so much power had been invested in the Federal government and the Federal Reserve (created by the Federal government).

Maybe the shortest way of making my point would be this: a government that is large and powerful enough to fix all of society's problems is a government large enough to be coopted by powerful people and used for whatever purposes they want, including bailing themselves out.

Idealists think they can grow the government in power and size in order to do all the "good" things they want it to do, to work to perfect society through control by government via laws, regulations, taxes, programs, agencies, commissions, white papers, blue ribbon panels, etc, etc, etc, and then they expect that the ambitious, ruthless people who rise to the heights of power in that huge government they built will not use that power to dole out the people's money to their connected friends in business. These idealists think, "if only everyone voluntarily refrained from using the huge government we have built for their greedy, selfish purposes, then everything would work. These failures are the fault of the greedy businessmen using their wealth to buy influence and asking for bailouts from their former business associates who are now in government. We didn't intend for them to do that when we created these big government agencies and gave them all that power so they could fix our problems."

Well, if you build a big powerful government you are simply centralizing power and making it convenient for the ruthless to use it for their own purposes. It is unavoidable. The powerful and ruthless and smart are drawn to the centers of power. If you make government the major center of power, that is where they will go.

The genius of the Founders of the USA was the idea to keep government small, to give it only very limited powers. It was not meant to be the first thing we turn to for every problem in society. It was not meant to guarantee pensions for the old, education for the young, "free" birth control for women, the security of every ally on earth, foreign aid, and the 9 million other things that the "progressives" have empowered it to do over the last 200 years. Now they have built a behemoth and given it the power to print money and spend it with practically no limitations, and they are shocked when the powerful use that edifice for their own purposes.

So I stand by what I wrote before. This problem is not caused by greedy businesspeople (Goldman) being helped by their friends in government (Goldman). There will ALWAYS be people who are ambitious and ruthless. There is no perfect way to prevent the rich and ruthless from abusing their power, but the best way we have is to insist that they be subject to the same free market discipline that everyone else is, and that we have a culture that values entrepreneurship, liberty, non-corruption, and small government instead of a culture of entitlement and positive "rights" where every time a problem arises people turn to the government to solve it. And the way to make sure they are subject to free market discipline is for there to be no alternative - for there to be no government entity powerful enough to hand them the people's money to bail them out.

Having said that, let me take off my own libertarian idealist hat and note that the impulse to look to government to solve all problems is probably as ingrained as the impulse to take advantage of things like government bailouts and to make friends with people in high places and use your connections to get wealthy. We'll always have rich ambitious ruthless people and we'll always have unconnected naive average joes that get fleeced. The reason I've been coming to this site for five years is to try to avoid being one of the latter. There are giants tromping around swinging massive clubs, and I suppose the opinions of ants like me about the morality of what the giants (in business or in government) do is irrelevant. I just have to watch out not to get stepped on.

Raz
09-15-12, 12:45 PM
"You get the same order of criminality from any State to which you give power to exercise it; and whatever power you give the State
to do things for you carries with it the equivalent power to do things to you."

Albert J. Nock (1939)

Onlooker
09-15-12, 12:50 PM
Maybe the shortest way of making my point would be this: a government that is large and powerful enough to fix all of society's problems is a government large enough to be coopted by powerful people and used for whatever purposes they want, including bailing themselves out.

Idealists think they can grow the government in power and size in order to do all the "good" things they want it to do, to work to perfect society through control by government via laws, regulations, taxes, programs, agencies, commissions, white papers, blue ribbon panels, etc, etc, etc, and then they expect that the ambitious, ruthless people who rise to the heights of power in that huge government they built will not use that power to dole out the people's money to their connected friends in business. These idealists think, "if only everyone voluntarily refrained from using the huge government we have built for their greedy, selfish purposes, then everything would work. These failures are the fault of the greedy businessmen using their wealth to buy influence and asking for bailouts from their former business associates who are now in government. We didn't intend for them to do that when we created these big government agencies and gave them all that power so they could fix our problems."

Well, if you build a big powerful government you are simply centralizing power and making it convenient for the ruthless to use it for their own purposes. It is unavoidable. The powerful and ruthless and smart are drawn to the centers of power. If you make government the major center of power, that is where they will go.

Excellent. Nicely put, really (all of it; I just excerpted the meat of it).

Speaks for me very well. Thanks

Raz
09-15-12, 12:54 PM
The Fed said it will buy $40 billion of mortgages per month in an attempt to desperately foster a recovery in the real estate market. The purchases will be open-ended, meaning that they will continue until the Fed is satisfied that economic conditions, primarily in unemployment, improve.
Of course, this will also fail if they are buying mortgages from the bankers. Bankers will use this as a means to dump what they have been trying to get rid of all along, while it is not necessarily guaranteed to stimulate employment or housing prices. FED just created a dumping ground and golden parachutes for the bankers.

FED will never do anything to help 99% they are only concerned about 1%. It would be interesting to see when that will change if ever. As EJ has noted many times the only people that benefit from current policies are the connected ones.

+1. I've said for years that, being owned by the member banks, the Creature from Jekyll Island - like any good whore - works for her pimp.

Bernanke is all about saving the banks. And now with Romney stating publically that if he's elected "Bubbles" Ben won't be reappointed,
Bernanke just might be trying to save his own job. (Yes, I've become that cynical about our gov'mint.)

slippery
09-15-12, 01:15 PM
EJ writes in:


It was QE technically but not the QE the markets were expecting.

This QE3 forecast (http://blogs.barrons.com/incomeinvesting/2012/09/12/rbs-treasury-selloff-less-likely-post-qe3-than-post-qe2qe/?mod=google_news_blog) was typical: "RBS looks for the Fed to announce open-ended asset buys, but to commit to buying at least $600 billion in Treasurys and MBS between October and March, and to announce it will keep buying both beyond March."

Instead it was limited to MBS only and was only $230 billion over six months rather than $600 billion with no additional Treasury bond purchases.

I'm calling it QE Lite.

By failing to commit to the full QE3 that markets expected, bonds sold off.







That did not happen after QE1 and QE2.

QE Lite was aimed at the housing market and at currency depreciation.

QE Lite succeeded in weakening the USD. That's why gold popped.







A bigger bone for Bill Gross than I expected, but not full-on QE, either.


I have to disagree with your forecast and framing of the announcement. While the initial plan for QE3 is $40 billion a month, only $240 billion over 6 months, the commitment is OPEN ENDED, so the total amount is unknown. Also, the Fed made a promise to INCREASE the rate of purchases if the labor market did not improve substantially, so the net is OPEN ENDED AND GROWING. There was also the extension of ZIRP until mid-2015. This was a huge QE3 in my opinion, nothing Lite about it.

Recent history does not agree with your statement about treasury rates after QE1 and QE2. Treasury rates rose immediately and substantially after both QE1 and QE2, and Twist (though the effect is less pronounced for Twist).

http://advisorperspectives.com/dshort/charts/yields/snapshot.html?yields/SPX-10-yr-yield-and-fed-intervention.gif

Rates rose for several months after each announcement, but eventually fell again as the effects of QE diminished and the economy continued to deteriorate.

I think this was bigger than anyone expected. Time to reassess the situation.

EJ
09-15-12, 03:07 PM
I have to disagree with your forecast and framing of the announcement. While the initial plan for QE3 is $40 billion a month, only $240 billion over 6 months, the commitment is OPEN ENDED, so the total amount is unknown. Also, the Fed made a promise to INCREASE the rate of purchases if the labor market did not improve substantially, so the net is OPEN ENDED AND GROWING. There was also the extension of ZIRP until mid-2015. This was a huge QE3 in my opinion, nothing Lite about it.

Recent history does not agree with your statement about treasury rates after QE1 and QE2. Treasury rates rose immediately and substantially after both QE1 and QE2, and Twist (though the effect is less pronounced for Twist).

http://advisorperspectives.com/dshort/charts/yields/snapshot.html?yields/SPX-10-yr-yield-and-fed-intervention.gif

Rates rose for several months after each announcement, but eventually fell again as the effects of QE diminished and the economy continued to deteriorate.

I think this was bigger than anyone expected. Time to reassess the situation.

All of the forecasts were for an open-ended commitment. Everyone expected that.

$230 billion is 62% less than $600 billion.

Restricting purchases to MBS represents a far smaller scale of QE than purchases of both MBS and UST.

QE Lite was smaller than expected and smaller than QE1 and QE2.

The purpose of QE is to inflate asset prices to increase aggregate demand via wealth effects by raising the value of assets on household balance sheets.

It is a bizzarre notion that the Fed believes that by making wealthy people feel more wealthy that the economy will add jobs unless he means FIRE jobs.

QE has improved employment in the finance side of the real estate labor market, albeit without helping the production side.


http://research.stlouisfed.org/fredgraph.png?g=aIN

FIRE jobs back to 2005 levels while construction remains at levels not seen since the depths of the 1990s recession.

magicvent
09-15-12, 03:24 PM
EJ,

Does this latest QE lite alter your position on how fast gold prices will rise?

we_are_toast
09-15-12, 03:45 PM
As I said earlier in this thread, I don't find this QE3 very exciting, and without the purchase of UST and an accompanying fiscal policy, I don't see how this is going to help. I wouldn't call it QE3 lite, I'd call it QE3 fail.



Restricting purchases to MBS represents a far smaller scale of QE than purchases of both MBS and UST.

QE Lite was smaller than expected and smaller than QE1 and QE2.

The purpose of QE is to inflate asset prices to increase aggregate demand via wealth effects by raising the value of assets on household balance sheets.

It is a bizzarre notion that the Fed believes that by making wealthy people feel more wealthy that the economy will add jobs unless he means FIRE jobs.




All you have to do is follow the money. Approx $8 billion of new houses are built every month. The FED will buy $40B in MBS, which means the VAST majority of the purchases will be existing MBS. Who owns those existing MBS? The same big banks, hedge funds, investors... who've recovered nicely since this depression began, and who've failed to invest in the productive economy. How does simply giving them more money change anything? I just don't see how this is going to significantly impact the jobs market.

slippery
09-15-12, 04:18 PM
QE Lite was smaller than expected and smaller than QE1 and QE2.


The baseline forecast was no QE unless there was an acute crisis, and that made sense. Maybe the Fed sees an acute crisis that is not in the news, or they are coordinating action with ECB re Euro sovereign debt. While many analysts expected open ended QE, it was a shock to me. If the labor market doesn't improve, does the Fed buy every MBS security for sale? It sounds like the Fed intends to create a serious bout of inflation, whatever the consequences.



It is a bizzarre notion that the Fed believes that by making wealthy people feel more wealthy that the economy will add jobs unless he means FIRE jobs.


So true.

Osmose
09-15-12, 05:59 PM
I think this is the real deal. This is a maasive, all in QE that will break the bond market and increase inflation expectations.
This is not about the number of billions per month. It is about the message that was between the lines. What I am confused about is this... Higher inflation will inflate the debt away, however, the higher rates go, the more difficult it will be for the Treasury to service the debt. So which one will prevail? The beneficial effects of higher nominal growth or the negative effects of rising rates? I actually wonder how much the Treasury cares about rising rates.. I believe they extended the maturity profile of the debt substantially plus a big chunk is owned by the Fed.

I will repeat what I said before... Faber has it right... 25 pct in gold, 25 in cash, 25 in good equities, and 25 in corporate bonds. This game is becoming to difficult to navigate.

Osmose
09-15-12, 06:14 PM
Toast,

You are missing the point. Check out the price action in ITB and XHB. What Bernanke is doing is making people start buying houses instead of paying higher and higher rents. Think about it. If you put off a house purchase for a while because you thought inflation was dead, now you should hurry up with locking in that low mortgage rate, and buy a house. Inflation expectations. It is like an avalanche... " oh crap, better buy that house, and i will need some new furniture and appliances. Money will be worth less tomorrow, etc...etc"

With business owners: my truck fleet is 10 years old, better replace it now while financing is so cheap and the trucks have not gone up in price.

astonas
09-15-12, 06:16 PM
There is no doubt that powerful, connected people in business use their connections with their revolving-door friends in government to get bailouts and other perks that the average slob has no chance at.

So, where does the blame lie for this? How was it possible for this to occur? Is it the fault of the powerful, connected people who use their connections to protect themselves from loss? Everyone wants to protect themselves from loss. If there is a "legal" way to do that - to get your friends in government to bail you out - then I think it is human nature for people to take advantage of that. Would it be nicer if those folks just went bankrupt and didn't take advantage of their connections and power to save themselves? I suppose, but I don't think that's how people actually behave.

My diagnosis of the problem is that the federal government has grown in power to the point where it was possible for a Treasury Secretary and a Fed Chairman and some congressmen to have the ability to use the people's money to bail their powerful friends out. I don't think that would have been possible before so much power had been invested in the Federal government and the Federal Reserve (created by the Federal government).

Maybe the shortest way of making my point would be this: a government that is large and powerful enough to fix all of society's problems is a government large enough to be coopted by powerful people and used for whatever purposes they want, including bailing themselves out.

Idealists think they can grow the government in power and size in order to do all the "good" things they want it to do, to work to perfect society through control by government via laws, regulations, taxes, programs, agencies, commissions, white papers, blue ribbon panels, etc, etc, etc, and then they expect that the ambitious, ruthless people who rise to the heights of power in that huge government they built will not use that power to dole out the people's money to their connected friends in business. These idealists think, "if only everyone voluntarily refrained from using the huge government we have built for their greedy, selfish purposes, then everything would work. These failures are the fault of the greedy businessmen using their wealth to buy influence and asking for bailouts from their former business associates who are now in government. We didn't intend for them to do that when we created these big government agencies and gave them all that power so they could fix our problems."

Well, if you build a big powerful government you are simply centralizing power and making it convenient for the ruthless to use it for their own purposes. It is unavoidable. The powerful and ruthless and smart are drawn to the centers of power. If you make government the major center of power, that is where they will go.

The genius of the Founders of the USA was the idea to keep government small, to give it only very limited powers. It was not meant to be the first thing we turn to for every problem in society. It was not meant to guarantee pensions for the old, education for the young, "free" birth control for women, the security of every ally on earth, foreign aid, and the 9 million other things that the "progressives" have empowered it to do over the last 200 years. Now they have built a behemoth and given it the power to print money and spend it with practically no limitations, and they are shocked when the powerful use that edifice for their own purposes.

So I stand by what I wrote before. This problem is not caused by greedy businesspeople (Goldman) being helped by their friends in government (Goldman). There will ALWAYS be people who are ambitious and ruthless. There is no perfect way to prevent the rich and ruthless from abusing their power, but the best way we have is to insist that they be subject to the same free market discipline that everyone else is, and that we have a culture that values entrepreneurship, liberty, non-corruption, and small government instead of a culture of entitlement and positive "rights" where every time a problem arises people turn to the government to solve it. And the way to make sure they are subject to free market discipline is for there to be no alternative - for there to be no government entity powerful enough to hand them the people's money to bail them out.

Having said that, let me take off my own libertarian idealist hat and note that the impulse to look to government to solve all problems is probably as ingrained as the impulse to take advantage of things like government bailouts and to make friends with people in high places and use your connections to get wealthy. We'll always have rich ambitious ruthless people and we'll always have unconnected naive average joes that get fleeced. The reason I've been coming to this site for five years is to try to avoid being one of the latter. There are giants tromping around swinging massive clubs, and I suppose the opinions of ants like me about the morality of what the giants (in business or in government) do is irrelevant. I just have to watch out not to get stepped on.

This is a well-written and cogent analysis. Thank you!

But it is not complete. One may equally well apply many of the same arguments you make against government, to those collections of powerful individuals who would dominate, even more than they now do, in a world with diminished government.

The absence of government does not imply the absence of corrupt and powerful groups who will control other people's lives. On the contrary.

Collected power exists with or without government, whether in the form of collectives, corporations, or bands of marauding militias. The strong will in general take advantage of the weak, given the opportunity to do so. And there will always be both strong and weak.

But a properly constructed and maintained government (which I am not claiming we currently have) has a chance of doing so in the interests of the overall good. i.e. to reduce net-value-destructive predation. This helps all members of a society, strong and weak alike.

The solution is thus not to dismantle government, but repair it. I'm in agreement that government as it is today is not the answer. But that is a very different thing than saying government, in any form and at any size, is a fundamentally destructive influence, that varies only in scale and not in kind.

Thus, I feel that you have only made the first part of the argument to support your conclusion, and the easier part at that.

Put another way, the statement I highlighted in bold makes the assumption that it is the size, or perhaps the strength, of government, that affects whether its impact is positive, or negative. This assumption is, in my opinion, entirely false. I hold that it is the structural balance of a government that determines whether it is effective, or destructive.

What is needed is thus a government that is structured to make corruption harder. Mandatory transparency into all aspects of governance and campaign funding is a start. And many further steps beyond that would be required as well. But simply saying "smaller is better" is, to my mind, throwing the proverbial baby out with the bath water.

astonas
09-15-12, 06:31 PM
It is a bizzarre notion that the Fed believes that by making wealthy people feel more wealthy that the economy will add jobs unless he means FIRE jobs.

Is there a reason to believe that the FED is not fully aware of this, and is therefore intentionally creating FIRE jobs?

FIRE shows up in GDP and employment numbers the same way productive work does, and while we here are aware of the difference between productive work and parasitic work, Keynesian economists treat them as interchangeable.

CanuckinTX
09-15-12, 06:39 PM
I'm with Toast on this one osmose. Look at this article for example which is a perfect illustration of EJ's comment re: the wealthy are getting wealthier. http://www.doctorhousingbubble.com/financing-wealthy-homeowner-government-loans-helping-most-affluent-us-communities-high-income-areas/

A perfect quote: "One of the biggest ironies of current housing policy is that its initial target was in helping middle class Americans when the actual results have helped upper middle class and wealthier American homeowners get sweeter deals on their home purchases."

I myself have re-fi'd twice in the last 2+ years and sure it's helping with my monthly cash flow but I wasn't really a target for any bailout in the first place. I have lots of equity in my home and wasn't behind on any payments. I'm not spending any more money either because I was already comfortable but I sure enjoy putting more into the bank each month. How does that help our economy?

It sounds like a nice theory that wealthy or well off upper middle class people are going to start spending more money and it will trickle down into the economy to kick start it, but when you realize how few 'well off' people there are in this country compared to the masses, and that they typically save a lot of their money anyway, this amounts to nothing more than helping the rich get richer.

Osmose
09-15-12, 07:01 PM
Canuck,

You want to tell me you are just going to shovel money into that account earning zero, if you start seeing inflation pick up?

There is an awful lot of money in the US still. It will start to shift from bonds.

jk
09-16-12, 12:28 AM
2 comments.

over at ftalphaville [and perhaps elsewhere, i don't know] it's called QEnfinity. doesn't sound lite to them, apparently.

re the purpose of this round of qe: i agree with osmose that it is aimed very specifically at the housing market. they are going to buy approximately half the monthly issuance of mbs, for an indefinite time until employment improves. this will lower mortgage rates, very directly lead to another round of refi's for those who can qualify, and stimulate the low end of the market and especially first time buyers. more first time buyers will promote more step-up buyers. i am very dubious that it will work, but this is what i think they have in mind.

Chris Coles
09-16-12, 03:33 AM
This is a well-written and cogent analysis. Thank you!

But it is not complete. One may equally well apply many of the same arguments you make against government, to those collections of powerful individuals who would dominate, even more than they now do, in a world with diminished government.

The absence of government does not imply the absence of corrupt and powerful groups who will control other people's lives. On the contrary.

Collected power exists with or without government, whether in the form of collectives, corporations, or bands of marauding militias. The strong will in general take advantage of the weak, given the opportunity to do so. And there will always be both strong and weak.

But a properly constructed and maintained government (which I am not claiming we currently have) has a chance of doing so in the interests of the overall good. i.e. to reduce net-value-destructive predation. This helps all members of a society, strong and weak alike.

The solution is thus not to dismantle government, but repair it. I'm in agreement that government as it is today is not the answer. But that is a very different thing than saying government, in any form and at any size, is a fundamentally destructive influence, that varies only in scale and not in kind.

Thus, I feel that you have only made the first part of the argument to support your conclusion, and the easier part at that.

Put another way, the statement I highlighted in bold makes the assumption that it is the size, or perhaps the strength, of government, that affects whether its impact is positive, or negative. This assumption is, in my opinion, entirely false. I hold that it is the structural balance of a government that determines whether it is effective, or destructive.

What is needed is thus a government that is structured to make corruption harder. Mandatory transparency into all aspects of governance and campaign funding is a start. And many further steps beyond that would be required as well. But simply saying "smaller is better" is, to my mind, throwing the proverbial baby out with the bath water.

Both of you make very valid points. Again, the overall problem is not confined to the USA; here in the UK we face exactly the same need to redefine the role and responsibilities of government. What has become very interesting is the realisation of the responsibility of intellect to speak to truth. None of us has all the answers, but many here on iTulip show a very good understanding of the overall problem; the need to fix rather than destroy. To show the courage to debate.

The great difficulty is getting across to those currently holding power; that they must listen to our input. On the other hand, they will see us as an enemy; someone that does not have their best interest at heart; which in a sense, is true. On the other hand, what is their best interest?

And that question automatically leads to another; how do you show to someone with their head down, working, (as they see it), their fingers to the bone, that all their work is leading the nation in the wrong direction?

Here in the UK, it would seem that my comments have so far produced the reaction that I am to be seen as a threat; that I must be such. So the real challenge is to answer the question ourselves; how do we get across that we see our role, not as a subversive influence; but as being ....... honourably loyal to the needs of the wider nation by making the comments.

It is very easy to say to someone, anyone, that they are wrong. Both sides are doing it to each other at one and the same time; the challenge is to make your case in a way that forces the truth out into the open so all can see it as such.

But again, both sides will each say theirs is the truth of it.

My analysis, my instincts, tell me that the only way to do this is to stick to the point we make and keep making it; regardless of the consequences to ourselves as individuals. That by so doing, we force the existing leadership to look inward to their own decisions; that by so doing, we force them to sit still, even for just a moment, and reflect upon what we are saying.

The overall problem as I see it, is very simple; we are not living within a true free market system, where if you fail, the basic rules everyone has to abide by; force you to have to change direction; retrench. Instead, by creating what I have often described as a feudal mercantile economy, the Western government system has become deeply feudal itself. That what we are witnessing is good old fashioned medieval feudalism.

Looking at the wider picture, the Western economies today are short of perhaps 100 million private sector jobs on the one hand, yet, due to long term policy decisions, (made certainly in honesty without any perception of the long term consequences), today, there is no functioning mechanism to fund the free enterprise equity capital to fund the creation of those much needed jobs. Rather than accept that very simple fact and act to put things right, government has embarked upon repeated attempts to create new jobs using all the tools at the disposal of a feudal government.

Yet, as we here know full well; their attempts simply will not work.

The challenge we face is to slowly, carefully, keep making the same points in such a way that, eventually, they come to see that we are not the enemy at the gates, but responsible citizens trying our best to get our message across; that they have to recognise they are all working to a set of rules that lead the wider nation away from freedom and success and instead, towards a continual decline.

The responsibility of the honest citizen is to speak to truth. Loyalty is not about never questioning the actions of existing leadership; it is being honest to our intellects and showing the courage of our convictions to say what we believe to be true; even if the leadership seem to not believe it to be so.

Polish_Silver
09-16-12, 08:30 AM
I: What happened in the 1940s after the war ended when the U.S. government stopped rigging the bond market?
EJ: In the 1940s the risk of a sudden selloff was far more limited than today for several reasons. First because most of the bonds were held domestically. Second the exchange rate was fixed at the time; the small portion of overseas UST holdings did not impact, nor where they impacted by, the exchange rate.

EJ explains why the bonds did not crash after 1947: USD exchange rate was fixed. Bonds were held domestically. However, the bond prices must still "clear the market".

Long term bonds were still vulnerable to interest rate hikes and depreciation/inflation risk.
But perhaps the bond holders were not thinking along those lines. They were probably thinking that bonds were safer than cash in the bank, due to the 1930's bank run experience. Also, there were few alternatives: Gold was illegal (and price controlled), commodities are problematic, and people had been badly burned on stocks. So alternatives to bonds were very limited.
There's a big dimension of psychology in bond markers. Glad to get some data on inflation and rates after 1947.

charliebrown
09-16-12, 09:10 AM
Thanks for checking in Jtabeb. Have missed hearing from you. Agree that some R&R is good.

charliebrown
09-16-12, 09:22 AM
I was thinking along your lines. I did not expect any QE here.
Oil/Food prices high
Stocks high
and wait for the next shoe to drop in europe or the middle east before doing this.

So why?
Is there a known event on the horizon?
Why MBS? I have heard that there aren't that many 10y Ts left in circulation.
Also does this put the treasury on the hook to make good on the p and i payments on the bonds?
I'm sure the asset base on these bonds is slowly rotting away. Many of the underlying mortgages are going to go into default.
Without the treasury backstop, that means the FED will be creating money that will never be paid back.

Slimprofits
09-16-12, 10:32 AM
2 comments.

over at ftalphaville [and perhaps elsewhere, i don't know] it's called QEnfinity. doesn't sound lite to them, apparently.

re the purpose of this round of qe: i agree with osmose that it is aimed very specifically at the housing market. they are going to buy approximately half the monthly issuance of mbs, for an indefinite time until employment improves. this will lower mortgage rates, very directly lead to another round of refi's for those who can qualify, and stimulate the low end of the market and especially first time buyers. more first time buyers will promote more step-up buyers. i am very dubious that it will work, but this is what i think they have in mind.

http://ftalphaville.ft.com/blog/2012/09/14/1160221/the-day-after-lingering-thoughts-and-questions-about-qe3/


3) Some have noted that the size of the new purchases, $40bn a month, is much smaller than both QE1 and QE2. So what?

For one thing, as bad as things are now, the circumstances leading up to those previous rounds were a lot worse (severe financial market strains before QE1 and a real threat of deflation before QE2).
But more to the point, we think the initial small size of the programme is feature rather than bug. Well, maybe.

We won’t repeat all of our thoughts from an earlier post (http://ftalphaville.ft.com/blog/2012/08/23/1131701/minutes-minutiae-and-open-ended-questions/). But the Fed’s previous easing programmes, though successful in their main objectives, were also flawed in that they both removed safe asset collateral from the financial system and failed to disabuse markets and economic agents of the belief that 2 per cent was an inflation ceiling. On Thursday, Bernanke tried the opposite script — smaller purchases to start and clear signs that 2 per cent is not a ceiling.

Will it work? We’ll see, but the hope is that the messaging itself is strong enough that the Fed will generate more economic activity per dollar of balance sheet expansion (precisely because the program is open-ended) than with lump sum purchases. In monetary policy parlance, the portfolio balance channel works better when accompanied by use of the expectations channel.

we_are_toast
09-16-12, 11:52 AM
Toast,

You are missing the point. Check out the price action in ITB and XHB. What Bernanke is doing is making people start buying houses instead of paying higher and higher rents. Think about it. If you put off a house purchase for a while because you thought inflation was dead, now you should hurry up with locking in that low mortgage rate, and buy a house. Inflation expectations. It is like an avalanche... " oh crap, better buy that house, and i will need some new furniture and appliances. Money will be worth less tomorrow, etc...etc"

With business owners: my truck fleet is 10 years old, better replace it now while financing is so cheap and the trucks have not gone up in price.

I'm afraid we'll have to disagree about this. I don't think the rate of future inflation is a big factor of many people looking to buy a home today. My guess would be that people are far more concerned about job location, family size, how much junk they have... Of course the lower interest rates will make a difference, but by how much? Are there really that many more people who will qualify for a mortgage, or chose to refi, or chose to buy a house when the rates are at 3% compared to 3.8%? I don't think so.


Will it work? We’ll see, but the hope is that the messaging itself is strong enough that the Fed will generate more economic activity per dollar of balance sheet expansion (precisely because the program is open-ended) than with lump sum purchases. In monetary policy parlance, the portfolio balance channel works better when accompanied by use of the expectations channel.

This concept of the FED creating future expectations of inflation, is a bit confusing to me. If the Fed can create inflation by buying MBS, can't they cut off inflation by dumping those MBS, along with raising overnight rates and using a bunch of other tools? And given how paranoid this FED is over inflation, can't we expect them to stomp on inflation before it meets our irrational exuberant expectations? So I'm not so sure we should fear the inflation the FED is "trying" to create. It's the inflation that the FED is forced to create, or beyond their control that is scary, and this doesn't look like it.

Osmose
09-16-12, 01:41 PM
Toast,

When people look at mortgage rates, it is not the rate that matters. If the rate is 3 pct and you think it will stay there for 10 years, you won't rush to buy a home. If you think the rate will be 7 pct next year, that will force you to move.

sunpearl71
09-16-12, 02:37 PM
If the rate is 3 pct and you think it will stay there for 10 years, you won't rush to buy a home. If you think the rate will be 7 pct next year, that will force you to move.
This was one of the key aspects that I considered while buying a home 3 months ago, though the main reason was to provide more space to my growing children.

radon
09-16-12, 04:48 PM
I'm afraid we'll have to disagree about this. I don't think the rate of future inflation is a big factor of many people looking to buy a home today. My guess would be that people are far more concerned about job location, family size, how much junk they have... Of course the lower interest rates will make a difference, but by how much? Are there really that many more people who will qualify for a mortgage, or chose to refi, or chose to buy a house when the rates are at 3% compared to 3.8%? I don't think so.

But low interest rates are. They are going way out on a limb to backstop the most significant asset the "99%", or whatever that means, owns. For all the angst about helping the rich there are better ways to do it than pointing a money cannon at the housing market.



This concept of the FED creating future expectations of inflation, is a bit confusing to me. If the Fed can create inflation by buying MBS, can't they cut off inflation by dumping those MBS, along with raising overnight rates and using a bunch of other tools? And given how paranoid this FED is over inflation, can't we expect them to stomp on inflation before it meets our irrational exuberant expectations? So I'm not so sure we should fear the inflation the FED is "trying" to create. It's the inflation that the FED is forced to create, or beyond their control that is scary, and this doesn't look like it.

There is no exit. Once the return on debt drops below unity they can either continue with consecutive QEs until the currency crises or let the entire thing burn down in an apocalyptic deflationary cataclysm.

Raz
09-16-12, 09:31 PM
...
There is no exit. Once the return on debt drops below unity they can either continue with consecutive QEs until the currency crises or let the entire thing burn down in an apocalyptic deflationary cataclysm.

That's correct. Doug Noland explained this in 2010.

DSpencer
09-17-12, 11:27 AM
Toast,

When people look at mortgage rates, it is not the rate that matters. If the rate is 3 pct and you think it will stay there for 10 years, you won't rush to buy a home. If you think the rate will be 7 pct next year, that will force you to move.

This is definitely true for some people. But what percent of the population deciding whether to rent or buy thinks about this?

ProdigyofZen
09-17-12, 11:45 AM
I'm afraid we'll have to disagree about this. I don't think the rate of future inflation is a big factor of many people looking to buy a home today. My guess would be that people are far more concerned about job location, family size, how much junk they have... Of course the lower interest rates will make a difference, but by how much? Are there really that many more people who will qualify for a mortgage, or chose to refi, or chose to buy a house when the rates are at 3% compared to 3.8%? I don't think so.



This concept of the FED creating future expectations of inflation, is a bit confusing to me. If the Fed can create inflation by buying MBS, can't they cut off inflation by dumping those MBS, along with raising overnight rates and using a bunch of other tools? And given how paranoid this FED is over inflation, can't we expect them to stomp on inflation before it meets our irrational exuberant expectations? So I'm not so sure we should fear the inflation the FED is "trying" to create. It's the inflation that the FED is forced to create, or beyond their control that is scary, and this doesn't look like it.


Not to go too far off topic but has anyone watched The Year of The QB "The Brady Six"

In the first 20 mins of the hour long video when Tom Brady first arrives at Patriots camp Brady is recalling how he felt. He said he "called up his agent 2 weeks into camp and said hey I think I want to buy a house here" His agent replied are you nuts, you havent even made the team yet.

Brady said "yea I know I will make the team don't worry about that, I just want to get a good interest rate on my mortgage"

That should have been one of the key indicators of his future success!

After all he did go to Michigan, which has one of the best business schools in the nation for non-Ivy.

ProdigyofZen
09-17-12, 12:04 PM
Sure that may be the case but have you thought about this....

If interest rates for mortgages are currently 3% and you think interest rates will be 7% within the next 1 to 2 years what mechanisms and what is occurring in the economy to get to that 7%?

In other words, sure you will buy your house now for 200k at 3% but in 2 years if rates jump to 7% it will be worth 150k.............as the economy and housing crash from the doubling in interest rates.

CanuckinTX
09-17-12, 12:13 PM
Canuck,

You want to tell me you are just going to shovel money into that account earning zero, if you start seeing inflation pick up?

There is an awful lot of money in the US still. It will start to shift from bonds.

I've already got my gold and I'm sure as heck not going to just go spending money on stuff I don't need just because I have money lying around. Maybe I'm in the minority but that's the whole point I'm making anyway. The masses they need to be able to re-fi can't do it. 40% of people in CA are underwater and over 50% in Nevada. Florida is just as bad. The people that really need the money get no help from lower interest rates.

As jk says, I understand what the Fed's thinking is here, I just don't think it's going to work.

ProdigyofZen
09-17-12, 12:42 PM
Very Simple Grasshopper, THEY WON'T. They want a positive inflation rate (sorry should say a very negative real rate) and they want everyone to know about it. This is the mother of all asset price pumps (till we hit the wall again when gas hits$5-6 per gallon), then we get another ka. But, I think that after Obama gets re-elected, the bond market will not flinch. Over $1 T in defense cuts next year. The biggest Austerity in the US will be in the defense industry. Luckily, I think I'm in the only growth Industry in DOD right now. Just enough salve to goose the election, and then REAL pain next year as QE3 will not offset defense cuts. But till those cuts are announced IN DETAIL, yeah we got a rally in all risk assets, till may next year.

If I'm wrong and Romney wins, I think you are going to see a sell off on the risk side after the honeymoon rally, he's actively targeting Bernanke and pushing really hard for domestic austerity, (in all things OTHER than defense). Bond market will like that but risk assets won't. If Romeny succeeds in pushing through his domestic austerity agenda sans defense, dollar rallies strong, strong deflationary trend, dollar gets way overvalued and real economy grinds to a halt. And then we get a real no kidding big ka followed by big almost immediate poom. (Aka Argentina)


Assuming, of course, no IRAN strike, no unexpected crisis, and Draghi stays on the path of QE European style. As long as europe QEs at a slower rate than the fed, then we hit the wall first. Otherwise they do. But bottom line there is a recession coming hard core when gas breaks the $5 gallon thershold.

Lots of variables and ways for this to play out, my guess is May June next year if obama is re-elected, or if Romney wins (based on the end of the rally and gas crossing a threshold price)
Outcome seems the same, the only diff seems to be who will be left holding the bag in the White house when bad things happen.

Maybe I'm wrong and Romney is pandering to fiscal conservatives, but if he practices what he preaches, we are likely to hit the Big One (the one the bond market takes notice of) sooner than the Obama Scenario.

Obama = Gas Price driven demand destruction recession (inflationary)
Romney = Austerity led Super KA (followed immediately by Market driven POOM)

I actually think that the Romney path gets us on the Argentina Trajectory Faster than the Obama path.



Should have some clarity come November.

The "rhetoricalness" of my question "how are they going to raise rates if inflation hits 5% in thext 3-6 months" was apparently lost in internet forum purgatory !

lektrode
09-17-12, 12:43 PM
As jk says, I understand what the Fed's thinking is here, I just don't think it's going to work.

+1
but it IS 'going to work'
just not so much for The Rest Of US.
free money/QE to the priv eq crowd to buy up millions of foreclosures is certainly going to work for them tho...

shiny!
09-17-12, 01:50 PM
+1
but it IS 'going to work'
just not so much for The Rest Of US.
free money/QE to the priv eq crowd to buy up millions of foreclosures is certainly going to work for them tho...

+ 40,000,000,000

Bundi
09-17-12, 02:49 PM
+1
but it IS 'going to work'
just not so much for The Rest Of US.
free money/QE to the priv eq crowd to buy up millions of foreclosures is certainly going to work for them tho...

Maybe helps them to sell existing inventory of mortgage backed securities but it isn't so clear to me that buying for investment purposes because rates are low represents a smart decision given all of the macro factors. These PE firms in theory would need to exit at some point, no? Renting a slew of separate single family homes may not be as easy or profitable as people expect.

vinoveri
09-17-12, 03:10 PM
With respect, this is about creating money to write of the bad debt while making whole the creditors who hold the debt ... in a controlled way attempting to maintain the illusion of order of democracy and rule of law and nothing more (except perhaps dollar hegemony, global power, etc.).


It will likely work w/o a major exogeneous shock or internal revolution. It's "worked" so far for those pulling the strings.
Recall the prognostications in 2009, 2010, 2011 that, respectively, 2010, 2011,2012 was the year that everything would blow up because "at some point it has to end"
Even itulip has modified its prediction that the change would occur in 2013 after the presidential elections to now 2015.

Eventually, some one will be right. Maybe next month, maybe 10 years, maybe 50. Eventually we'll all be dead. I for one am going to focus more the goodness and beauty in life, continue to develop meaningful human relationship and return to philosophy - the coming to grips over these past 6 years of the economic/political/legal corruptions and being disabused on illusions have taken a toll .. for far too long.

shiny!
09-17-12, 03:30 PM
I for one am going to focus more the goodness and beauty in life, continue to develop meaningful human relationship and return to philosophy - the coming to grips over these past 6 years of the economic/political/legal corruptions and being disabused on illusions have taken a toll .. for far too long.

Anticipation fatigue. I've been expecting disaster for so many years and maybe it's happening, but it's a slow process, not a clear-cut event. The Big Crisis will not occur until after I give up expecting it and decide to relax. I'll let you all know when that happens so you can be prepared...

vinoveri
09-17-12, 03:59 PM
Anticipation fatigue. I've been expecting disaster for so many years and maybe it's happening, but it's a slow process, not a clear-cut event. The Big Crisis will not occur until after I give up expecting it and decide to relax. I'll let you all know when that happens so you can be prepared...

Ha Ha, thanks for the laugh Shiny. Please do let me know.

I don't want or look for disaster, but have been expecting something to occur to, as to the title of this thread, a forcing function of sorts, to reset/readjust the system to one of less instutionalized corruption and political capture, but have concluded that while it could occur, historically these changes happen over generations if not centuries (

(and reading hudson and hedges doesn't help):)

llanlad2
09-17-12, 04:56 PM
Sure that may be the case but have you thought about this....

If interest rates for mortgages are currently 3% and you think interest rates will be 7% within the next 1 to 2 years what mechanisms and what is occurring in the economy to get to that 7%?

In other words, sure you will buy your house now for 200k at 3% but in 2 years if rates jump to 7% it will be worth 150k.............as the economy and housing crash from the doubling in interest rates.

Unless there is wage inflation. In the Uk rates went from 5% to 12% between 1970 and 1974. Average house prices............doubled.
Admittedly it it was a more unionised manufacturing era with less threat of outsourcing which is opposite to today. But still not impossible.

Osmose
09-17-12, 04:59 PM
Anticipation fatigue. I've been expecting disaster for so many years and maybe it's happening, but it's a slow process, not a clear-cut event. The Big Crisis will not occur until after I give up expecting it and decide to relax. I'll let you all know when that happens so you can be prepared...

Basically yes. The markets are not kind. The only way to survive is to distance yourself. Vast majority of people will be burnt out or will have given up when the real crazy stuff happens. It is really hard to stay cool but it is the key to surviving the volatility and maybe even making some money

Osmose
09-17-12, 04:59 PM
Unless there is wage inflation. In the Uk rates went from 5% to 12% between 1970 and 1974. Average house prices............doubled.
Admittedly it it was a more unionised manufacturing era with less threat of outsourcing which is opposite to today. But still not impossible.

Exactly!

llanlad2
09-17-12, 05:28 PM
Exactly!
Wage price inflation is definitely more likely if repatriation of jobs takes place due to protectionism and trade wars.

Obama complaint against China raises threat of trade war (http://www.telegraph.co.uk/finance/china-business/9549155/Obama-complaint-against-China-raises-threat-of-trade-war.html)

ProdigyofZen
09-17-12, 05:42 PM
In that scenario, unemployment most likely rises to 10 to 12%. Not sure I see wage inflation with an extra 4 to 6% unemployed.

llanlad2
09-17-12, 05:59 PM
In that scenario, unemployment most likely rises to 10 to 12%. Not sure I see wage inflation with an extra 4 to 6% unemployed.

Difficult to picture I know. But unemployment rose at the same time peaking in 1975, the UK had to go to a 3 day working week to conserve energy, suffered major devaluation etc.
Classic example of stagflation.

ProdigyofZen
09-17-12, 06:13 PM
Difficult to picture I know. But unemployment rose at the same time peaking in 1975, the UK had to go to a 3 day working week to conserve energy, suffered major devaluation etc.
Classic example of stagflation.

Yes, llanlad but the difference between the 1970s in the UK and US to today is debt.

raja
09-17-12, 10:48 PM
Sure that may be the case but have you thought about this....

If interest rates for mortgages are currently 3% and you think interest rates will be 7% within the next 1 to 2 years what mechanisms and what is occurring in the economy to get to that 7%?

In other words, sure you will buy your house now for 200k at 3% but in 2 years if rates jump to 7% it will be worth 150k.............as the economy and housing crash from the doubling in interest rates.
Yes.

The opposing force to inflation is the woresening of global economic Depression.
People with big money will spend it in fear of inflation.
The rest will not spend it out of fear of unemployment . . . or because they don't have any money as a result of already being unemployed.

Speaking of predictions, in June 2012 Jim Rickards called for QE in August or September. It was on Capital Account -- http://www.youtube.com/watch?v=FgngIN7CO1Q
(http://www.youtube.com/watch?v=FgngIN7CO1Q)I'm not surprised he got it right . . . .

I am really impressed by Rickards. Somebody on iTulip recommended his book "Currency Wars", and I have been devouring it. Learning so much. Also, I've been searching out internet videos featuring him, and there are a lot. Of course, in the videos you only get little bits . . . but his book is like a course on the recent economic history of the world from a man who has been involved in it on many levels.
He has some interesting things to say on gold . . . .

ddn3f
09-18-12, 08:46 AM
Yes.

The opposing force to inflation is the woresening of global economic Depression.
People with big money will spend it in fear of inflation.
The rest will not spend it out of fear of unemployment . . . or because they don't have any money as a result of already being unemployed.

Speaking of predictions, in June 2012 Jim Rickards called for QE in August or September. It was on Capital Account -- http://www.youtube.com/watch?v=FgngIN7CO1Q
(http://www.youtube.com/watch?v=FgngIN7CO1Q)I'm not surprised he got it right . . . .

I am really impressed by Rickards. Somebody on iTulip recommended his book "Currency Wars", and I have been devouring it. Learning so much. Also, I've been searching out internet videos featuring him, and there are a lot. Of course, in the videos you only get little bits . . . but his book is like a course on the recent economic history of the world from a man who has been involved in it on many levels.
He has some interesting things to say on gold . . . .

I am curious, what does he have to say on gold? Does he see a return to some sort of gold-backed currency?

raja
09-18-12, 12:41 PM
I am curious, what does he have to say on gold? Does he see a return to some sort of gold-backed currency?
Yes.

Also, regarding the fear of gold confiscation, he says that the government need not confiscate gold . . . it can simply slap a 90% windfall profit tax on gold. If that occurs, those who bought gold early hoping to cash in will lose most of their profit.

He also says he owns gold . . . so I guess he figures he'll be able to know when to sell.

On the topic of gold, I never completely understood what Volker meant when he said, "Gold is the enemy."
I understand now . . . .

The government wants to control the economy, such as manipulating the currency to boost exports by devaluing the dollar. The politician's main motives are to stay in power and enrich their friends.

Gold competes with the government's currency -- fiat -- and thereby inhibits government control.
Gold can't be manipulated directly, since its price is determined by world markets. It can only affected through confiscation or onerous taxation.

Be careful with your gold. You may not have a financial counterparty, but you have a political one -- Uncle Sam.

gwynedd1
09-18-12, 01:09 PM
So then there will be a foreign company that sells canned squid that happens to own gold.

vt
09-18-12, 02:56 PM
"End Of The Bond Bull Market" Jeffrey Gundlach
http://www.advisorperspectives.com/n...ull_Market.php (http://www.advisorperspectives.com/newsletters12/Gundlach-The_End_of_the_Bond_Bull_Market.php)

Take a look at the 66 page slide presentation.

radon
09-18-12, 03:51 PM
CI: You mean de-leveraging? Isn't that good?
EJ: Not the way our economy is structured it isn't. The portion of the increase in net worth is happening on the liabilities side of the balance sheet. It's not a huge number relative to $62 trillion in total net worth. It's only about $1 trillion but again it's all about the housing market. Most of the household liabilities number is home mortgages. We are seeing an historically anomalous decline in home mortgage liabilities as home owners continue to default and repay mortgages faster than they take out new ones. The chart below shows periods of de-leveraging of liabilities since the early 1950s. You can hardly make out any decrease at all. That all changed in 2007. We cannot call what is happening to the liabilities side of the household balance sheet "de-leveraging." It's collapsing. It's collapsing because the price of the collateral that backs the mortgages -- homes -- is collapsing.


http://www.itulip.com/images2/TotalLiabilitiesHouseholdswtmk.png

CI: That looks ominous.
EJ: But it's inevitable; as home prices fall so will mortgage debt.


The frustrating thing about this situation is that by forcing interest rates down they have removed much of the incentive to invest. Who is going to buy a CD at <1% when you are paying 6% interest on your mortgage, or a money market, or any the other "safe" investment vehicles. After having been burned twice in the stock market and saddled with low bond yields the only real investment strategy many folks are left with is paying down debt.

Is the strategy of suppressing interest rates in order to make loans more attractive paradoxically hastening the decline?

ProdigyofZen
09-18-12, 03:57 PM
Yes.

Also, regarding the fear of gold confiscation, he says that the government need not confiscate gold . . . it can simply slap a 90% windfall profit tax on gold. If that occurs, those who bought gold early hoping to cash in will lose most of their profit.

He also says he owns gold . . . so I guess he figures he'll be able to know when to sell.

On the topic of gold, I never completely understood what Volker meant when he said, "Gold is the enemy."
I understand now . . . .

The government wants to control the economy, such as manipulating the currency to boost exports by devaluing the dollar. The politician's main motives are to stay in power and enrich their friends.

Gold competes with the government's currency -- fiat -- and thereby inhibits government control.
Gold can't be manipulated directly, since its price is determined by world markets. It can only affected through confiscation or onerous taxation.

Be careful with your gold. You may not have a financial counterparty, but you have a political one -- Uncle Sam.

The prudent thing to do is sell half your gold holdings in the manic up phase that will come in gold before the linking of gold to the dollar.

Polish_Silver
09-18-12, 03:58 PM
Yes.

Also, regarding the fear of gold confiscation, he says that the government need not confiscate gold . . . it can simply slap a 90% windfall profit tax on gold. If that occurs, those who bought gold early hoping to cash in will lose most of their profit.

He also says he owns gold . . . so I guess he figures he'll be able to know when to sell.

On the topic of gold, I never completely understood what Volker meant when he said, "Gold is the enemy."
I understand now . . . .

The government wants to control the economy, such as manipulating the currency to boost exports by devaluing the dollar. The politician's main motives are to stay in power and enrich their friends.

Gold competes with the government's currency -- fiat -- and thereby inhibits government control.
Gold can't be manipulated directly, since its price is determined by world markets. It can only affected through confiscation or onerous taxation.

Be careful with your gold. You may not have a financial counterparty, but you have a political one -- Uncle Sam.

Spoken like a true Bug! Should we try to organize a "bug group" on I-tulip? Bugs need to come out of the closet.

jiimbergin
09-18-12, 04:57 PM
The prudent thing to do is sell half your gold holdings in the manic up phase that will come in gold before the linking of gold to the dollar.

I have always planned to sell a good part of it then, assuming I am astute enough to recognize that phase. Hopefully, if I don't many of the amazing ituilpers will and clue me in.

Chris Coles
09-18-12, 05:43 PM
But surely any government can retrospectively tax any transaction it deems fit for purpose. Heads I win, Tails you lose applies....

radon
09-18-12, 06:05 PM
But surely any government can retrospectively tax any transaction it deems fit for purpose. Heads I win, Tails you lose applies....
That may violate article I section 9 of the US constitution - ie "No Bill of Attainder or ex post facto Law shall be passed". I'm not sure how an action like that would be interpreted in the UK.

shiny!
09-18-12, 06:21 PM
I have always planned to sell a good part of it then, assuming I am astute enough to recognize that phase. Hopefully, if I don't many of the amazing ituilpers will and clue me in.

EJ has said he'll let people know, and that when he gives his sell recommendation it will seem like a bad time to sell because gold will appear to be doing so well...

Onlooker
09-18-12, 08:54 PM
That may violate article I section 9 of the US constitution - ie "No Bill of Attainder or ex post facto Law shall be passed". I'm not sure how an action like that would be interpreted in the UK.

I hate to say this, but being a violation of our constitution hasn't exactly been a stopper for our government, for, well, quite some time now. They could find a way, I'm afraid. They can be quite creative when it comes to picking our pockets, eh?

raja
09-18-12, 09:10 PM
The prudent thing to do is sell half your gold holdings in the manic up phase that will come in gold before the linking of gold to the dollar.
On first take, I thought that was a good idea.
At least one would make some good profit on 1/2 of one's gold stash.

But there are two problems:


1) What if you sell your 1/2 gold, and later in the year the gov't passes the "windfall profits gold tax"? You would still have to pay it next April 15th.

2) How do you know when the manic phase is occurring? And, how do you know how far along it is?
Say that gold goes up to $5000, and you sell. But then gold contines up to $10,000. Your prior profits are cut in half by inflation.


Still, selling 1/2 halfway up the manic phase is better than losing 90% of profits to a windfall tax.

Any thoughts?

EJ thinks he will know when to sell.
Although I don't know what's in his mind, I imagine he'll be looking at Treasury rates. If Treasury yield get very high -- like in the Volker years -- Treasuries would become a more desireable investment, and gold would fall.

By the way, when you suggest selling 1/2 of gold in the manic phase, what would you do with the other 1/2?

Slimprofits
09-18-12, 10:36 PM
All of the forecasts were for an open-ended commitment. Everyone expected that.

$230 billion is 62% less than $600 billion.

Chicago Fed President Charles Evans says it won't stop at $230 billion:

http://www.bloomberg.com/news/2012-09-18/fed-s-evans-says-qe3-will-make-economy-more-resilient.html


“We’re going to look at the labor market and the way the economy is going and also inflation pressures, and if it seems like we need to continue to do this, we’ll continue to do this next year,” Evans said in response to audience questions.

“We’re looking for stronger employment growth, some beginning declines in the unemployment rate and stronger growth,” Evans said. “I’d be surprised if we would see enough evidence of that by the end of this year. So under that conditioning, I would expect that we would continue at something like an $85 billion pace of purchases post December.”

ProdigyofZen
09-19-12, 12:44 AM
Rajesh (sorry had to bring in the Big Bang Theory name :) ) The thing is when you buy physical you dont have to put your name etc. When I go to sell they wont take my name either. All I have is a receipt with the price paid for my gold coins. In other words I am anonymous, how would the government know I ever owned any gold?

The windfall profit tax wouldnt apply, I presume.

I am pretty confident I will know when the manic phase is occurring. One way is to observe the individuals going into the gold shops. If suddenly for a stretch of 3 to 6 months there are lines out the door at the gold shops to buy gold then you know it is in the manic phase (ala 1980-81).

Most of the other 1/2 is in gold ETFs like IAU, PHYS and GLD or Futures. Those products are super liquid and I could dispose of them closer to the top (if i called it right).


I plan on keeping a few gold coins for sentimental reasons :)

On a side note here is Guggenheim talking about the Fed and their Taylor Rule. If I remember correctly EJ's own chart on the Taylor Rule said they should have raised rates back in 2010.

Once upon a time, the Federal Reserve decided to adopt the Taylor rule, named
after Stanford economist John Taylor, as its key determinant in setting the Fed
Funds rate. Then, after it realized that the original formulation of the Taylor
rule was too constricting and not as permissive to pro-inflationary policy as
the Fed's financial sector superiors demanded, it decided to adjust the Taylor
rule formulation to its own parameters so that it was always in sync with
whatever policy, monetary or as of QEterenity, pseudo-fiscal, it decided to
pursue. In the meantime, John Taylor has become one of the more vocal critics of
Ben Bernanke's printing ways if for no other reason then because the original
Taylor rule says that instead of ZIRP at least until 2015, the Fed should be
tightening right now.

Guggneheim's Scott Minerd comments:










Following the latest FOMC meeting, the committee announced a new asset
purchase program and an extension of their low rate pledge through mid 2015 in
an effort to stimulate economic growth and improve the labor market. In
addition, the FOMC also released its latest outlook on inflation and
unemployment. Based on the new estimates for inflation and unemployment, the
optimal Federal Funds Target rate suggested by the Taylor rule would suggest the
Fed funds rate should rise to over 2% by mid-2015, in contrast to the Fed’s
pledge to keep rates near zero through that time. In light of this analysis, it
appears likely that the FOMC will fall behind the curve in raising rates,
especially given its new outlook on economic growth and its pledge to keep rates
on hold through mid 2015.



http://www.itulip.com/sites/default/files/images/user5/imageroot/2012/09/Taylor%20Tule%209.18.gif (http://www.itulip.com/sites/default/files/images/user5/imageroot/2012/09/Taylor%20Tule%209.18.gif)

What this means is that by the time 2015 rolls by, all else equal, the Fed
will be far behind on the tightening curve and when it finally does admit
tightening is overdue, it will have to scramble to not only hike
short-term rates, but promptly proceed to commence offloading its balance sheet
which as we calculated will be $5 trillion by then, or nearly
100% higher than it is now, and with a DV01 of $4 billion. Oops.

What this will mean for risk, i.e., stock prices, is self-explanatory.
Luckily for Bernanke, by then the collapse in the stock market which will
finally shift to a phase of liquidity extraction, will be some other Fed
Chairman's problem.


http://www.zerohedge.com/news/taylor-rule-says-fed-should-be-tightening-now

Chris Coles
09-19-12, 04:27 AM
That may violate article I section 9 of the US constitution - ie "No Bill of Attainder or ex post facto Law shall be passed". I'm not sure how an action like that would be interpreted in the UK.

My thinking here has nothing to do with the UK as I have no Gold and cannot access my (perceived), value in my IP, so this is entirely a thought exercise.

My view has been for a very long time now that the very best strategy is to hold onto your Gold until some time AFTER the entire economic system has re-stabilised. My thinking goes something like this. The one thing that stands out historically, is that in ALL circumstances, Gold will hold its value. What you are not looking at is what will that value be in future years. Instead, you all seem to be content to sell your holdings for what will, at that moment of sale, (assumed to be right at the top of the market value for this debate), the highest level of expansion of the fiat currency. That what you will have in your hand, at that moment of sale, will be a vast sum of rubbish value currency that will, INEVITABLY, immediately de-value back to base.

That what you will hold at that point of sale will be EXACTLY the same value as at the moment of purchase..... in GROSSLY inflated terms. That the one thing that will hold its value regardless of the circumstances AFTER top of market, will be the Gold that you just sold.......

That if the market price of Gold is say ten times your original purchase, then your holding physical Gold will be like the Million Pound Note in the movie, where you can better carry that "Value" forward from the top of the market without selling it.

That the very best strategy is not to sell, but to hold. That in ALL circumstances, you thus retain the value.

Another point to make is that at the time of the last confiscation, (which no doubt many of you are considering the sale to avoid), the one group of holders of Gold that were not deprived of their holdings were the charitable trust funds. I do not see anyone considering confiscating Gold from any form of charitable trust fund... a very difficult move for any government.

Food for thought?

Polish_Silver
09-19-12, 08:38 AM
Rajesh (sorry had to bring in the Big Bang Theory name :) ) The thing is when you buy physical you dont have to put your name etc. When I go to sell they wont take my name either. All I have is a receipt with the price paid for my gold coins. In other words I am anonymous, how would the government know I ever owned any gold?

The windfall profit tax wouldnt apply, I presume.


On a side note here is Guggenheim talking about the Fed and their Taylor Rule. If I remember correctly EJ's own chart on the Taylor Rule said they should have raised rates back in 2010.





Here in SC, the coin shops keep a paper copy of your drivers license for a while, supposedly to verify that the coins are not stolen. Then they destroy the record. So there is at least a temporary record of your name and what coin you sold. There is some logic in this, but it is certainly a sacrifice of freedom.

Taylor has a nice article showing how if the FED followed his rule, the higher rates would have prevented a housing bubble. No secret that rates were too low, except to Bernanke et. al.

I think I figured out a way to improve the taylor rule. It is based on measured inflation and measured gdp.
Well, what if the measurments are off? Likely the government would bias towards higher gdp growth and lower inflation, as Williams claims. Then the taylor rule will keep interest rates too low. So what is needed is to add an additional term to the expression, which measures either debt growth or money supply growth . In our system, money supply and debt are highly correlated . The idea being that if debt grows above a certain level, interest rates rise. Right now the taylor rule does not explicity include debt or money supply growth, and so it does nothing to prevent a gradual increase in debt level, which is what happened from 1980 to 2008.

Polish_Silver
09-19-12, 08:55 AM
Referring back to the chart above, the purpose of government price fixing of bonds is wholly different today than during and shortly after WWII.--EJ

Wasn't the purpose of the 1940's rate suppression to make it easier to finance the government's debts acquired because of WW II, and to a lesser extent, the new deal?


Isn't the purpose of low rates now to support the housing sector and other highly indebted aspects of the fire economy?

So in both cases the rate suppression makes debt levels more supportable.

When federal debt at $14 trillion, the US could not finance this debt at 7% rates, so the low rates are also keeping government debt "manageable".

They mystery to me is why people people bought UST bonds when inflation was so high. Probably because they had so few alternatives.

raja
09-19-12, 09:00 AM
The thing is when you buy physical you dont have to put your name etc. When I go to sell they wont take my name either. The windfall profit tax wouldnt apply, I presume.
I agree, a windfall tax on gold couldn't be applied to hidden transactions.
But who would buy your gold?
Don't you think that a 90% tax would put a damper on gold price and sales?
Would you buy gold now if you knew that it was a criminal act?

I know I would look very hard for other, less risky investments.
And, isn't that just what the government wants . . . to control our behavior and channel our money into areas where they have control and can profit? Greed and power -- it's the eternal human story.


I am pretty confident I will know when the manic phase is occurring. One way is to observe the individuals going into the gold shops. If suddenly for a stretch of 3 to 6 months there are lines out the door at the gold shops to buy gold then you know it is in the manic phase (ala 1980-81).
Yes, I think I would be able to tell the manic phase, too.
But the question is knowing when to sell during the manic phase.
If you sell at $5000, and gold goes to $10,000, you've lost half your profit to inflation.
If you wait too long and the gov't institutes a windfall profit tax, you've lost 90% of your profit.
How will you know when to sell during the manic phase.

By the way, if the s___ really hits the fan, you'll wish you hadn't sold at all.


Most of the other 1/2 is in gold ETFs like IAU, PHYS and GLD or Futures. Those products are super liquid and I could dispose of them closer to the top (if i called it right).
That's a good idea.

But what would you do with the dollars from your sale?
Would gold hitting the top signify that inflation is over?
In that case, it would be good to sit on your dollars.

If the government decides they need a new "reichsmark", as in the 1920s, you would take a big devaluation hit.
If inflation continues, you better spend your dollars as fast as possible on "real" things.
In that case, why not buy the "real" things now?
I guess the answer there is to profit from the mania as much as possible.

I haven't heard much talk anywhere about what the world would be like AFTER the gold mania.
We talk a lot about profiting from gold, but not what will happen once we have our profits.
I'd like to hear some opinions if anyone would like to share . . . .

Polish_Silver
09-19-12, 09:16 AM
This is a well-written and cogent analysis. Thank you!


What is needed is thus a government that is structured to make corruption harder. Mandatory transparency into all aspects of governance and campaign funding is a start. And many further steps beyond that would be required as well. But simply saying "smaller is better" is, to my mind, throwing the proverbial baby out with the bath water.

We needed better structures in our institutions. For example, if we use Kotlikoff's Limited Purpose Banking,
we have a secure banking system without leverage, TBTF, fed regulators etc. In that context, market forces really would regulate banks. The fed would not be setting interest rates.

Another example is our election system. We need proportional representation in at least the Senate.
That would bring new parties in, which would really have different ideas. The choice you have now is voting for someone you hate or voting for someone who will certainly lose.

radon
09-19-12, 01:26 PM
What this means is that by the time 2015 rolls by, all else equal, the Fed
will be far behind on the tightening curve and when it finally does admit
tightening is overdue, it will have to scramble to not only hike
short-term rates, but promptly proceed to commence offloading its balance sheet
which as we calculated will be $5 trillion by then, or nearly
100% higher than it is now, and with a DV01 of $4 billion. Oops.


They won't be able to raise rates. They can't slow down without the bomb on the bus going off.

radon
09-19-12, 01:39 PM
Another example is our election system. We need proportional representation in at least the Senate.

Also, it shouldn't take a billion dollars to run for president. People should be as upset at a political add on TV as a cigarette machine in a high-school.

Mn_Mark
09-19-12, 02:36 PM
Yes.

Also, regarding the fear of gold confiscation, he says that the government need not confiscate gold . . . it can simply slap a 90% windfall profit tax on gold. If that occurs, those who bought gold early hoping to cash in will lose most of their profit.

He also says he owns gold . . . so I guess he figures he'll be able to know when to sell.

Be careful with your gold. You may not have a financial counterparty, but you have a political one -- Uncle Sam.

I've found the posts and discussion over at fofoa.blogspot.com very interesting. This issue of confiscation has been discussed at length and FOFOA contends that there will be no confiscation or 90% windfall profits tax on gold after the transition from the current dollar-as-world-reserve-currency status quo. In fact he argues that there will be no capital gains tax or sales tax on gold either.

His reasoning is that after the transition, gold will again be the international currency for settling trade imbalances. Countries that export more than they import will gradually accumulate gold, and countries that import more than they export (USA) will gradually see their gold flow out. This will not be an official government function, but a function of the market.

The important thing for a countrywith regard to this international trade balancing function of gold will be the total amount of gold held within that country, whether by government or private citizens - and private citizens will be the major source. Us average joes selling our one or two ounces down at the coin store in response to market factors, and those ounces flowing out to our trade creditors, will be what matters.

If the government puts a punitive tax on an average joe who wants to sell his ounces, average joe won't sell them. He will hoard them or he will sell them on the black market. They will not be available for serving this trade-balancing function that will occur because of irresistible market pressures once the international community no longer accepts dollars as the international reserve currency. A short-sighted government may try to put such a tax in place, but it will be forced in relatively short order to abandon it in order to keep the private flow of gold moving. Same goes for confiscation. A government that says everyone must turn in their gold for a set price is a government that will see the flow of gold stop immediately.

India and Singapore both had to recently remove taxes on gold sales that they had tried to impose. As I understand it, there is already no sales tax on gold in Europe. Europe is smarter about gold than we in the USA are; as FOFOA points out, they revalue their central bank holdings of gold to the market price quarterly, which smoothly transitions their central bank holdings to a larger and larger share of the total (with foreign reserves like dollars shrinking as a percentage of the total as gold's price in euros increases).

FOFOA also makes a good argument that there will be no blow-off top and then drop in the dollar price. Instead, there will be a "reverse waterfall", where the price swoops relatively suddenly to a very high level (he estimates the most likely price to be in the neighborhood of $50,000/ounce), drops for a short period as weak hands like those here discussing how to time the market sell out, and then rises back to more or less a plateau going forward. So no need to try to time this....just buy physical gold coins and hold them through the transition and (if applicable) any short-term government stupidity like windfall profit taxes or confiscation attempts.

But don't count on your PHYS and GLD and GDX saving your ass. In the turmoil of the transition, much of that "paper gold" is likely to evaporate, and mines will be nationalized or heavily taxed. What will count is the physical gold in your hands. In fact, FOFOA predicts a plunging "paper gold" price before this transition occurs as it becomes clear that GLD, the COMEX, et al can not deliver physical gold after all. It will simultaneously become impossible to buy physical bullion as no one wants to sell. After a short period, a new physical price discovery method will evolve and physical gold will be priced at around $50k (in today's dollars - much more in inflated dollars).

Again, go read the FOFOA archives for the details of these arguments. I find them the most convincing arguments I've read. The basic idea is that what we are heading into is not just another bump like 1980 or 2000. The dollar is going to lose its international reserve status and that is going to yield an entirely new (but very old) role for gold that has no analogue in living Western memory.

Chris Coles
09-19-12, 02:55 PM
....just buy physical gold coins and hold them through the transition and (if applicable) any short-term government stupidity like windfall profit taxes or confiscation attempts.

But don't count on your PHYS and GLD and GDX saving your ass. In the turmoil of the transition, much of that "paper gold" is likely to evaporate, and mines will be nationalized or heavily taxed. What will count is the physical gold in your hands. In fact, FOFOA predicts a plunging "paper gold" price before this transition occurs as it becomes clear that GLD, the COMEX, et al can not deliver physical gold after all. It will simultaneously become impossible to buy physical bullion as no one wants to sell. After a short period, a new physical price discovery method will evolve and physical gold will be priced at around $50k (in today's dollars - much more in inflated dollars).

....... The basic idea is that what we are heading into is not just another bump like 1980 or 2000. The dollar is going to lose its international reserve status and that is going to yield an entirely new (but very old) role for gold that has no analogue in living Western memory.

On these points I whole heartedly agree.

ProdigyofZen
09-19-12, 06:32 PM
Fed's Fisher sees "Inflation Expectations Rising"

http://www.bloomberg.com/news/2012-09-19/fed-s-fisher-says-u-s-inflation-expectations-rising.html

Federal Reserve Bank of Dallas President Richard Fisher (http://topics.bloomberg.com/richard-fisher/) said the central bank’s third round of large-scale asset purchases has led to an increase in market expectations for higher inflation without more job creation (http://topics.bloomberg.com/job-creation/).
“I do not see an overall argument for letting inflation rise to levels where we might scare the market,” Fisher said on Bloomberg Radio (http://topics.bloomberg.com/bloomberg-radio/)’s “The Hays Advantage” with Kathleen Hays (http://topics.bloomberg.com/kathleen-hays/) and Vonnie Quinn. “We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction (http://www.itulip.com/quote/SPX:IND).”



Fisher, who doesn’t vote on monetary policy this year, opposed the Federal Open Market Committee decision last week to expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing. The Fed is seeking to boost growth and reduce 8.1 percent unemployment.



Measures of expected future inflation “have ramped up pretty quickly,” Fisher said. The five-year, five-year forward breakeven rate, which projects the pace of price increases starting in 2017, rose to 2.88 percent on Sept. 14, the day after the FOMC decided on QE3. That was up half a percentage point from July 26. It dropped to 2.80 percent on Sept. 17.

dd eisenhoover
09-19-12, 08:08 PM
Why QE3 ?
It's mostly for Treasury-Market support, according to the 'Turd':

"An here's where almost everyone drops the ball. The mainstream media will tell you that The Fed is "supporting the mortgage market" and "helping to keep homes affordable" with this program. This is complete, unadulterated BS. Sure, The Fed is buying $85B in MBS every month...but...from whom??? Which institutions own these MBS and are obligingly selling them to The Fed??? I'll wait here and let you think about that one for a few moments...

The Primary Dealers! Goldman, The Morgue, MorganStanley, Citi, BoA...all of them. They own or purchase new the MBS which The Fed buys from them. And here's the very important next step: The Primary Dealers turn around and use the proceeds from these sales to buy U.S. treasuries! To the tune of $85B/month. Let me do the math for you...that's slightly more than one trillion dollars over the next year. And what does the Congressional Budget Office project the U.S. federal deficit to be in fiscal 2013? It will again be north of one trillion dollars, at a minimum. http://www.cbo.gov/publication/43539

At the end of the day...and here's where we get down to brass tacks...last week The U.S. Federal Reserve announced a plan whereby they will be almost completely and directly monetizing the deficit spending of the U.S. government. Though the illusion of legitimate borrowing will be maintained and politicians will continue to claim that "we're borrowing all of this from China", you should not be fooled. We have entered a new paradigm of direct debt monetization. By doing so, The Federal Reserve has begun the process of overt currency debasement and devaluation."
From "Brass Tacks" http://www.turdtalksmetals.com

jtabeb
09-19-12, 08:17 PM
The "rhetoricalness" of my question "how are they going to raise rates if inflation hits 5% in thext 3-6 months" was apparently lost in internet forum purgatory !
[\sarcasm], it helps.


V/R

JT

raja
09-19-12, 10:00 PM
I've found the posts and discussion over at fofoa.blogspot.com very interesting. This issue of confiscation has been discussed at length and FOFOA contends that there will be no confiscation or 90% windfall profits tax on gold after the transition from the current dollar-as-world-reserve-currency status quo. In fact he argues that there will be no capital gains tax or sales tax on gold either.

Mn_Mark, thanks for sharing that !!!

I will check out the archives at FOFOA, and jump back in the discussion if I have anything worthwhile to bring up.

astonas
09-19-12, 11:31 PM
FOFOA has come up on these forums several times before, and when I've looked into the writings, I've found them to include very detailed (if not always orthodox) information. But the conclusions strike me as somewhat dramatic, at times even hyperbolic. And yet I don't have enough specific information to refute the picture that is being painted.

EJ has studied gold to an extraordinary extent. Has he ever given an analysis on FOFOA's thesis in the past? Not just a dismissal, since that would almost be too easy, but actually pointed out where an error was being made? Alternatively, does he agree in principle, but not to the $50k/oz degree? In this case, how does he calculate his estimated maximum value, that is different from FOFOA.

FOFOA's ideas are a bit out there, but not so far that I think they shouldn't be addressed substantially.

metalman
09-19-12, 11:50 PM
On first take, I thought that was a good idea.
At least one would make some good profit on 1/2 of one's gold stash.

But there are two problems:

1) What if you sell your 1/2 gold, and later in the year the gov't passes the "windfall profits gold tax"? You would still have to pay it next April 15th.

2) How do you know when the manic phase is occurring? And, how do you know how far along it is?
Say that gold goes up to $5000, and you sell. But then gold contines up to $10,000. Your prior profits are cut in half by inflation.


Still, selling 1/2 halfway up the manic phase is better than losing 90% of profits to a windfall tax.

Any thoughts?

EJ thinks he will know when to sell.
Although I don't know what's in his mind, I imagine he'll be looking at Treasury rates. If Treasury yield get very high -- like in the Volker years -- Treasuries would become a more desireable investment, and gold would fall.

By the way, when you suggest selling 1/2 of gold in the manic phase, what would you do with the other 1/2?

ej on gold confiscation...

---

For example, a gold bug will tell you that gold was illegal for Americans to own from 1933 until 1974, which is true, but then he will spin this into a tale of government goons cracking open safe deposit boxes to confiscate gold. The fact is that that the law was so weak that it was enforced only once in 40 years, and that single case was dismissed.

The truth of the episode of the gold's 41 years as contraband is more interesting than the conspiracy theories. The majority of gold investors, who become known as gold hoarders whenever the government needs it, turned in gold voluntarily before the May 1, 1933 legal deadline set by FDR’s order. They did so for largely patriotic reasons, to help rescue the economy that had been in a deflationary death spiral for three years under the non-leadership of Herbert Hoover.

Sixty-five years later, in the depths of the Asian Currency Crisis in 1998, without force of law millions of Koreans scraped together more than a billion dollars worth of gold jewelry, coins and other personal items to give to the government voluntarily to be melted down to shore up the central bank's reserves. To put this egalitarian behavior into context, thousands of Korean college students had to go home to their families in Seoul that year from the U.S. because the won had so depreciated that savings in domestic bank accounts could not cover tuition. City parks filled with the unemployed when only months before unemployment was largely unknown. It was a classic Sudden Stop event (see Headed for a Sudden Stop, 2008 (http://www.itulip.com/forums/showthread.php/5403-Headed-for-a-Sudden-Stop)). The populace rallied in the nation’s time of need, turning in gold to shore up the system for the greater good.

This nuanced interpretation of gold's function in a currency crisis is critical to get right because it suggests how the latest episode in the life of gold as a monetary asset is most likely to end. Rather than by government confiscation as gold fanatics warn, I have argued since 2001 that the most probable endgame is for global monetary crisis to force the U.S. to re-open the gold window, a concept I explain in detail later, with gold turned in by U.S. citizens voluntarily to increase U.S. holdings from 8,133 tons today to enough to truly back the full faith and credit of the U.S. Treasury.
http://www.itulip.com/forums/showthread.php/20640-Essential-Trends-Part-I-A-Gold-in-an-Era-of-Global-Monetary-System-Regime-Change-Eric-Janszen

---
ah, yep... flags waving & crosses in the air... patriotic gold bugs will be 1st in line to support the usa when the dollar plops ;_FP

http://i.imgur.com/1HG8A.jpg

Slimprofits
09-20-12, 08:18 AM
ah, yep... flags waving & crosses in the air... patriotic gold bugs will be 1st in line to support the usa when the dollar plops ;_FP

http://i.imgur.com/1HG8A.jpg

No, it will depend entirely on who is doing the asking.

Imagine if it happened this year. How many Patriots do you think would be volunteering their gold for the Marxist, Muslim El Presidente Hussein Obama?

EJ
09-20-12, 08:37 AM
This explains the Fed's move so close to U.S. elections. It also explains why gold has been rising in all currencies versus only the USD.

We'll get the $1 trillion plus dollar global stimulus by the end of Q3 as I forecast July 11, 2012.


http://www.itulip.com/images2/DeflationStimulusUSDdepreciationQ12007-Q22012wtmk.png

Here comes Global Stimulus 3, right on schedule.


Sept. 7: First China committed $158 billion in fiscal stimulus (http://money.cnn.com/2012/09/07/investing/world-markets/index.html) to boost public spending on make-work programs.

Sept. 13: The Fed committed $240 billion aimed at the housing market (http://articles.latimes.com/2012/sep/13/business/la-fi-fed-stimulus-20120914) with a commitment to go beyond six months "if the labor markets do no improve," which is like saying "I'm going to keep hitting this screw with a hammer until it goes in." The QE is restricted to ASB purchases, not U.S. Treasury bonds.

Sept. 20: Today the Bank of Japan committed $125 billion in asset purchases (http://www.telegraph.co.uk/finance/markets/9554211/FTSE-100-makes-gains-on-Japan-stimulus-boost.html), including government bonds.

That leaves the ECB and "others" with ten days and $523 billion to go.

My bet? The ECB comes in above $300 billion and "others" altogether at $200 billion, more or less.


http://www.itulip.com/images2/globalstimuluspercentgdp.png

$4 trillion stimulus from Q4 2008 to Q1 2009. Third try's a charm or is this the end of the road for coordinated global stimulus?

Polish_Silver
09-20-12, 09:21 AM
How will you distinguish between a political ad and news story? That problem was the logical basis of the supreme court decision.

littleshark
09-20-12, 09:43 AM
That leaves the ECB and "others" with ten days and $523 billion to go.

My bet? The ECB comes in above $300 billion and "others" altogether at $200 billion, more or less.




Didn't the ECB do essentially do their QE, committing to buy sovereign debt if asked? I know I needs to be triggered by a bailout request, but are you saying you think there will be something in addition to that?

EJ
09-20-12, 10:01 AM
Didn't the ECB do essentially do their QE, committing to buy sovereign debt if asked? I know I needs to be triggered by a bailout request, but are you saying you think there will be something in addition to that?

They have made a series of statements but as of yet have made no firm commitment.

Being the most bureaucratic of the lot, and having been back from the summer holiday only a few weeks, you have to give the Europeans more time than the workaholic Japanese and Americans to do the necessary operational work to execute a EU-wide stimulus. Let's give them until the end of next week.

jabberwocky
09-20-12, 11:03 AM
I continue to be somewhat surprised that you seem to imply that the Fed will not take increasing share of the treasury market in the future to suppress US gov't yields. I see nothing in Bernanke's actions or beliefs that precludes this. Once the system fractures, there is no limit to intervention, and the mirage of rule of law in the US can be maintained as long as the powerful write the laws.
If it is the case that complex systems are not "logic" systems, administered perturbations will result in irreversible, unpredictable outcomes, and surely our financial markets are now "admiministered".
I can imagine the Fed declaring, or, at least covertly promising, that it will buy every treasury forever, until, of course, forever comes!

EJ
09-20-12, 01:55 PM
I continue to be somewhat surprised that you seem to imply that the Fed will not take increasing share of the treasury market in the future to suppress US gov't yields. I see nothing in Bernanke's actions or beliefs that precludes this. Once the system fractures, there is no limit to intervention, and the mirage of rule of law in the US can be maintained as long as the powerful write the laws.
If it is the case that complex systems are not "logic" systems, administered perturbations will result in irreversible, unpredictable outcomes, and surely our financial markets are now "admiministered".
I can imagine the Fed declaring, or, at least covertly promising, that it will buy every treasury forever, until, of course, forever comes!

There has been much confusion in the markets for the entire period since 1998 when I started writing on this site.

In 1999 I kept being told that we were in a bull market in stocks. I kept explaining in response that the bull market ended in 1995 when the market morphed from bull to bubble, reaching its critical point in March 2000 when I issued my sell warning.

Similar deal from 2002 until late 2007 when I issued my second sell warning. I kept being told of a bull market in housing. I explained that the bull market ended in 2002 when housing became a bubble that started to collapse in 2006 as I said it would.

Now the confusion is over the UST market. Even clever guys like Jeffrey Gundlach are confused.

He refers to the UST market as a bull market.

It is not a bull market, but it's not a bubble, either. The term "repression" is also inaccurate and delusional.

The UST bull market ended in 2001. From 2001 until the crash in the market for securitized mortgage bonds the UST market was manipulated by rate policy and accelerated foreign UST sales. Since Q2 2009 when short rates effectively hit zero prices of UST have been fixed by policy across the yield curve. Not coincidentally that is when foreign central banks became net gold buyers.

None of this is surprising. It is as the Fed said it was planning to do under these circumstances. The shock for me as I saw this all developing starting in the late 1990s was that the Fed had so little interest in preventing the circumstances that demanded a deflationary collapse fighting policy down the road.

Cultivation of asset bubbles followed by radical Fed and fiscal intervention after bubbles has been my theory since 1998 when this site was started after I figured out that this is the logic of our political economy.

That's why I sold stocks in early 2000 and bought long-term Treasury bonds that fall then gold in the summer of 2001.

Since early 2005 when I first debated guys like Mish and Denneger about deflation I have tried to explain the philosophy of the Fed and Congress. Granted it is not easy to get your head around these policies if you are a rational person. Part of the task of forecasting in this environment is to think like a crazy person but without becoming one.

After Greenspan tried and failed in 1994 he justified future inaction by applying fundamentalist free market philosophy. Under the Clinton administration Greenspan found it to be too politically unpopular to halt asset bubbles. The Fed decided consciously to not try to prevent bubbles and crashes.The Fed convinced itself that it could manage the macroeconomic aftermath of the crashes that inevitably follow asset bubbles.

In 2010 I re-enforced the point I made about the Fed's use of its balance sheet to prevent deflation.



Door Number Two Revisited – Part I: Re-inflation theory and practice (http://www.itulip.com/forums/showthread.php/17553-Door-Number-Two-Revisited-–-Part-I-Re-inflation-theory-and-practice-Eric-Janszen)

In theory, the balance sheet of the Federal Reserve can be expanded infinitely.”
- Alan Greenspan, 2005


Yes, they actually believe this. I have met them -- Bernanke and Yellen and Summers and, yes, even Volcker believes this. I can tell you that they believe every word that they have written about all of the ways that a central bank and government can manage the aftermath of a credit bubble as if nothing happened and we can all go merrily on our way. Loony stuff, but never underestimate the ability of members of an entrenched power group to talk each other into crazy ideas.

Next month I meet Jamie Dimon and Simon Johnson. Simon is one of the good guys, of course. It will be fun to talk to him. The reason for meeting Dimon is the same as for meeting Summers. It's important aspect of my work here to understand how the guys we do not agree with are think, especially when they have their hands on the steering wheel and foot on the gas pedal.

In 1998 I decided that they were going to let the bubbles rip then pop. The Fed and Congress will use every trick in the book to try to get the economy going again.

They do not think of themselves as fixing bond prices or manipulating rates, or selling U.S. foreign policy determination to alien foreign powers.

They think they are heros for preventing a deflationary depression by "shaping the yield curve."

It's insanity, of course, but it's important to remember that the original act of insanity was allowing the U.S. economy to become leveraged on mortgage debt to nearly 100% of GDP.

They will try and try and try until eventually the Fed and the U.S. runs out of credit and the UST market implodes.

To me it appeared inevitable that if the Fed encouraged asset bubbles that the U.S. economy was going to wind up on monetary and fiscal life support and just as inevitably this effort will fail.

Heavy on the word "eventually."

We took our positions for the eventuality of a U.S. currency and bond crisis more than a decade ago.

The Janszen Scenario is about how -- and possibly when -- the Fed and U.S. run out of credit trying to support the over-indebted U.S. economy to prevent its collapse into a deflationary depression.

In Part II of this article, which I plan to publish tomorrow, we look into one of three ways that the U.S. runs out of credit while trying to prevent a deflationary depression.


http://www.itulip.com/images2/USEconomyLifeSupportwtmk.png

The U.S. economy has been running on borrowed money and borrowed time since 2009.
Japan's economy has been similarly "assisted" since 1992. Can the U.S. do the same?

I asked Larry Summers if he thought there was a limit to the amount of leverage that the U.S. economy could take on and still function. He didn't really answer the question. But the question wasn't formulated in a way that kept him from avoiding an answer. A corollary question that perhaps I'll put to Dimon, and word more cleverly so he has to answer, to see what he'll say, is whether there is a theoretical upper limit to the Fed's balance sheet. Is it $10 trillion? $100 trillion? $1,000 trillion? The answer should be interesting. All in the subscriber area, of course.

rlskaggs2003
09-20-12, 01:57 PM
CI: You show QE as beefing up the assets side of the household balance sheet, for those who have financial assets. What about net worth overall?
EJ: Peak to trough we're talking about a $16 trillion decline in household net worth from $68 trillion to $52 trillion. As of Q2 2012 households made back $10 trillion of that; now its off $6 trillion from the peak.


http://www.itulip.com/images2/HouseholdNetWorthQ11955-Q22012wtmk.png



There are roughly 118 million households in the U.S. Unless my math is off, $62 trillion equates to an average household and NPO net worth of a little over half million dollars per household. Unless there's a bunch of NPO's with really strong balance sheets, I have trouble believing avg household NW is truly this large. I wonder if the methodology used to estimate NW has been consistent over the time period shown above.

rogermexico
09-20-12, 02:06 PM
This nuanced interpretation of gold's function in a currency crisis is critical to get right because it suggests how the latest episode in the life of gold as a monetary asset is most likely to end. Rather than by government confiscation as gold fanatics warn, I have argued since 2001 that the most probable endgame is for global monetary crisis to force the U.S. to re-open the gold window, a concept I explain in detail later, with gold turned in by U.S. citizens voluntarily to increase U.S. holdings from 8,133 tons today to enough to truly back the full faith and credit of the U.S. Treasury.

My prediction has been and remains that there will be no vilification of gold, no confiscation of gold and no unavoidable punitive taxation when the gold window opening is imminent and US GOV has decided that gold is the new money. Remember, right now gold is still the enemy, and even if it is acknowledged by TPTB that gold will become the new money eventually, the fiction that it will always be the enemy must be maintained.

When the gold window is imminent, it will be in the interests of those who want to peg the out of control dollar to gold to get as many dollars for the gold as possible - the reverse of the current posture. The more dollars or UST per gold ounce, the more debt is covered by the gold, correct?

This will mean that the gold peg must be set higher than the market clearing price of gold absent the window re-opening. This means the ultimate price will be high.

The UST or Fed or whoever holds the gold (makes no difference as the dynamics are the same) will want to possess more of this newly valuable gold than what they have at the time. Do you suppose it would be efficient to go house to house with a metal detector or to depend on patriots ( a la Korea) to donate the gold in private hands? Will black helicopters fly? Will gold profits be taxed at 90% to punish you for holding what is now the new basis for money? Would this tax alone motivate you to turn it in or sell it or to simply go to greater efforts to hide it to avoid the taxation? Would any of these goldbug inspired maneuvers put much more gold in the treasury to back the new gold pegged dollar? NO.

The government or Fed will buy your gold. The price will be at a modest discount to the remonetization price and will likely be at least equal to if not higher than the market determined spot price at the time.

Why will you sell it to them?

Because if you accept the price offered the taxes will all be waived.

That is the one sure way the government can collect the most gold that is in private hands without screwing or disincentivizing itulipers or the goldbugs or the law abiding citizens, or the seret hoarders or the 1% who increasingly hold gold and like any sane person desire to minimize their taxes. So you, John Paulson, George Soros and grandma with a Kugerrand will all be incentivized to turn in your gold. And at a reasonable price that is discounted relative to the remonetization price but higher than you would get in the market after accounting for taxes at current rates.

There's my prediction. Let's see how close it comes to fruition. I think this will happen in the next presidential term.

* Could tax rates also be raised punitively to assist in this "confiscation"? Sure, but it will not matter because you will sell most of what you have to avoid it under the terms and time window offered, and what small core position you retain you will not sell....

jneal3
09-20-12, 02:14 PM
The Janszen Scenario is about how -- and possibly when -- the Fed and U.S. run out of credit trying to support the over-indebted U.S. economy to prevent its collapse into a deflationary depression.

In Part II of this article, which I plan to publish today or die trying, we look into one of three ways that the U.S. runs out of credit while trying to prevent a deflationary depression.


Is this (BOPI) (http://research.stlouisfed.org/fredgraph.png?g=aT6)one of the gauges on the dashboard tracking when we run out of credit? Seems to have taken an ominous turn of late...are foreigners pulling capital out of the US, or is this just the Fed's QE crowding out buyers?

jabberwocky
09-20-12, 02:33 PM
Thank you, and forgive my comment. The difficulty I often times have, is with the relative lack of precision in words over time, while maintaining stricter control over statistics, even though we all know the latter are inadequate representations of reality at best, and frauds at worst.
I, for one, do not think the prime actors in this sordid drama "believe" what they preach. Surely, a coterie of "usefull idiots" do, but not the central players. Praising J. Yellen, for example, for recognizing the debt problem over 30 years is damning with faint praise. The history of paper inflations, including China's episodes in the distant past, is one of inevitable collapse. It is shocking to me how this can be ignored by academics.
The paralysis that I, personally,feel (aside from my physical decrepitude!), is whether, and when, to jump from one side of the ship to the other, as we sink. Dare I eat a peach? Should I buy more gold now? Or will GS engineer a fall as soon as I do? And will the entity be a fraud?
As for Fed balance sheet expansion, what is to stop them from doing it "off balance sheet"? They have allowed fraudulent mortgages to infect said balance sheet without hesitation. There is no limit save ultimate economic failure. No idea when that happens, however. Trajedy followed by farce.

Keep up the good work.

Chris Coles
09-20-12, 05:33 PM
Yes, they actually believe this. I have met them -- Bernanke and Yellen and Summers and, yes, even Volcker believes this. I can tell you that they believe every word that they have written about all of the ways that a central bank and government can manage the aftermath of a credit bubble as if nothing happened and we can all go merrily on our way. Loony stuff, but never underestimate the ability of members of an entrenched power group to talk each other into crazy ideas.

By pure chance this evening we have had a major public interview of Mervyn King on Channel 4 News. That interview absolutely confirms your theory. Everything is about maintaining the credibility of the banking system. King, (as we must assume every other central banker), believes that by taking the road they are on they will eventually bring the economy back to long term stability.

As it will be probably well past midnight here before you get the part 2 up EJ, I shall have to wait til tomorrow to comment further.
http://www.channel4.com/news/sir-mervyn-king-debt-target-channel-4-news-interview

Southernguy
09-20-12, 05:45 PM
In summary: if the very rich are, increasingly, hoarding gold, gold shall not be confiscated. Unless the theory about the US (and most of the rest of the world as well) is governed by and for the rich is wrong. Insofar the theory seems to be the only possible explanation for what´s happening, be it economic bubbles, crises and of course wars.
I don´t buy the explanation that those who allow bubbles to grow are "fools" or "ignorants".
I think that they simply make money for them or their patrons in every situation. When bubbles inflate they make money, when bubbles deflate they make money. They do so by buying assets at discounted prices. Then they inflate a new bubble: they make more money. Etc., etc.
So, when the time comes that gold prices go sky high they shall be already hoarding big amounts of it. Why would then "their" government expropiate gold? And that is, by the way, the explanation, in same path by central banks, why gold price shall be so high.
For us, the "small fry" just find some clever and honest economic analyst, as EJ, and try to survive; and eventually make some money.
By the way, the coal miners play, apart from the wild volatility is doing quite well. Keep buying in what I see as "dips".

shiny!
09-20-12, 08:30 PM
My prediction has been and remains that there will be no vilification of gold, no confiscation of gold and no unavoidable punitive taxation when the gold window opening is imminent and US GOV has decided that gold is the new money. Remember, right now gold is still the enemy, and even if it is acknowledged by TPTB that gold will become the new money eventually, the fiction that it will always be the enemy must be maintained.

When the gold window is imminent, it will be in the interests of those who want to peg the out of control dollar to gold to get as many dollars for the gold as possible - the reverse of the current posture. The more dollars or UST per gold ounce, the more debt is covered by the gold, correct?

This will mean that the gold peg must be set higher than the market clearing price of gold absent the window re-opening. This means the ultimate price will be high.

The UST or Fed or whoever holds the gold (makes no difference as the dynamics are the same) will want to possess more of this newly valuable gold than what they have at the time. Do you suppose it would be efficient to go house to house with a metal detector or to depend on patriots ( a la Korea) to donate the gold in private hands? Will black helicopters fly? Will gold profits be taxed at 90% to punish you for holding what is now the new basis for money? Would this tax alone motivate you to turn it in or sell it or to simply go to greater efforts to hide it to avoid the taxation? Would any of these goldbug inspired maneuvers put much more gold in the treasury to back the new gold pegged dollar? NO.

The government or Fed will buy your gold. The price will be at a modest discount to the remonetization price and will likely be at least equal to if not higher than the market determined spot price at the time.

Why will you sell it to them?

Because if you accept the price offered the taxes will all be waived.

That is the one sure way the government can collect the most gold that is in private hands without screwing or disincentivizing itulipers or the goldbugs or the law abiding citizens, or the seret hoarders or the 1% who increasingly hold gold and like any sane person desire to minimize their taxes. So you, John Paulson, George Soros and grandma with a Kugerrand will all be incentivized to turn in your gold. And at a reasonable price that is discounted relative to the remonetization price but higher than you would get in the market after accounting for taxes at current rates.

There's my prediction. Let's see how close it comes to fruition. I think this will happen in the next presidential term.

* Could tax rates also be raised punitively to assist in this "confiscation"? Sure, but it will not matter because you will sell most of what you have to avoid it under the terms and time window offered, and what small core position you retain you will not sell....

This is logical and makes perfect sense, so it will likely not come to pass for those reasons. I've continually overestimated the intelligence or good intentions of those in charge.

rogermexico
09-20-12, 09:46 PM
Ha Ha Ha

I see your point but we must be careful of contra-contrarianism. Just because you are paranoid does not mean they are not out to get you.

Just because it makes sense does not mean it won't happen in this world that so often makes little sense.

I propose this scenario because I assume that in the big ways they will be mad, and in the small ways they will be lucid.

The same way EJ assumes that earnest attempts to do what really should be done will not be made, but within the framework of continuing to do the wrong thing in the largest sense, they will still behave in a manner that is logical and goal oriented with respect to this wrong plan that they have. That is Kremlinology vis a vis FIRE and the US Govt.

Likewise, my assumption is that TPTB will continue on a path that they do not necessarily see as inevitably leading to gold remonetization, yet they will indeed continue on that path, and when they get to the point where they see that it is inevitable that this is the destination, they will then act in a rational manner to make it work out the best way for themselves, i.e., in a way that gets them the most gold.

The fact that it will not be what gold bugs or doomers predict will have nothing to do with them desiring to prove such people wrong or to punish them, and therefore the fact that it may work out well for holders of gold will only be an accident, and a sign of neither approval not reproach.

These actions will be a force acting on gold holders, not a plot that treats holders of gold as good or bad or anything other than a source of gold.....

metalman
09-20-12, 09:51 PM
No, it will depend entirely on who is doing the asking.

Imagine if it happened this year. How many Patriots do you think would be volunteering their gold for the Marxist, Muslim El Presidente Hussein Obama?

how many? zirp... er...i mean zilch.

in 2022?

this guy... distant memory... (http://www.itulip.com/forums/showthread.php/19879-Meanwhile-Back-in-the-Sandbox?p=239265#post239265)

after war & inflation & no video games to play?

our leader then?????

http://i.imgur.com/ucmJb.jpg

http://i.imgur.com/rq5ab.jpg

EJ
09-21-12, 09:53 AM
The gold price may be telling us that the ECB stimulus that I expect before the end of Sept. to round out the $1 trillion in global Q3 stimulus that I forecast for Q3 earlier in the year may be announced soon.


http://www.itulip.com/images2/ECBgold092112wtmk.png

China, the U.S., and Japan have already announced this month.

Chomsky
09-21-12, 09:57 AM
The gold price may be telling us that the ECB stimulus that I expect before the end of Sept. to round out the $1 trillion in global Q3 stimulus that I forecast for Q3 earlier in the year may be announced soon.


http://www.itulip.com/images2/ECBgold092112wtmk.png

China, the U.S., and Japan have already announced this month.



Sweden announces stimulus:

http://www.presseurop.eu/en/content/news-brief/2729621-stockholm-banks-stimulus-not-austerity

Slimprofits
09-21-12, 10:44 AM
Thanks Metalman!

gugion
09-21-12, 11:05 AM
The gold price may be telling us that the ECB stimulus that I expect before the end of Sept. to round out the $1 trillion in global Q3 stimulus that I forecast for Q3 earlier in the year may be announced soon.


http://www.itulip.com/images2/ECBgold092112wtmk.png

China, the U.S., and Japan have already announced this month.


Any ideas for a short-term trade surrounding your expectation of ECB stimulus announcement, or has the market already priced it in and it's too late? Thanks.

vt
09-21-12, 01:09 PM
Short term trading is difficult and fraught with danger.

EJ gave a series of expected ranges for gold this year and next, as well as potential targets for the rest of this decade. That was great advice to plan intermediate and long term plans for whatever gold holdings one would consider.

rogermexico
09-21-12, 04:16 PM
Any ideas for a short-term trade surrounding your expectation of ECB stimulus announcement, or has the market already priced it in and it's too late? Thanks.


My best idea for the short term is to make sure you have an appropriately large core position of gold for the long term. If you don't now is a good time to buy more and hold it no matter what it does in the short term....

jiimbergin
09-21-12, 04:21 PM
My best idea for the short term is to make sure you have an appropriately large core position of gold for the long term. If you don't now is a good time to buy more and hold it no matter what it does in the short term....

+1

Chris
09-22-12, 04:40 AM
Paul Volker agrees that QE3 is pointless:

http://www.telegraph.co.uk/finance/economics/9559082/QE3-will-not-fix-Americas-problems-warns-Paul-Volcker.html

The Bank of England to pursue more QE. Or should that be QED?

nonlin_dynamics
09-22-12, 06:08 AM
Hi all,

Has Part II been already published?

Chris Coles
09-22-12, 06:26 AM
Hi all,

Has Part II been already published?

As far as I can make out, no.

nonlin_dynamics
09-22-12, 06:43 AM
As far as I can make out, no.

Thanks for the reply.

I did hear EJ speak with Financial Sense and he was mentioning about 3 triggers for a bond market crisis (alluded to at the end of Part I of this article).

1. The Fed itself (gradual transition planning going wrong similar to early 1990s, inadvertently starting a stampede)
2. Disruption among major foreign buyers (Japan/China being at odd with each other on supporting US government spending policy)
3. ?? probably energy induced crisis?

Can't wait to read Part II.

Polish_Silver
09-22-12, 08:34 AM
The UST bull market ended in 2001. From 2001 until the crash in the market for securitized mortgage bonds the UST market was manipulated by rate policy and accelerated foreign UST sales. Since Q2 2009 when short rates effectively hit zero prices of UST have been fixed by policy across the yield curve. Not coincidentally that is when foreign central banks became net gold buyers. --EJ


Why is "repression" not a good word for that? I would call it "interest rate suppression".

jabberwocky
09-22-12, 11:17 AM
I, for one, believe EJ's trust in the sincerity of the major players is misplaced, and quite surprisingly so. Why he thinks , having met them, he can read their minds, like Bush of Putin, (NOT that I am comparing EJ to Bush in any literal sense) seems oddly out of place here. "The banality of evil" comes to mind, or the old line about having someone change their opinion on an issue, the outcome of which, determines their income.
This is systemic psycopathy, with fellow travelling attendents.
If Larry Summers, for instance, "believes" what he writes and says, I will be shocked, just shocked!
No offence meant to anyone, and to be clear, I know none of these folks, so my opinion is worth nothing.+=(

EJ
09-22-12, 12:15 PM
--EJ


Why is "repression" not a good word for that? I would call it "interest rate suppression".

We have been as successful as we have been here over the past 14 years largely because we are careful in our use of language. The financial media often gets things wrong simply because the language used in the "debate" on economic issues is too imprecise, and the language is imprecise because the concepts are sloppy. For example, the financial media talks about the economy as "weak" and the weakness as due to "the recession" when in fact the actual period of economic contraction, the recession, started Dec. 2007 and ended Jun. 2009, more than three years ago. The recession created an output gap, the difference between real potential GDP if the recession had not occurred and the actual GDP of the recovering economy. All recessions create output gaps. They typically begin to close right away as the economy recovers and close completely within three to four years so that the economy is growing again at the rate it would be at if the recession had never occurred. But the output gap created by the last recession was so large and recovery so slow that the gap has not even started to close yet and at this rate will not close before a new recession makes the gap even larger.

We call this stuck condition of the economy an Output Gap Trap because the economy is not growing fast enough to escape before a new recession opens the gap wider, making escape even more problematic. The implications are for even higher unemployment, an even weaker housing market, and even more dramatic policy measures to try to get the economy growing again. Since we have developed this unique understanding of the condition of the economy and have concise language to use to refer to it we have a foundation to build on to determine its future direction and the precise language we need to use to discuss it conceptually. Out Output Gap Trap concept explains why cost-push inflation from high energy prices are not being transmitted to wage rates in a typical price-wage spiral: demand is still too weak to produce demand-pull inflation. Instead the inflation that the Fed is creating shows up as declining product and services quality. We were able to forecast this outcome here in 2008 because of our understanding of the consequences of reflation policy in the context of an Output Gap Trap. Careful use of language to describe the processes involved keeps us from losing our way in the economics conversation de jour, such as about financial repression, the new normal, or what have you. The entire framework of discussion of economic policy is flawed because it is based on the erroneous assumption that if the Fed just keeps inflating enough and if Congress keeps raising the debt ceiling to allow the government to continue to stimulate the economy via deficit spending that eventually the output gap will close. The "debate" is over what kind of policy should be used. The fact is that none of the policy options currently on the table can possibly work because if and when the economy falls back into recession before the output gap closes from the previous recession the impossibility of escape and the implication of this will become apparent to the bond markets.

To develop a valid theory of the future of the UST bond market we have to be clear about the events that led to this point and we have to be clear and concise in our use of language to describe the circumstances of the UST market.

The market for the Treasury bonds of a country whose economy is stuck in an Output Gap Trap and kept afloat by government borrowing cannot be called a "bull market" despite historically low interest rates. If corn prices increased for 20 years we'd call that a bull market in corn. If subsequently corn prices crashed and the government then stepped in to support corn prices at an even higher price than they were at before the crash, because the economy ran on corn and the government was afraid of the impact on the economy of a lower market price for corn, we would not call the resulting rise in corn prices a bull market in corn. We would not say that corn prices had been repressed. The concise term is price fixing.


http://research.stlouisfed.org/fredgraph.png?g=aXn

Note the long end of the yield curve in Q1 and Q2 2009 before price-fixing operations started.

Of course our economy doesn't run on corn. At this time and since 2009 it runs on money borrowed against the Fed's and Federal government's balance sheets. The borrowing is done by issuance of UST bonds. The Fed by creating demand for the bonds issued by the Treasury has produced an artificial and temporary shortage of a wide range of bond maturities. The Fed thinks it can safely extricate itself from this role in the future. History says otherwise.

A Dub
09-22-12, 01:18 PM
The "debate" is over what kind of policy should be used. The fact is that none of the policy options currently on the table can possibly work because if and when the economy falls back into recession before the output gap closes from the previous recession the impossibility of escape and the implication of this will become apparent to the bond markets.

EJ, 2 questions for you:
1. Have you sold every last one of your Treasury's yet?
2. If not, why not, given your forecast of a bond market crisis?

Thanks

jabberwocky
09-22-12, 01:40 PM
I am less impressed with the concept of "precision" in language. As I understand it, the output gap is revealed in recession, but is developed in the preceding boom. When the tide goes out, we see who was swimming naked.
For US treasuries to have been sold to foreigners after 2001 buyers were required, not just salesmen. Foreign CB's largely Japan, and China, after it's accession to the WTO in 2001, accomplished this, a mercantilist act to maintain export market penetration to the gluttonous American "consumer", sad Frankenstein creation that we have become.
Bankers (and other malefactors}, having "bought " congress, executive branch, and some parts of the judiciary, saw the opportunity to perpetrate massive fraud, and get away with it. "The big lie" concept. Academia supplied the narrative justification.
Once the inevitable collapse started, the Bank's best friend, tne Fed, bailed them out, preventing, the cleansing (Just like Japan, inc.), and precluding any possibility of productive recovery.
With respect, EJ, what you measure and describe as recovery, is, to other eyes, no recovery at all, but rather, sound and fury, signifying nothing.
Back to the issue of the treasury market, or any market at all. What is to stop the Fed from buying all the market? Nothing. It will fail, but it has already failed to my tired and ignorant eyes.

EJ
09-22-12, 03:11 PM
EJ, 2 questions for you:
1. Have you sold every last one of your Treasury's yet?
2. If not, why not, given your forecast of a bond market crisis?

Thanks

New allocation noted at the end of Part II, coming soon.

EJ
09-22-12, 04:14 PM
I am less impressed with the concept of "precision" in language. As I understand it, the output gap is revealed in recession, but is developed in the preceding boom. When the tide goes out, we see who was swimming naked.

That is an ideological construct. It does not help us 1) understand what the Fed and policy makers are thinking and 2) prepare for they are likely to do.

Economics is about human behavior. The credit structure of the economy is built on certain growth rate expectations of producers and consumers. Real potential output estimates what the expected future growth rate is. It is as real as the income, inflation, and other expectations of every person who runs a company or buys goods at the store. If those expectations are not met, producers and consumers change their behavior.

Looking back at the history of output gaps and output surpluses since the 1920s we can clearly see that inflation was low or negative during output gaps and positive or high during periods of output surplus. The potential output concept is useful.


http://www.itulip.com/images2/outputgapsinflationQ11929-Q32011wtmk.png

The U.S. economy has experienced only three extended output gaps since the 1920s: During The Great Depression, during the
1981 - 1983 recessions manufactured by the Fed to halt the price-wage spiral, and since 2009.

The current episode is unlike any other in history. My bet is that there is only one way for this to end: With a reversal of pro-finance, low inflation economic policy of the FIRE Economy since 1980. There is only one way out of the Output Gap Trap: nominal growth in excess of 6% of GDP and real growth of 4% of GDP.


For US treasuries to have been sold to foreigners after 2001 buyers were required, not just salesmen. Foreign CB's largely Japan, and China, after it's accession to the WTO in 2001, accomplished this, a mercantilist act to maintain export market penetration to the gluttonous American "consumer", sad Frankenstein creation that we have become.

There was more to it than that. The U.S. cut more than trade deals with China and Japan in exchange for the bailout of the U.S. economy since 2001. Let's hope the Clinton then Bush then Obama administrations didn't make promises to both that are at odds with China's and Japan's interests with respect to each other.


Bankers (and other malefactors}, having "bought " congress, executive branch, and some parts of the judiciary, saw the opportunity to perpetrate massive fraud, and get away with it. "The big lie" concept. Academia supplied the narrative justification.

No argument.


Once the inevitable collapse started, the Bank's best friend, tne Fed, bailed them out, preventing, the cleansing (Just like Japan, inc.), and precluding any possibility of productive recovery.
With respect, EJ, what you measure and describe as recovery, is, to other eyes, no recovery at all, but rather, sound and fury, signifying nothing.

I use the term "recovery" to mean a return of 80% to 90% or more of PCE, retail sales, and other measures of consumption to pre-crisis levels. However, as we see in Part II the gap between PCE today after the AFC and PCE today if we had not gone through the AFC is still a $1 trillion a year shortfall. This is what makes this recovery not feel like any previous recovery. We could say that the economy is now back where it's supposed to be if it had not been artificially inflated with excessive credit creation but the trouble with that conception goes back to expectations. The cleansing approach was taken in the U.S. from 1930 to 1933. Didn't work. This is also an "as if" ideological concept. The cold turkey approach cannot work in a post credit bubble economy because all of the debt that built up over the credit bubble period creates a self-reinforcing mechanism of wealth and demand destruction. As the U.S. discovered in 1933 the process has no magical self-limiting feature. Demand falls, prices fall, incomes fall, debts are defaulted on, banks go under, businesses fail, demand falls, prices fall, incomes fall, debts are defaulted on, banks go under, and on and on. An over-leveraged economy in a recession is as a capsizing ship; past a certain point the more it tips the more it tips. I wish it were not so indebted but it is, and I wish that the result of unmanaged debt deflation was not a self-reinforcing, runaway economic crash, but it is. This is our predicament. It is no use to pretend otherwise.


Back to the issue of the treasury market, or any market at all. What is to stop the Fed from buying all the market? Nothing. It will fail, but it has already failed to my tired and ignorant eyes.

Despite what Greenspan said in 2005 in that quote I use about the Fed's balance sheet being infinite, it isn't, or at least it isn't infinite forever. There is both a level and a time component that limits the Fed. In Part II look at the Fed's balance sheet since the last time we looked in March 2010 and it appears that the Fed is trying to hold the line under $3 trillion.

Thank you for your comments and questions.

I'm going to go offline until Part II is completed.

c1ue
09-22-12, 04:33 PM
Economics is about human behavior.

...

The current episode is unlike any other in history. My bet is that there is only one way for this to end: With a reversal of pro-finance, low inflation economic policy of the FIRE Economy since 1980. There is only one way out of the Output Gap Trap: nominal growth in excess of 6% of GDP and real growth of 4% of GDP.

I don't dispute any of what you note above.

What I will add is that the framework by which I disagree on some of your conclusions is that those in power, with the money, will not act to hurt themselves without strong leadership and/or an overwhelming public mandate.

Those who make their living via pro-FIRE policies as well as those bought into power by said pro-FIRE individuals and industries are not going to quietly go into the night.

Equally the prospect of the majority of homeowners in the US choosing to undertake asset deflation - I think this is highly unrealistic.

Of course the alternative is dollar devaluation/inflation - but equally this is anathema to FIRE.

Any or all of these can be overcome by a transcendant leader, but I see no one with either the charisma, position, or ideology anywhere in sight.

Thus IMO the most likely path is a penny wise, pound foolish re-hashing of the same old pro-FIRE prescriptions until a breaking point is achieved - at which point anything can happen, and most of which are bad.

Southernguy
09-22-12, 06:14 PM
"Thus IMO the most likely path is a penny wise, pound foolish re-hashing of the same old pro-FIRE prescriptions until a breaking point is achieved - at which point anything can happen, and most of which are bad."

That, I think is the marrow of the "Janszen scenario". Only two "little" details are missing: when and how it will unfold.
Hope some light comes out from part II.
Meantime, bite our nails

patrikkorda
09-22-12, 08:37 PM
My bet is that there is only one way for this to end: With a reversal of pro-finance, low inflation economic policy of the FIRE Economy since 1980.

I don't want to sound like a FIRE cheerleader. However, an anti-finance, high inflation economic policy just doesn't seem to roll off the tongue too well. I certainly think we are heading in the direction of a banana republic, but that doesn't mean it should somehow be welcomed.;_N

jk
09-22-12, 09:29 PM
as the mainstream financial world moves toward more real assets [e.g. buffett buys burlington northern not more insurance companies, gross and dalio endorse gold], they are positioning themselves for the burning out of fire. the more prepared they are with real assets, the more likely they will by happy to dance around the embers. the only "solution" to all the debt is a lot of inflation. i don't think we can get from here to 6% nominal and 4% real gdp without passing through a phase in which the nominal/real spread is much wider. some of the inflation can be denied to make it officially more palatable.

runlikehe11
09-22-12, 10:30 PM
I will repeat what I said before... Faber has it right... 25 pct in gold, 25 in cash, 25 in good equities, and 25 in corporate bonds. This game is becoming to difficult to navigate.

Sounds like Faber is leaning towards Harry Browne's Permanent Portfolio.

Polish_Silver
09-23-12, 08:39 AM
My prediction has been and remains that there will be no vilification of gold, no confiscation of gold and no unavoidable punitive taxation when the gold window opening is imminent and US GOV has decided that gold is the new money. Remember, right now gold is still the enemy, and even if it is acknowledged by TPTB that gold will become the new money eventually, the fiction that it will always be the enemy must be maintained.



I think History is against you, Rogermexico. As of 1932, the enemy was not "gold", but "speculators" , ie, private parties holding gold. Sure, Roosevelt wanted to get as much gold as possible, so the fed's forced people to sell at a fixed price, then devalued the dollar. There is a lot less respect for private property now than then.

Just like our profound energy policy debates. The bad people are "oil companies". People who drive huge cars and commute 30 miles to work are never mentioned as the problem.

Another reason that they do not want gold in private hands because it makes possible a payment and saving system independent of the banks and government issued currency. Gresham to the max!

After the gold window is opened, won't they keep reducing the backing ratio gradually, or inflating the dollar/oz ratio?

rogermexico
09-23-12, 01:16 PM
I think History is against you, Rogermexico. As of 1932, the enemy was not "gold", but "speculators" , ie, private parties holding gold. Sure, Roosevelt wanted to get as much gold as possible, so the fed's forced people to sell at a fixed price, then devalued the dollar. There is a lot less respect for private property now than then.

A currency crisis in the the world's reserve currency is not your father's great depression where, crucially, we started with gold backing the dollar. That is why there has been no deflationary spiral to date. We are talking about going from pure fiat back to some kind of gold backing, which will be done not out of a sense of propriety, but in order to stop a currency from crashing completely. Put yourself in the shoes of the Fed/UST. You need physical gold bullion and there is enough in private hands that it is useful to your purposes. We stipulate that it was not taken by force the last time, and it would be physically impossible to actually confiscate the gold even they wanted to and had no compunction against it. "Respect" for private property is therefore totally irrelevant. The government may be thieves, but to propose they will try to STEAL or forcibly take gold, when it would work better to buy it assumes that they are VANDALS. Vandals who are not greedy, but nihilistically amoral and not even interested in what's best for themselves. Into chaos and pain for its own sake - like the Joker... That is 9/11 truther tin foil hat gold bug reasoning.


Just like our profound energy policy debates. The bad people are "oil companies". People who drive huge cars and commute 30 miles to work are never mentioned as the problem.

Agree with you on the 30 mile commutes. Look at passenger miles driven since 1970 and imagine if we all drove as much as we did back then.


Another reason that they do not want gold in private hands because it makes possible a payment and saving system independent of the banks and government issued currency. Gresham to the max!

Not sure I agree they will not want it in private hands. They will be indifferent to it being in private hands other than taxing it higher if you turn down their tender offer. Legal tender laws will likely stay unchanged and if it is illegal to make contracts with gold as tender, then gold will stay as store of value as long as the international dollar is backed by it, whether there is a separate "payment" system or not.


After the gold window is opened, won't they keep reducing the backing ratio gradually, or inflating the dollar/oz ratio?

Induction of domestic inflation for political or other purposes will still be possible with the gold window opened at a fixed rate. That is kind of a separate problem from the issue of backing the dollar to balance trade under a new IMS, but if that were done it would be at cross purposes to the reason we open the gold window - printing more dollars is adding to the world supply of dollars which will ceteris paribus increase demand for our now limited stores of gold! This would be a repeat of the 1960s and would simply bring us full circle to 1971 again, with more and more dollars chasing the same amount of gold at a fixed rate. If this is your fear, then you are now incentivized to hold on to some of your gold as insurance, I guess.

My arguments are independent from and not derived from this site and he has a different scenario, but here is a good explanation of some of the reasons it makes sense that there will not be punitive taxation or confiscation - at least not for long...

http://fofoa.blogspot.com/2012/01/gold-must-flow.html

radon
09-23-12, 01:54 PM
Sounds like Faber is leaning towards Harry Browne's Permanent Portfolio.


I would think that the same reasoning that forced a person to sell treasuries would preclude the purchasing of dollar denominated corporate bonds or US equities etc. You shouldn't even be holding dollars.

radon
09-23-12, 01:55 PM
I think History is against you, Rogermexico. As of 1932, the enemy was not "gold", but "speculators" , ie, private parties holding gold. Sure, Roosevelt wanted to get as much gold as possible, so the fed's forced people to sell at a fixed price, then devalued the dollar. There is a lot less respect for private property now than then.

Just like our profound energy policy debates. The bad people are "oil companies". People who drive huge cars and commute 30 miles to work are never mentioned as the problem.

Another reason that they do not want gold in private hands because it makes possible a payment and saving system independent of the banks and government issued currency. Gresham to the max!

After the gold window is opened, won't they keep reducing the backing ratio gradually, or inflating the dollar/oz ratio?

But gold isn't in the same position as it was in the 1930s. Roosevelt desperately needed to induce inflation but couldn't so long as the dollar was domestically redeemable. The situation is different today. While speculators/"evil white bankers" are still viewed as the enemy it isn't gold they are viewed as hoarding. And confiscation is unnecessary if the use of gold is to arrest a currency crisis. The most likely scenario in my mind is that the gold window will be used in a transitory fashion, both to stop the run on the bank and to set up the replacement of the current IMS.

Also, people are not as trusting in the government as they were in the 30's. They won't like the idea of confiscating gold to give to the speculators in order to restart the banking system. The government is also likely aware of the potential backlash. So, not only is it unnecessary, it will be unpopular politically.

vinoveri
09-23-12, 02:47 PM
Also, people are not as trusting in the government as they were in the 30's. They won't like the idea of confiscating gold to give to the speculators in order to restart the banking system. The government is also likely aware of the potential backlash. So, not only is it unnecessary, it will be unpopular politically.

People were overwhellming against TARP but it did not stop the authorities.
Only if +10% of the population owned a meaningful amount of gold individually would there potentially be a critical mass for political backlash.

c1ue
09-23-12, 02:56 PM
That, I think is the marrow of the "Janszen scenario". Only two "little" details are missing: when and how it will unfold.

Yes and no.

For one thing, I've been operating under the 'penny wise, pound foolish' for over a decade now. EJ/iTulip has been generally much more optimistic, though no longer.

Secondly, as I understand it, iTulip views a war with China - proxy or otherwise - as the excuse needed to kick the can/reorient the US economy (depending on your viewpoint). I do think there are elements of the US government and dependent sectors which are for this, but I also think that this type of action would be enough to precipitate a crystallization of the non-aligned. An equally strong factor is the huge economic influence China can (and does) bring to bear; while the China lobby is nowhere as effective as say AIPAC, on the other hand they are learning.

Thus in my view the descent is far more likely to be internalized rather than a new trajectory achieved via a 'war economy' or some dramatic political turnaround.

jk
09-23-12, 02:56 PM
the more people like gross and dalio buy gold, the less likely it will be seized.

radon
09-23-12, 03:30 PM
People were overwhellming against TARP but it did not stop the authorities.
Only if +10% of the population owned a meaningful amount of gold individually would there potentially be a critical mass for political backlash.

TARP was transparent to most people. Raiding safe deposit boxes and going door to door with guns collecting gold to give to rich bankers is hardly a good comparison. Vocal minorities tend to have a disproportionate political influence, beside this would feed the current political melee, not defuse it. Why would they do something that is not only unnecessary but politically unpopular?

vinoveri
09-23-12, 05:05 PM
the more people like gross and dalio buy gold, the less likely it will be seized.

People like gross and dalio are insiders; They will be spokemen for whatever form of "misappropriation/theft" is proposed.
The will be persuaded with carrot and/or stick to play ball and will come out on top.

vinoveri
09-23-12, 05:11 PM
TARP was transparent to most people. Raiding safe deposit boxes and going door to door with guns collecting gold to give to rich bankers is hardly a good comparison. Vocal minorities tend to have a disproportionate political influence, beside this would feed the current political melee, not defuse it. Why would they do something that is not only unnecessary but politically unpopular?

Sorry, don't get it. TARP was transparent to ALL so its not a good example (of government doing whatever it will notwithstanding what 'the people' want) compared to opaque theft from a minority?

Yes, agree, you will not see FBI agents lining up citizens on the street seaching them for gold. More likely a voluntary surrender/exchange. This will still be misappropriation and taking, and those who don't want to cooperate will be forced to become 'criminals'.

rogermexico
09-23-12, 05:12 PM
People like gross and dalio are insiders; They will be spokemen for whatever form of "misappropriation/theft" is proposed.
The will be persuaded with carrot and/or stick to play ball and will come out on top.

Bill Gross is the Ray Kroc of bond investing. The proletariat and their proxies (retirement and pension funds, etc) are the ones who are actually doing the buying when Bill Gross "buys" gold. You can't screw Bill Gross' clients without screwing Bill Gross.

IOW, I agree with JK.

rogermexico
09-23-12, 05:22 PM
Sorry, don't get it. TARP was transparent to ALL so its not a good example (of government doing whatever it will notwithstanding what 'the people' want) compared to opaque theft from a minority?

Yes, agree, you will not see FBI agents lining up citizens on the street seaching them for gold. More likely a voluntary surrender/exchange. This will still be misappropriation and taking, and those who don't want to cooperate will be forced to become 'criminals'.

Explain how you think the government will recover more gold for its reserves with coercion (which is what I think you mean by misappropriation and taking) than with making it attractive by incentivizing the sale of it. Please use an explanation other than "government does bad things".....

Punishing gold holders and "taking" gold will:

1) Hurt or at least inconvenience insiders who hold it

2) Not net as much gold to the government.

3) Result in black market sales that result in gold flowing OUT of the USA and thereby ending up in other country's reserves, to team USA's relative disadvantage in a new non-fiat IMS.

4) Cause unnecessary political resistance/ strife that serves zero purpose and is counterproductive once the goverment wants gold to be worth as many dollars as possible to deflate the unpayable debts

radon
09-23-12, 08:26 PM
Sorry, don't get it. TARP was transparent to ALL so its not a good example

My point was that the parallel you drew between TARP and gold confiscation was faulty.


Yes, agree, you will not see FBI agents lining up citizens on the street seaching them for gold. More likely a voluntary surrender/exchange.

Again, the political climate and citizens perception of government have, for good reason, changed since the 30s.

vinoveri
09-23-12, 09:18 PM
Explain how you think the government will recover more gold for its reserves with coercion (which is what I think you mean by misappropriation and taking) than with making it attractive by incentivizing the sale of it. Please use an explanation other than "government does bad things".....

Punishing gold holders and "taking" gold will:

1) Hurt or at least inconvenience insiders who hold it

2) Not net as much gold to the government.

3) Result in black market sales that result in gold flowing OUT of the USA and thereby ending up in other country's reserves, to team USA's relative disadvantage in a new non-fiat IMS.

4) Cause unnecessary political resistance/ strife that serves zero purpose and is counterproductive once the goverment wants gold to be worth as many dollars as possible to deflate the unpayable debts


Simple: Recall history. The taking that occurred in 1933 was retroactive, it was not taking at the time; turn in your gold and receive $ currency of equal value in exchange was the deal. Followed by devaluation which constituted the taking.

My position is simply that the government will do what is in its interest, the people, rule of law, and justice be damned. Of course it will strive to maintain power and attempt to avoid crossing any line which would jeopardize that power (e.g., alienate enough of the populace to effect actual grass roots change).

Your theory is Ipse Dixit. Hope you are right.

raja
09-23-12, 10:41 PM
The government is running huge deficits, and at some point money printing will stop working.
At that time, the government will be looking for money anywhere and any way it can be pried out of its citizens' hands. This will be true whether or not a gold standard is instituted.

One good source of money for the government will be a windfall profit tax on gold, say 90%.
Of course, the big boys who own gold will be tipped off in advance, and be able to unload their gold before the tax law takes effect.

Gold owners make up a very small percentage of the population, so taxing this minority will not be politically dangerous. Also, gold owners will be demonized as "speculators", and the non-goldowning majority will be happy to see the alleged evil-doers suffer.

If the government is planning to institute a gold standard, announcing the windfall profit tax on gold first will cause a huge panic selling, with lots of tax money generated from the gold profits tax. As the price of gold falls, profits will decline and tax revenues will decrease. But the government still wins, because at that point it can swoop in and scoop gold up at bargain prices.

The US owns the most gold of any country.
Shifting to a gold standard will work no matter how much new gold the government can obtain, so I don't see any strong necessity for it to get more gold through confiscation. But maybe I'm not understanding this correctly . . . and if so, can someone please explain it to me.

vt
09-23-12, 11:44 PM
Eurozone To Boost Bailout Fund To $2 Trillion

http://finance.yahoo.com/news/euro-zone-boost-bailout-fund-170041055.html (http://finance.yahoo.com/news/euro-zone-boost-bailout-fund-170041055.html)

rogermexico
09-24-12, 12:17 AM
The government is running huge deficits, and at some point money printing will stop working.
At that time, the government will be looking for money anywhere and any way it can be pried out of its citizens' hands. This will be true whether or not a gold standard is instituted.

Think of the reason money printing will stop working. What does it mean to say the government will be "looking for money" when they can print a literally infinite amount of it at will. They will not be looking for "money" they will be looking for something to back new money to stop the crash in dollars and UST that is cause by having too much "money" and claims on the wealth of the USA - credit in the form of UST as well as dollars. If all the government needs is "money", then what advantage is there to prying money out of hands when the printing press can make as many dollars as they want? They have not needed taxes for any of the trillions in bailout funds so far.

If there is no gold backing of a new dollar, then you must be proposing that they would steal or tax gold and then sell it for dollars. But as I just said, they can already print all the dollars they want. If there is backing for a new dollar, it will be because they already "have" too many dollars and too much credit issued and this is crashing the dollar's exchange value internationally. In such a situation, they have no need for "dollars" at all, they need to make a new dollar by backing it with gold. So under scenario 1 where there is no gold backing, they have no need to acquire dollars specifically by appropriating gold, and under scenario 2, they need only gold and not dollars


One good source of money for the government will be a windfall profit tax on gold, say 90%.
Of course, the big boys who own gold will be tipped off in advance, and be able to unload their gold before the tax law takes effect.

Again, the government has a million ways to "get money" that would be higher yield and easier than taxing gold ( for one thing, a tax requires the sale of the asset which naturally discourages realization of the tax - hardly efficient) and I would suggest forcing IRAs into UST or instituting a wealth tax (suggestion in England just recently actually) would get a lot more money than forcing gold to be hoarded and having to knock on doors or patiently wait for it to be sold. A windfall profits tax would be the lest effective way to extract either fiat dollars or gold itself from private hands. I think your narrative is clinging to the "gold is the enemy and always will be anathema to the evil fiat promoters" meme - this is a goldbug theme and is flawed as it assumes that gold can become the new money under a new gold window and that it makes sense to vilify gold at the same time. I claim this makes no sense, as gold will not become the new money unless evil fiat promoters stop seeing it as evil and promoting it as evil.


Gold owners make up a very small percentage of the population, so taxing this minority will not be politically dangerous. Also, gold owners will be demonized as "speculators", and the non-goldowning majority will be happy to see the alleged evil-doers suffer.

The 1%ers are 1% of the population and it is not dangerous to attack them. The 1%ers are the elite and know how to avoid attack. Which of these is it? And WHY will they be demonized? I have never heard a goldbug explanation for this. I understand why they might be demonized NOW in a fiat regime that is still printing, or in 1933 when we are under a gold standard and need to deflate. But why, when the government has transitioned to a desire to stabilize the dollar and assure people that it is a safe store of value would the government demonize gold or the few who hold it? What would be the purpose of this? Just to be mean to gold holders?


If the government is planning to institute a gold standard, announcing the windfall profit tax on gold first will cause a huge panic selling, with lots of tax money generated from the gold profits tax. As the price of gold falls, profits will decline and tax revenues will decrease. But the government still wins, because at that point it can swoop in and scoop gold up at bargain prices.

Yes, the government has proved to be so efficacious at manipulating the price of gold. That's why it gone from $270 to $1770 in 10 years. I don't find that scenario convincing, but I guess we will see. It would be clever even as it would not be very effective in acquiring gold. Also, once the decision has been made, USG will want he price of gold in dollars to be as high as possible. As I've said, I think the peg must be higher than the current market price of gold by some amount. What would be the purpose in doing something to depress the gold price right before the window opens if that means our gold is worth less in terms of dollars and any extant debt. Are you suggesting USG would want the dollar price of gold to be lower than otherwise, or that they will not have thought about it carefully enough, and beating up on gold owners will somehow be more important?


The US owns the most gold of any country.
Shifting to a gold standard will work no matter how much new gold the government can obtain, so I don't see any strong necessity for it to get more gold through confiscation. But maybe I'm not understanding this correctly . . . and if so, can someone please explain it to me.

This is true, in a sense, but it contradicts most of your other arguments here about how badly the government "needs money". Why go to such effort to get money via taxes on gold owners when more valuable gold (as backing for the new money) is left on the table that could easily be acquired in the win/win fashion that I have proposed?

The crux of my argument, at least understanding it, is to see the state change - like from ice to water - that must occur for gold to be remonetized internationally. It has huge ramifications and it's hard to wrap your head around. I am only hypothesizing on one aspect of it and how it will affect gold holders. There are lots of other interesting implications.

rogermexico
09-24-12, 12:38 AM
Simple: Recall history. The taking that occurred in 1933 was retroactive, it was not taking at the time; turn in your gold and receive $ currency of equal value in exchange was the deal. Followed by devaluation which constituted the taking.

More goldbug logic. The government is mean and will be mean to us once again, even if it is against the interest of the government itself and what it is trying to accomplish. The current situation is the polar opposite of 1933 monetarily. Deflation spiral vs sudden stop catastrophe in the exchange value of dollar/ UST.

Explain how acquiring gold to STOP devaluation means the goverment will do the same thing it did when it wanted to CAUSE devaluation? The trashing of the dollars in your pocket it happening right now and will accelerate. There is no need to appropriate gold to effect this. The situation will be exactly the opposite. Why devalue when you have just returned to a gold standard to stop devaluation? In 1933 inflation was needed. This time the inflation will have already occurred and will need to be stopped.


My position is simply that the government will do what is in its interest, the people, rule of law, and justice be damned. Of course it will strive to maintain power and attempt to avoid crossing any line which would jeopardize that power (e.g., alienate enough of the populace to effect actual grass roots change).

Your theory is Ipse Dixit. Hope you are right.

You have not, as far as I can see, offered any reason for the government doing what you propose other than that the government is going to be mean to gold holders because they were in 1933. I've explained why, if the government is going back on the gold standard, it makes sense from their perspective to maximize how much of it they get. Please explain how there is a better way for them to get more gold, or what the motivation would be behind devaluing a new dollar after opening the window specifically to arrest the falling value of the dollar internationally.

Osmose
09-24-12, 09:39 AM
I guess EJ did die trying to get Part II out. :)

shiny!
09-24-12, 09:41 AM
Think of the reason money printing will stop working. What does it mean to say the government will be "looking for money" when they can print a literally infinite amount of it at will. They will not be looking for "money" they will be looking for something to back new money to stop the crash in dollars and UST that is cause by having too much "money" and claims on the wealth of the USA - credit in the form of UST as well as dollars. If all the government needs is "money", then what advantage is there to prying money out of hands when the printing press can make as many dollars as they want? They have not needed taxes for any of the trillions in bailout funds so far.

If there is no gold backing of a new dollar, then you must be proposing that they would steal or tax gold and then sell it for dollars. But as I just said, they can already print all the dollars they want. If there is backing for a new dollar, it will be because they already "have" too many dollars and too much credit issued and this is crashing the dollar's exchange value internationally. In such a situation, they have no need for "dollars" at all, they need to make a new dollar by backing it with gold. So under scenario 1 where there is no gold backing, they have no need to acquire dollars specifically by appropriating gold, and under scenario 2, they need only gold and not dollars



Again, the government has a million ways to "get money" that would be higher yield and easier than taxing gold ( for one thing, a tax requires the sale of the asset which naturally discourages realization of the tax - hardly efficient) and I would suggest forcing IRAs into UST or instituting a wealth tax (suggestion in England just recently actually) would get a lot more money than forcing gold to be hoarded and having to knock on doors or patiently wait for it to be sold. A windfall profits tax would be the lest effective way to extract either fiat dollars or gold itself from private hands. I think your narrative is clinging to the "gold is the enemy and always will be anathema to the evil fiat promoters" meme - this is a goldbug theme and is flawed as it assumes that gold can become the new money under a new gold window and that it makes sense to vilify gold at the same time. I claim this makes no sense, as gold will not become the new money unless evil fiat promoters stop seeing it as evil and promoting it as evil.



The 1%ers are 1% of the population and it is not dangerous to attack them. The 1%ers are the elite and know how to avoid attack. Which of these is it? And WHY will they be demonized? I have never heard a goldbug explanation for this. I understand why they might be demonized NOW in a fiat regime that is still printing, or in 1933 when we are under a gold standard and need to deflate. But why, when the government has transitioned to a desire to stabilize the dollar and assure people that it is a safe store of value would the government demonize gold or the few who hold it? What would be the purpose of this? Just to be mean to gold holders?



Yes, the government has proved to be so efficacious at manipulating the price of gold. That's why it gone from $270 to $1770 in 10 years. I don't find that scenario convincing, but I guess we will see. It would be clever even as it would not be very effective in acquiring gold. Also, once the decision has been made, USG will want he price of gold in dollars to be as high as possible. As I've said, I think the peg must be higher than the current market price of gold by some amount. What would be the purpose in doing something to depress the gold price right before the window opens if that means our gold is worth less in terms of dollars and any extant debt. Are you suggesting USG would want the dollar price of gold to be lower than otherwise, or that they will not have thought about it carefully enough, and beating up on gold owners will somehow be more important?



This is true, in a sense, but it contradicts most of your other arguments here about how badly the government "needs money". Why go to such effort to get money via taxes on gold owners when more valuable gold (as backing for the new money) is left on the table that could easily be acquired in the win/win fashion that I have proposed?

The crux of my argument, at least understanding it, is to see the state change - like from ice to water - that must occur for gold to be remonetized internationally. It has huge ramifications and it's hard to wrap your head around. I am only hypothesizing on one aspect of it and how it will affect gold holders. There are lots of other interesting implications.

FWIW (which is admittedly not much) I agree with you; your scenario is what should happen. But the pessimistic part of me thinks raja's argument is more likely what will happen. If the gov't always did what should happen, we wouldn't be in the mess we're in now. Only time will tell.

"The United States invariably does the right thing, after having exhausted every other alternative."
-- Winston Churchill

raja
09-24-12, 11:03 AM
Here's another scenario to throw in the stew . . . .

I just finished the last section of James Rickards "Currency Wars" . . . what a great book.
I rank Rickards #1 of all the economic pundits I follow, not only for his recent prediction accuracy, but for his real world experience, such as advising the military on financial warfare, his use of systems theory, his frequenting of the university lecture circuit and his 35 years experience working in capital markets. I like his approach to economics in "Currency Wars": he gives the history, the current situation, and his predictions on the outcome -- all well explained. As a lawyer, he presents his "case" in a rational and orderly fashion.

With that intro, let me tell you my understanding of what he predicts as one of three possible future scenarios:

A run on the dollar will occur suddenly and without warning. It will be like an avalanche, where one snowflake too many starts the inevitable catastrophe. (This is reasonable, since the crash will be caused by a crisis of confidence -- a psyhcological phenonmon -- and move at the speed of thought and communication.)

In a matter of only two days, after the Fed and Treasury have tried and failed to stem the selling of dollars, and the stock markets worldwide have closed, the government will step in and impose draconian measures to stop the fall into chaos by invoking the IEEPA act (similar to the one used by FDR). This will include many actions, such as: banning UST sales, closing all exchanges until further notice, no exporting gold, confiscating all private and international gold in the Fed's NYC depository and couple of other NYC depositories (former gold owners to received "suitable" compensation at a future time). This confiscation gives the US over 17,000 tons, about what it held in 1945 before Bretton Woods, making the US the top dog. This majority gold hoard will allow the US to issue a new, gold-based dollar, at 10x the value of the old dollar. A 90% windfall profits tax will be imposed on anyone selling gold to profit from the revaluation.

Under this scenario, you will have about one day to sell your gold in order to profit from the initial mania and avoid the windfall profits tax. Good Luck!
In its timing, Rickards' scenario differs greatly with EJ's. EJ predicts much more time to sell gold prior to the crash. Obviously, these two scenarios require greatly different strategies . . . .

Rickards did not elaborate on why the windfall profits tax will be imposed, and how it would be possible to carry it off. I would like to know his reasoning, but can only speculate at this point:

After revauation, gold would be worth 10x its price before the crash, so gold owners would profit immensely in relation to the rest of the citizenry, who would be suffering as a result of the crash. It would therefore be politically popular to punish those "profiteers", and divert some of the anger that would be generated by the ensuing poverty.
And . . . the government likes money . . . so the windfall tax would provide more moolah to lavish on themselves and their buddies.

By the way, Rickards thinks the scenario described above is the best possible outcome. His other two possible outcomes are chaos, and greater chaos. ;-00

c1ue
09-24-12, 11:41 AM
Gold was money in 1933. Thus devaluation of the dollar necessitated recovery of as much 'free' gold as was possible, otherwise the devaluation would have had much less effect.

Gold is not money today. As noted - all that is necessary for the government to acquire American gold would be some form of tax incentive. One quick example: making profits on gold sales subject to the same investment taxation rates as other passive investments if sold the the US government.

Then devalue.

Note however that the purpose of acquiring gold today is not the same as the purpose of acquiring gold in 1933. In 1933 it was to bring as much of the physical money supply back into government control in order to facilitate the impending devaluation. Today the purpose of the US government acquiring gold is to mitigate against the effects of an impending/ongoing devaluation in the minds of foreign dollar holders. I say only foreign dollar holders because the US residents are screwed anyway.

Confiscation simply makes no sense given this, though of course irrational behavior can always happen.

astonas
09-24-12, 11:44 AM
Rickards did not elaborate on why the windfall profits tax will be imposed, and how it would be possible to carry it off. I would like to know his reasoning, but can only speculate at this point:

Isn't this precisely the point that requires elaboration (without speculation) for Rickards' views on the matter to be taken seriously?

jk
09-24-12, 11:48 AM
under the rickards scenario, a windfall profits tax serves a political purpose, not an economic one.

vinoveri
09-24-12, 11:49 AM
More goldbug logic. The government is mean and will be mean to us once again, even if it is against the interest of the government itself and what it is trying to accomplish. The current situation is the polar opposite of 1933 monetarily. Deflation spiral vs sudden stop catastrophe in the exchange value of dollar/ UST.

Explain how acquiring gold to STOP devaluation means the goverment will do the same thing it did when it wanted to CAUSE devaluation? The trashing of the dollars in your pocket it happening right now and will accelerate. There is no need to appropriate gold to effect this. The situation will be exactly the opposite. Why devalue when you have just returned to a gold standard to stop devaluation? In 1933 inflation was needed. This time the inflation will have already occurred and will need to be stopped.



You have not, as far as I can see, offered any reason for the government doing what you propose other than that the government is going to be mean to gold holders because they were in 1933. I've explained why, if the government is going back on the gold standard, it makes sense from their perspective to maximize how much of it they get. Please explain how there is a better way for them to get more gold, or what the motivation would be behind devaluing a new dollar after opening the window specifically to arrest the falling value of the dollar internationally.

Again would turn to history; Bretton Woods, where modified Gold standard reimposed. On gold, off gold, on gold, off gold. At least we are likely to agree that the world will be returning to some sort of gold standard.

Here's how it could happen:
So, we have a run on the dollar; gold spikes say to $5000;
Feds ban gold sales and calls in gold (pays "fair compensation") - and ideally do this in conjunction and coordination with other countries, which makes it more difficult to transfer gold to other territories. All this in anticipation of re-opening the gold window or returning to some form of gold standard.

When ready, Fed and other government announce new global currency system gold valued at $15,000/oz. System allows governments to excahnge gold but not citizenry, similiar to Bretton Woods.

Chris
09-24-12, 11:53 AM
under the rickards scenario, a windfall profits tax serves a political purpose, not an economic one.

That makes the most sense. Although as mentioned previously, with gold at a fixed revalued price, gold owners would have no incentive to sell with a tax rate at 90%. This outcome is unlikely, in my view. Gold confiscation is more likely if there was populist pressure on governments to punish the evil speculators.

rogermexico
09-24-12, 12:01 PM
FWIW (which is admittedly not much) I agree with you; your scenario is what should happen. But the pessimistic part of me thinks raja's argument is more likely what will happen. If the gov't always did what should happen, we wouldn't be in the mess we're in now. Only time will tell.

"The United States invariably does the right thing, after having exhausted every other alternative."
-- Winston Churchill


But this is not what the government should do. What they should do is not wait until there is a currency crisis and are forced into it. What I am predicting is simply what they will find to be in their interest when that is what they see they have to do. Accordingly, I still have heard no argument here explaining why if it is stipulated that they want to acquire gold to avert a currency slide that they would choose methods to get gold that get them less of it or that are at cross purposes to the point of acquiring the gold.

rogermexico
09-24-12, 12:38 PM
Again would turn to history; Bretton Woods, where modified Gold standard reimposed. On gold, off gold, on gold, off gold. At least we are likely to agree that the world will be returning to some sort of gold standard.

And I would turn to paying attention to how history differs from the present. Bretton woods was a partial or pseudo- gold standard that relied on USA military and monetary hegemony more than any thing else. The premise of Ka-Poom theory, which presumably most of us here ascribe to, is that this dollar hegemony is becoming untenable in a way that makes unilateral imposition of the dollar/UST as the world's reference currency the way it has been since then impossible. The event that makes the gold window necessary is going to require actual gold backing the dollar because nothing else will be acceptable to the other parties. Parties whom we can no longer arbitrarily dictate to the way we have ever since the dollar replaced the pound sterling.


Here's how it could happen:
So, we have a run on the dollar; gold spikes say to $5000;
Feds ban gold sales and calls in gold (pays "fair compensation") - and ideally do this in conjunction and coordination with other countries, which makes it more difficult to transfer gold to other territories. All this in anticipation of re-opening the gold window or returning to some form of gold standard.

When ready, Fed and other government announce new global currency system gold valued at $15,000/oz. System allows governments to excahnge gold but not citizenry, similiar to Bretton Woods.

I don't disagree that the USG could pay fair compensation, and then devalue the dollars tendered by two thirds. They could do that in the sense that it is obviously mechanically possible to do so. Indeed, if you re-read my original scenario, it calls for the government buying the gold at some discount to the intended peg, yet incentivizing this by waiving taxes on it for those who tender their gold. I also hold that the peg will be set above the market price of gold at the time, but not likely 3 times higher. So it is unlikely that if your tender your gold, you will suffer a punitive tax via a two thirds devaluation.

Why not?

For one thing, this very objection you have raised is in the minds of every significant gold holder. So part of the tender offer will be that you have some assurance that your new dollars are not instantly replaced with a new, new dollar. They are not going to offer old dollars, as who would take that when the dollar is crashing and gold is going up? I think there will have to be some assurance that the dollars you are paid with are as good as gold or near to it. You will have to know what the future value of the dollars tendered will be in order to accede to this exchange. I know I would rather take my chances on the black market than risk this outcome by taking "old dollars" with no assurance that the dollar will stabilize. I suggest that the backing and the peg will be announced before they tender for your gold. That way the dollar price to the world is instantly fixed, and they can tender a discounted price to you that is tax-free, and everyone wins, including the government, whose reserves grow at a discount.

There is another way to think about this scenario, though, of "stealing" the gold and then revaluing, aside from the obvious one of who will tender their gold without some guarantee of the what the offered dollars are worth. The gold will be made as valuable as possible. Perhaps as valuable as they can "get away with". So what determines what they can get away with? What is the purpose of the gold window? It is to stop the decline in the dollar and UST market, right?

If the dollar is crashing, and interest rates are 12% and the market value of gold is at $5000, what precisely is the effect of offering our gold as our new money are a rate of $15,000 to the ounce of gold. What would the reception be? What would the price of bonds do in response to this and what would the happen to the governments' borrowing costs? Is it not obvious this would do nothing to stop the slide of the dollar and rising interest rates, and in fact exacerbate them severely?

That is why I think an optimization equation dictates the peg. USG wants gold to be valuable enough in dollars that all dollars do not come home instantly (high price in dollars) in exchange for gold, but ROW will demand a price in dollars that is low enough that they stop dumping dollars and are willing to hold (newly issued or exchanged for existing?) UST. There must be a balance between these, and a peg that is 3x the most recent market price would not satisfy this requirement.

My guess is the peg might be $6,000 or $7,000 if the market price were $5,000. The peg must be higher than market, but not much higher.....

Slimprofits
09-24-12, 01:03 PM
http://money.cnn.com/2012/09/24/news/economy/goldman-fed-qe3/


The Federal Reserve's QE3 bond buying program announced earlier this month could last until the middle of 2015 and eventually reach $2 trillion, according to an estimate from economists at Goldman Sachs.

The Goldman economists also wrote in a report that they believe the Fed will not raise the federal funds rate until 2016. This rate, which is used as a benchmark for a wide variety of consumer and business loans, has been near 0% since December 2008. The Fed said in its last statement that it expected rates would remain low until mid-2015.

Goldman's $2 trillion estimate also includes the buying of long-term Treasuries planned by the Fed under an extension of what is popularly known "Operation Twist." In that program, the Fed is selling short-term Treasuries to fund those purchases.

The Goldman economists also said they think the Fed wants to see the nation's unemployment rate in the 7% to 7.5% range before it ends its bond purchases, and in the 6.5% to 7% range before it starts raising interest rates again.

The Fed's own forecasts call for the unemployment rate to be in the range of 6.7% to 7.3% in 2014. If that actually happens, Goldman said the Fed could end QE3 in the middle of that year. At that point, the bond purchases would have reached $1.2 trillion. But Goldman's own forecasts call for a slower recovery in the job market and overall economy.

"If the recovery continues to disappoint, additional steps are possible," the Goldman economists said. "These include an increase in the pace of asset purchases as well as further changes in Fed communications."

c1ue
09-24-12, 01:04 PM
Again would turn to history; Bretton Woods, where modified Gold standard reimposed. On gold, off gold, on gold, off gold. At least we are likely to agree that the world will be returning to some sort of gold standard.

You're mixing terms: the US was officially off the gold standard - at least for everyone not a central bank - as of 1934.

The US dollar lost any relationship whatsoever to gold in 1973, even for central bankers.

But if you're going to talk about gold confiscation as an individual, the reality is still the same as I noted in my previous post on this thread.

As for the future - we're not going to have a 'true' gold standard no matter what, i.e. you can freely interchange gold for dollars at a fixed rate. We will almost certainly have a gold backed standard - i.e. the US dollar is backed by some volume of gold in the US central bank.

Not the same things at all.

vinoveri
09-24-12, 01:14 PM
You're mixing terms: the US was officially off the gold standard - at least for everyone not a central bank - as of 1934.

The US dollar lost any relationship whatsoever to gold in 1973, even for central bankers.

But if you're going to talk about gold confiscation as an individual, the reality is still the same as I noted in my previous post on this thread.

As for the future - we're not going to have a 'true' gold standard no matter what, i.e. you can freely interchange gold for dollars at a fixed rate. We will almost certainly have a gold backed standard - i.e. the US dollar is backed by some volume of gold in the US central bank.

Not the same things at all.

Sorry if I wasn't clear; not sure which terms you think I'm mixing; Bretton Woods was a gold standard reinstituted post WW2; then off in 1971-73 when gold window closed by nixon. Now we're preparing to go back on one. If you bothered to read the rest of my post (the part you didn't quote) perhaps this would have been clear:
"When ready, Fed and other government announce new global currency system gold valued at $15,000/oz. System allows governments to excahnge gold but not citizenry, similiar to Bretton Woods."

Mn_Mark
09-24-12, 01:33 PM
That is why I think an optimization equation dictates the peg. USG wants gold to be valuable enough in dollars that all dollars do not come home instantly (high price in dollars) in exchange for gold, but ROW will demand a price in dollars that is low enough that they stop dumping dollars and are willing to hold (newly issued or exchanged for existing?) UST. There must be a balance between these, and a peg that is 3x the most recent market price would not satisfy this requirement.

My guess is the peg might be $6,000 or $7,000 if the market price were $5,000. The peg must be higher than market, but not much higher.....

Let me toss into this discussion the FOFOA hypothesis (http://fofoa.blogspot.com), as I understand it.

Let's say we agree there is going to be a dollar currency crisis and that the government is going to be forced to restore domestic and international faith in the dollar by giving it some sort of gold backing.

There seems to be an assumption that there are only two ways for a government to relate its currency to gold: by not making the currency redeemable in gold at all (what we've had since 1933, and since 1971 with respect to other countries), or by having a gold standard where the dollar is pegged to gold at a fixed rate.

The discussion here has been assuming there will be a fixed peg to gold and we've been figiuring out the implications of that: how will the government get the gold that it will peg the dollar to? Will they confiscate all of the citizens' gold? Will they buy the gold from the citizens, encouraging them to sell with tax incentives? Will they punish citizens who try to hold on to their gold by implementing a 90% windfall profits tax? How will they decide what the exact dollar peg will be? Will they set it above the price they expect the market to demand? How much higher?

Well, what if there is a third alternative besides no backing and a fixed peg, and between the government having no interest in gold at all and the government confiscating all the gold and punishing citizens for holding it? What if, instead, the government simply puts gold back in the asset column of the balance sheet at the fed, marked to the market value of gold each quarter, as the European Central Bank does with the Euro? As the dollar value of gold rises, the asset side of the fed balance sheet rises, offsetting the currency on the liability side. This provides balance and stability to the value of the dollar without fixing it to a specific amount of gold. The Fed can then buy or sell gold on the market to strengthen or weaken the currency as they please, without being tied to a fixed peg.

When a government pegs the value of the fiat to a specific amount of gold, you eventually end up with gold being drained away from the treasury and you get shenanigans like 1933 where the government has to outlaw private possession of gold so it can devalue it. Why go to the trouble of starting that cycle again with another fixed peg as in pre-1933?

What is important is that foreigners know they are able to exchange their dollars for gold if they want to. They don't have to do that at the treasury via a peg. They can buy gold from any American private holder on the free market as long as the dollar price of gold is high enough to convince that private citizen to sell their physical gold. The gold is then flowing, which is what the market requires to trust the dollar. The market needs to know it can get gold for its dollars in order to trust those dollars. It doesn't have to be gold from the Fed.

So there is no need for the government to confiscate or even to buy the gold of private U.S. citizens. All the government needs is for people to know that they can always exchange dollars for gold on the free market. The government doesn't need more gold; it just needs a high enough price of gold. And as FOFOA has pointed out numerous times, gold can absorb any amount of fiat - it can be priced at any amount in dollars without harming the economy because it has no other significant economic purpose. Gold isn't used for anything else vital. It can be priced at $50,000 or $100,000 an ounce without upsetting any other part of the economy. No other "commodity" could do that.

The FOFOA argument is the best I've seen yet. So this is the scenario I think is most likely (based on my understanding of the FOFOA scenario):

Faith in the dollar as international reserve currency evaporates.
Dollars come flooding back into the U.S. as people around the world try to buy something real with them before they lose any more value.
Super-hyperinflation in the US begins.
The government, through whatever technical mechanism is necessary, puts the treasury's gold on the fed's balance sheet marked to some very high dollar price, announcing it will revalue it to the market price each month or quarter.
To encourage gold in private U.S. citizens' hands to flow unimpeded, thus providing an ideal way to soak up those massive amounts of internationally-held dollars flowing into the U.S., the government stops treating gold as a commodity and treats it as a special kind of international currency, which dollars can be changed into and out of without tax or other penality. I.e., no capital gains tax, no windfall profits tax, no sales tax. This encourages maximum free flow of gold from private hands, restoring international confidence that they will be able to get their hands on gold for those dollars...and thus no need to panic out of them.
The marked-to-market gold on the fed balance sheet gives the fed a way to manage the gold value of the dollar in a free-floating way without a fixed peg that always results in runs on the treasury gold. This gives them flexibility without the complete lack of gold backing that the international markets won't accept anymore.
The dollar price of gold "reverse waterfalls" up to the $10,000-$100,000/ounce level, drops briefly while people who think it is ending a "bubble" run sell, then rises and stabilizes around $50,000 (or some similar high price) and over time very gradually rises against the dollar as the government sees the need to devalue for political or economic reasons.

Slimprofits
09-24-12, 02:08 PM
http://www.bloomberg.com/news/2012-09-21/fed-s-kocherlakota-backs-more-stimulus-in-policy-reversal.html


Federal Reserve Bank of Minneapolis President Narayana Kocherlakota (http://topics.bloomberg.com/narayana-kocherlakota/) said battling unemployment may mean keeping interest rates (http://topics.bloomberg.com/interest-rates/) close to zero for four years, reversing his view that borrowing costs might have to rise as soon as this year.

As long as inflation doesn’t exceed 2.25 percent, the Fed “should keep the fed funds rate extraordinarily low until the unemployment rate (http://topics.bloomberg.com/unemployment-rate/) has fallen below 5.5 percent,” Kocherlakota said. The comment aligns him with the Federal Open Market Committee (http://topics.bloomberg.com/federal-open-market-committee/)’s decision last week to continue purchasing bonds until labor markets “improve substantially.” Kocherlakota is one of the first Fed officials to specify what he considers improvement in the labor market.



http://www.statesman.com/business/fed-officials-signaling-broad-support-for-doing-more-2465810.html


Last week, Dennis Lockhart, president of the Atlanta Federal Reserve Bank, stressed that the new round of bond purchases would continue until the job market improves, and "if we do not see improvement, more action may be taken."

In a speech last week, Eric Rosengren, president of the Boston Federal Reserve Bank, said he was pleased that the Fed's policy committee was "willing to take difficult actions like these rather than accept the possibility of a long, slow recovery turning into a stagnation that someday earns the dubious title of ‘Great.'"

Laurence Meyer, a former Fed board member and now an economist with Macroeconomic Advisors, said in a research note that Kocherlakota's statement was "one of the most dramatic shifts in policy positions" in Fed history.

http://www.washingtonpost.com/business/economy/under-ben-bernanke-a-more-open-and-forceful-federal-reserve/2012/09/23/52f3a1ae-03e1-11e2-8102-ebee9c66e190_story.html

Zachary Goldfarb:


Bernanke [is] studying the idea of declaring that the Fed will boost the economy until unemployment reaches a specific target or until inflation takes off. Some Fed officials have suggested that the central bank keep on stimulating until unemployment reaches 7 percent or inflation rises to 3 percent; others have proposed Fed action until unemployment reaches 5.5 percent or inflation rises to 2.25 percent.

Osmose
09-24-12, 02:09 PM
I think that's silly, Mark. If people lose confidence in the dollar, money will flow OUT of the country, not in. In the 70s people lined up to buy gold and dump USD for CHF. Hyperinflation begins with capital outflows

ddn3f
09-24-12, 02:18 PM
I agree with Rogermexico and FOFOA regarding confiscation or heavy punitive taxation. That would just drive gold into the black market into the hands of other countries or it will be passed on from generation to generation. The defeats the purpose of going back to some sort of a gold standard as there will not be a lot of gold to back the currency.

Mn_Mark
09-24-12, 02:28 PM
I think that's silly, Mark. If people lose confidence in the dollar, money will flow OUT of the country, not in. In the 70s people lined up to buy gold and dump USD for CHF. Hyperinflation begins with capital outflows

If the international community loses faith in the dollar, the people around the world holding dollars will want to get rid of them and buy something real. The only place left that will take dollars is the citizens and government of the U.S., since dollars are our legal tender. So picture those vast quantities of dollars from all over the world trying to buy something, anything, from the U.S., the only place left that they can get rid of the dollars. Suddenly no one else in the world wants dollars in exchange for their stuff. You can't buy that French wine anymore, or the Argentine beef, or the Chinese labor, or whatever. They don't want dollars, they want to get rid of them. In the U.S., prices for any foreign good skyrocket. Meanwhile, all those dollars come flooding back, trying to buy something, anything - and all those repatriated dollars compete with our own dollars when we go to the store or want to buy real estate or whatever. Hyperinflation.

The beauty of gold is that it is not used for anything else, like say oil or soybeans. And people all over the world are happy to take gold. So the dollar price of gold can skyrocket, soaking up all those excess dollars flowing back into the country. What is important is that U.S. citizen holders of physical gold are willing to take it down to the coin shop and sell it, accepting paper dollars in return for their precious physical gold. When the price is high enough, they will do that....and that flow of American-citizen-held-gold then flows out of the country in exchange for that massive inflow of unwanted dollars, taming the hyperinflation and reassuring foreigners that they can get something of real value for those dollars.

So I disagree. In a dollar confidence crisis, the dollars will massively flow INTO the U.S.. It will be very hard for U.S. citizens to get them to flow OUT, because foreigners will not want to give up anything of real value for hyperinflating dollars. Were foreigners interested in taking hyperinflating Weimar deutschemarks in 1924? Nope. They wanted "hard currency" in return for their imports, not worthless Weimar money.

radon
09-24-12, 02:37 PM
The discussion here has been assuming there will be a fixed peg to gold and we've been figiuring out the implications of that: how will the government get the gold that it will peg the dollar to? Will they confiscate all of the citizens' gold? Will they buy the gold from the citizens, encouraging them to sell with tax incentives? Will they punish citizens who try to hold on to their gold by implementing a 90% windfall profits tax? How will they decide what the exact dollar peg will be? Will they set it above the price they expect the market to demand? How much higher?


The government already has gold - if you believe them. And making the dollar domestically redeemable is unnecessary to stabilize the IMS. Confiscation is unlikely to yield much if any gold voluntarily and draconian taxes would be detrimental as it would drive gold out of the country or underground. What purpose is there to confiscation other than to pinch the middle class of what little remaining wealth they have managed to retain through the inflation, and, as HK mentioned, foment a political crisis. But why stir up trouble when you are already in charge? It makes no sense. Without some sound reasoning this all seems like doomer porn.



It can be priced at $50,000 or $100,000 an ounce without upsetting any other part of the economy. No other "commodity" could do that.


100K an ounce gold would have certainly have an impact on cost of electronics. Likewise certain medical treatments would become very expensive.

EJ
09-24-12, 03:12 PM
The government already has gold - if you believe them. And making the dollar domestically redeemable is unnecessary to stabilize the IMS. Confiscation is unlikely to yield much if any gold voluntarily and draconian taxes would be detrimental as it would drive gold out of the country or underground. What purpose is there to confiscation other than to pinch the middle class of what little remaining wealth they have managed to retain through the inflation, and, as HK mentioned, foment a political crisis. But why stir up trouble when you are already in charge? It makes no sense. Without some sound reasoning this all seems like doomer porn.



100K an ounce gold would have certainly have an impact on cost of electronics. Likewise certain medical treatments would become very expensive.

I've discovered at the various meetings I've had with Fed economists and others who attend meetings there that there is no faster way to clear the table after dessert than to bring up the topic of gold.

They really, really, really do not like to talk about gold.

But over the years some have learned that I'm not a journalist but an analyst; I'm not going to quote them on my web site to create controversy and traffic for me and headaches for them. That's not our business model. So one or two have opened up a bit.

One official gave me his personal and unofficial thoughts on what might happen in the highly, no extremely, no next to impossible event that the USD is officially associated with gold in some fashion some day off in the nearly infinite future. With all of those qualifications preceding his comment, he went on to give his opinion. It was an enlightening conversation and a window into a thought process.

It was not what I expected. Hint: No high taxation as I have been discussing here since 2001. The expectation is that a high gold tax rate will criminalize gold and create a black market, the opposite of what they want. They want an optimal tax rate on gold that generates the highest tax receipts for the IRS but without creating a black market. He pointed me to this paper (https://docs.google.com/viewer?a=v&q=cache:qizJM_ttPBkJ:www.msu.edu/~davidso4/OptimalTax.pdf+&hl=en&gl=us&pid=bl&srcid=ADGEEShzTeQ50FWq5dkos_oT4iyyHpl4PEjR1CmYkkEz p1lnBD00EeApympjfuRJW_5FAXI1LrxnhpttmeqQDhuGFW6DPJ Ktnij8ltNB-Qv5P0Tl72cm0myecSyxXHORedzw26f6aeES&sig=AHIEtbT7n6TkNZddT-IwbOiVkKS4f0lmag). In fact there is concern, he said, that the existing classification of gold as a collectible may cause the tax rate to be too high if the gold price keeps rising; as the gold price rises, so does the incentive for gold holders and dealers to conspire to evade taxes.

I'm glad to take the subject up over in the subscriber area now that we've finally published Part II of this article here... $ubscription (http://www.itulip.com/forums/showthread.php/23612-On-Track-for-a-Bond-Market-Crash-Part-II-What-will-collapse-the-U-S-Treasury-Bond-market-Eric-Janszen?p=239513#post239513).

c1ue
09-24-12, 03:22 PM
Sorry if I wasn't clear; not sure which terms you think I'm mixing; Bretton Woods was a gold standard reinstituted post WW2; then off in 1971-73 when gold window closed by nixon. Now we're preparing to go back on one. If you bothered to read the rest of my post (the part you didn't quote) perhaps this would have been clear:
"When ready, Fed and other government announce new global currency system gold valued at $15,000/oz. System allows governments to excahnge gold but not citizenry, similiar to Bretton Woods."

You clearly aren't reading what I posted, because Bretton Woods was not a gold standard for anyone but central banks, and even then it wasn't a gold standard so much as a standard to exchange excess foreign reserves for gold.

You as an individual could not trade dollars for gold at a fixed price with the government, nor could a foreign central bank trade its own currency into gold at a fixed price, although a central bank did have to buy its own currency and pay in gold.

In fact as an American, you couldn't even own gold as bullion. How can you have a 'gold standard' when Americans couldn't even legally own bullion until 1974? Which incidentally is after Bretton Woods was abrogated.

vinoveri
09-24-12, 03:52 PM
You clearly aren't reading what I posted, because Bretton Woods was not a gold standard for anyone but central banks, and even then it wasn't a gold standard so much as a standard to exchange excess foreign reserves for gold.

You as an individual could not trade dollars for gold at a fixed price with the government, nor could a foreign central bank trade its own currency into gold at a fixed price, although a central bank did have to buy its own currency and pay in gold.

In fact as an American, you couldn't even own gold as bullion. How can you have a 'gold standard' when Americans couldn't even legally own bullion until 1974? Which incidentally is after Bretton Woods was abrogated.

Bretton woods: $ pegged to gold at $35/oz and other currencies pegged to $ at fixed rate. I call this a gold standard. It appears you don't. Potato/tomato.

It was a gold standard b/c it was a check on fiat generation, which is evidenced by its breakdown in the 1970's: the standard was working to prevent US from inflating unilaterally and inordinately, so it was abandoned. Recall the US did transfer several thousand tons of gold in redemption to foreigners with dollars before closing the gold window.

To your last point, under BW, $35 to an american was worth 1oz of gold which bought a fixed amount of other currencies - there was limited dollar depreciation, only gold redemptions.

metalman
09-24-12, 07:18 PM
Bretton woods: $ pegged to gold at $35/oz and other currencies pegged to $ at fixed rate. I call this a gold standard. It appears you don't. Potato/tomato.

It was a gold standard b/c it was a check on fiat generation, which is evidenced by its breakdown in the 1970's: the standard was working to prevent US from inflating unilaterally and inordinately, so it was abandoned. Recall the US did transfer several thousand tons of gold in redemption to foreigners with dollars before closing the gold window.

To your last point, under BW, $35 to an american was worth 1oz of gold which bought a fixed amount of other currencies - there was limited dollar depreciation, only gold redemptions.

national gold standard = national gov't issues currency made out of gold & paper currency can be redeemed for gold by any citizen on demand.

pre 1933 international gold standard = national gov't #1 accepts currency in payment for trade from national gov't #2 IF the #2 guarantees that #1 can redeem #2's currency for gold on demand @ $24/oz or trade settled in gold bullion.

until 1933 most countries operated a national gold standard & all were on the international gold standard of the time.

after wwii no country operated a national gold standard & all were on the bretton woods international gold standard = trade settled in us$ with the us$ redeemed gold on demand @ $35/oz.

national gold standard = citizens don't trust the gov't with the currency.

international gold standard = gov't #1 doesn't trust gov't #2's currency.

now we got neither because all gov't can be trusted 100% with the currency ))O

& they trust the usa 100% ;]]

http://blogs.wsj.com/economics/2012/06/11/central-banks-back-to-buying-gold/

lying... stealing... cheating... has consequences.

usa is the example for the world... if not the usa, who???

<iframe width="853" height="480" src="http://www.youtube.com/embed/4c6NgVKcC0Q" frameborder="0" allowfullscreen=""></iframe>

rogermexico
09-24-12, 07:57 PM
I think that's silly, Mark. If people lose confidence in the dollar, money will flow OUT of the country, not in. In the 70s people lined up to buy gold and dump USD for CHF. Hyperinflation begins with capital outflows

It's a confusing concept. Capital flight means foreign capital and reserves flowing out of a country, and the countries own currency flowing back in - that is a currency crisis.


Dumping USD means they come home as they are exchanged for something else....

jk
09-24-12, 08:12 PM
Dumping USD means they come home as they are exchanged for something else....
the definition of poom

rogermexico
09-24-12, 08:19 PM
the definition of poom


Yes

FrankL
09-25-12, 04:58 AM
It's a confusing concept. Capital flight means foreign capital and reserves flowing out of a country, and the countries own currency flowing back in - that is a currency crisis.


Dumping USD means they come home as they are exchanged for something else....

I see a huge problem for the US treasury and FED in case of a poom event, which requires them to act really fast:

They'll want to restrict foreign ownership of assets even more, as to prevent a complete foreign takeover of American companies, and of inflating values for things that are essential to US citizen.

Maybe they'll expand the restriction on foreign ownership of certain assets (publicly traded companies?) from the current restrictions on companies active in 'strategic sectors' (as they Chinese have discovered in the past).

The double-edged sword is that the more they restrict foreign ownership, the less remaining assets can be bought, and resultantly, the more USD will chase them and inflate their value. I guess it's in the FED's interests to direct inflowing USD into those markets where they like to see inflated prices (i.e. real-estate), and prevent it from flowing to arable land, infrastructure and the energy sector.

In other words, will they need to quickly install some form of capital controls before poom really takes off, and come up with a sensible way to defend the USD (like repegging to gold at a credible USD:gold ratio)? To what degree will the poom phase go before they need to do this?

raja
09-25-12, 11:15 AM
. . . No high taxation as I have been discussing here since 2001. The expectation is that a high gold tax rate will criminalize gold and create a black market, the opposite of what they want. They want an optimal tax rate on gold that generates the highest tax receipts for the IRS but without creating a black market. He pointed me to this paper (https://docs.google.com/viewer?a=v&q=cache:qizJM_ttPBkJ:www.msu.edu/%7Edavidso4/OptimalTax.pdf+&hl=en&gl=us&pid=bl&srcid=ADGEEShzTeQ50FWq5dkos_oT4iyyHpl4PEjR1CmYkkEz p1lnBD00EeApympjfuRJW_5FAXI1LrxnhpttmeqQDhuGFW6DPJ Ktnij8ltNB-Qv5P0Tl72cm0myecSyxXHORedzw26f6aeES&sig=AHIEtbT7n6TkNZddT-IwbOiVkKS4f0lmag). In fact there is concern, he said, that the existing classification of gold as a collectible may cause the tax rate to be too high if the gold price keeps rising; as the gold price rises, so does the incentive for gold holders and dealers to conspire to evade taxes.

Again, too optimistic . . . .
That might be the way it plays out in the Fed's dreams -- that they will always maintain control, and everything will be OK.

But if there is a run on the dollar, and the Fed/Treasury can't stop it, and the US Gov needs to take the drastic measures such as those suggested by Rickards, your Fed informant's strategy will not prevail.
Political needs will trump the economic needs . . . and a windfall profits tax on gold "profiteers" wil be enacted.

BadJuju
09-25-12, 11:33 AM
Again, too optimistic . . . .
That might be the way it plays out in the Fed's dreams -- that they will always maintain control, and everything will be OK.

But if there is a run on the dollar, and the Fed/Treasury can't stop it, and the US Gov needs to take the drastic measures such as those suggested by Rickards, your Fed informant's strategy will not prevail.
Political needs will trump the economic needs . . . and a windfall profits tax on gold "profiteers" wil be enacted.

What political will would there be against people holding gold? I don't see it. And the US Gov would be shooting itself in the foot with a tax on it. I wouldn't sell mine if they did. And if they tried to come to my door to force it out of my hands, it would long be gone having been buried in a hidden location. And that hypothetical situation is ridiculous. Even in 1933, they did not forcefully arrest people's gold. There is simply no way a tax would ever benefit any party, whether the government or the gold holder, involved. Like the others here, I think they would encourage the sell of gold by reducing taxes on it because they are inevitably going to revalue it to their benefit anyway.