Top Bankers: Too Much Central Bank Easing Is Becoming Dangerous
And the Stock Rally Is Due to Money-Printing
Now, top bankers are saying that the amount of liquidity which the central banks are flooding into the economy is becoming dangerous.
All posts in category Central Banks
Posted by jackbassteam on March 10, 2013
The Federal Reserve will hold its last policy meeting of the year next week, and two key issues are expected to dominate the gathering and the market’s attention — the expiration of “Operation Twist” and a potential change in interest rate guidelines.
Implemented in September 2011, Operation Twist was designed to lower rates for mortgages and corporate bonds. The program, which expires at the end of this month, entailed the Fed buying $667 billion (roughly $45 billion per month) in longer-term Treasuries above 6-year durations, while selling the same amount in shorter-term securities under 3-year durations.
The goal of the monetary twist has been to lower long-term rates to fuel consumer and corporate borrowing and spending.
“With Operation Twist ending, that means they’ve run out of short-dated securities to sell in order to purchase more [longer-term securities], so what they’ve got to move to now is buying up pure $40 billion per month of mortgage-backed securities [QE3],” says Andrew Wilkinson, chief economic strategist at Miller Tabak. “They probably have to compensate for that loss of $40 [billion] to $45 billion per month.”
Rumors of QE4
Wilkinson is touching on concerns that have recently been addressed by various Fed governors. That is, that simply carrying out the third round of quantitative easing is not enough to boost the economy. QE3 is an open-ended program that has the Fed buying $40 billion per month in mortgage-backed securities.
So will the Fed turn Operation Twist into another outright securities purchasing program, essentially becoming QE4? Or are they more confident in the economy given the improvement in the November jobs report?
The market will be watching very closely to see if the Fed changes its tune. The decision on handling Twist’s expiration will be very telling as to how the committee views the recovery and how much stimulus will be pumped into the economy in 2013.
“There’s something else on the table with the Fed though,” says Wilkinson. “They may move to targeting a specific rate of unemployment as a guarantee to when they can stand by the promise of low interest rates.”
The Fed’s current policy is to hold rates near zero through mid-2015. Chatter is growing louder that the Fed will change its guidelines, and instead of tying interest rate policy to a calendar date, they will link it toward set goals for the unemployment and inflation rates. This would directly link rates to the Fed’s dual mandate to promote maximum employment and price stability.
Fed Vice Chairman Janet Yellen recently joined several other Fed officials calling for specific thresholds to guide policy. These thresholds would not be triggers to change policy, merely guidelines for debate.
“For now, it doesn’t really matter,” Wilkinson says of the possible shift. “As next year progresses we’ll hear more in terms of jawboning from the Fed, how it’s going to go about this process, how it’s going to anchor its inflation expectations, and whether we should be focused on more than purely employment. Inflation is equally important, but there’s a lid on it at around 2%, according to the Fed’s projections. We also have to factor in GDP as well.”
The Fed’s gathering will end Wednesday with a 12:15 p.m. ET policy statement, and a press conference with Fed chief Ben Bernanke will follow a short time later.
- Why Gold Prices Will Soar After the Dec. 12 FOMC Meeting (chasvoice.blogspot.com)
- Boston Fed President Defends QE, Sees Tools Against Inflation (dailyfinance.com)
- Operation Twist will give way to expanded QE3: Capital Economics (business.financialpost.com)
Posted by jackbassteam on December 9, 2012
Nothing has changed about his long-term view–he is still very pessimistic on markets and the economy.
However, Janjuah thinks we could see a major move higher in the over the medium term, owing to some sort of fiscal cliff deal that kicks the can and full-blown QE from the ECB.
Here’s what Janjuah has to say in his note:
If I look out 3-6 months I am open to the idea of one last parabolic spike higher in risk-on markets in this interim timeframe. I think we will eventually get fiscal and debt ceiling fudges in the US. Of course long-term credible solutions are needed, but are the most unlikely outcome.
Instead we may well be ‘forced’ to celebrate another round of horrible fudges which DO have a consequence. Namely, that the private sector continues to ignore Bernanke and the Washington elite (who between them continue to enjoy printing significant sums of money and/or spending way beyond their means) by instead doing the exact opposite, which means holding onto/building cash and savings, delaying spending/investment/hiring and thus hurting growth.
Markets will I think worry about these negative consequences eventually (see paragraph above), but in the interim the knee jerk reaction of markets to fiscal/debt ceiling fudges will likely be positive. Furthermore, and again on a 6 to 12 month interim timeframe, I think we could also see the ECB finally move to all out QE driven by another round of eurozone panic and driven in particular by the strong deflationary data trends that are emerging in the eurozone and which we in GMS think will get much stronger.
A combo of ECB QE and fiscal/debt ceiling fudges in the US – perhaps also complimented by a short-lived centrally planned but debt fuelled and ultimately wasteful China uptick – could even cause a parabolic spike powerful enough to take S&P – briefly – into the 1500s, before resuming the longer-term march over the rest of 2013 and 2014 to the 800s.
However, for the rest of 2012, in the short-term, Janjuah still remains bearish.
Posted by jackbassteam on November 13, 2012
the Societe Generale author is Dylan Grice
I am more worried than I have ever been about the clouds gathering today (which may be the most wonderful contrary indicator you could hope for…). I hope they pass without breaking, but I fear the defining feature of coming decades will be a Great Disorder of the sort which has defined past epochs and scarred whole generations….
He runs through some of the Great Debasements of the past, starting with third-century Rome, running through Europe’s medieval inflations and the French Revolution, to the monetary horror story of Weimar Germany in the 1920s.
His key point is that inflations and hyperinflations don’t just hurt money, they hurt people and the societies they live in. Inflating money is less trustworthy money, and so people doing business trust each other less. Plus, those who are farthest from the source of artificially created money suffer the most (the “Cantillon effect”).
And now the social debasement is clear for all to see. The 99% blame the 1%, the 1% blame the 47%, the private sector blames the public sector, the public sector returns the sentiment … the young blame the old, everyone blame the rich … yet few question the ideas behind government or central banks …
I’d feel a whole lot better if central banks stopped playing games with money….
All I see is more of the same – more money debasement, more unintended consequences and more social disorder. Since I worry that it will be Great Disorder, I remain very bullish on safe havens.
In just 10 days we will see how the US elections turn out. Depending on what happens after, the US will either remain as one of those safe havens (and perhaps become even more of one) or those of us who reside here will need to start thinking more globally. I know a lot of thoughtful people who are already contemplating (if not acting on) plans to make sure their life savings maintain their buying power through the coming decade. I remain optimistic that we will set ourselves on a course that ends in a safe harbor, although the sailing will be quite volatile. What Dylan describes are the unintended consequences of people who think they understand macroeconomics and who are well-intentioned but whose policies can be most disruptive.
Click here for for much more detail on the ins and outs of investing in gold.
- From currency debasement to social collapse: 4 case studies (hangthebankers.com)
- The loss of trust and the Great Disorder (cobdencentre.org)
Posted by jackbassteam on October 27, 2012