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  • What Is QE And What Does It Portend? Probably Less Than You Think  [View article]
    I might agree, Japan's yen seems strong enough to consume the world's output if they can stop buying their government's debt and spend.

    One might wonder if the US will emerge as a net exporter, again. Wages have lagged productivity (kind of a Greek style competitiveness), easy money seems to debase the currency, consumers (consuming domestic and imported goods) are pretty much tapped out, and we seem to be loosing our middle class to the poverty line. (Sometimes I joke our low wage wage work force comes across the border, too.)

    Plus, there are reports of US business might return to the US due to wage pressures, inflation, and shipping costs. There is supposed to be a switch toward emerging markets becoming the driver for global consumption. Maybe it's someone else's turn to consume like there's no tomorrow. China?

    Wonder when all this will happen.
    Sep 25, 2012. 12:48 AM | Likes Like |Link to Comment
  • Has The United States Started A Currency War?  [View article]
    "By increasing exports, the U.S. will indirectly increase U.S. output and lower U.S. unemployment." If the plan is to become a net exporter, otherwise this will only improve at the margin. Currency debasement makes sense for Greece who desperately needs export revenue and the resulting increase in it's money supply. The US needs an increase in the money supply (and velocity), too.

    But that is domestic monetary policy meant to induce borrowing, consumption, investment (in productive assets), and employment. The currency exchange rate is a knock on affect of risk on - while it lasts. The dollar is actually stronger despite ZIRP, three or four rounds of QE, and fiscal deficits. Japan's currency is stronger, too, despite pretty much the same policy response.

    The dollar floats with market forces precisely because it allows the Fed to focus on domestic monetary policy (domestic debasement) and not worry about the dollar's exchange rate or some non existent peg. Again it's market driven by design even if QE affects it through portfolio re-balancing. The Fed could care less, IMO.
    Sep 25, 2012. 12:41 AM | Likes Like |Link to Comment
  • Evaluating QE3 In A Global Context  [View article]
    Evan, I'd argue monetary policy is domestic policy designed to debase the currency at home, certainly, to induce domestic consumption and investment. The reason the dollar floats is precisely because it allows the central bank to focus on domestic policy without worrying about the dollar's foreign exchange value (or some peg to another currency.) That's market driven.

    The forex reaction is very real as investors seek risk through portfolio re-balancing. However, demand for money or money-like instruments seems to remain strong (in fact may even be in short supply) as evidenced by the lower longer term rates (and implied inflation expectations.) So, the outlook for the dollar is not so grim, IMO.

    Conversely, the euro responded nicely to ECB "easing." Risk on. The yen fell as predicted...that should be normal reaction to BoJ easing. Risk on, again, for a while anyway.

    If we are under a threat of deflation and essentially following the Japanese model of massive easing (minus the huge fiscal deficits, especially, if the cliff is realized), the the dollar may be on the same track to strengthen longer term as the yen has. Japan battled deflation and did not fare well in terms of debasing it's currency. It's still trying to do so despite decades of easy money and fiscal deficits.

    Sure, Japan mostly saved - a normal reaction to deflation - and bought Japanese debt. They did not consume a good chunk of their own production meant for export. If we do not get lending underway and unemployment down, neither will we. And our export sector is much smaller. So, you wonder why companies are sitting on idle cash or maybe looking for gains in non productive financial assets.
    Sep 25, 2012. 12:20 AM | Likes Like |Link to Comment
  • What Is QE And What Does It Portend? Probably Less Than You Think  [View article]
    "...why could not the US government emulate that model?" We seem to be, but with less emphasis on attaining that level of government debt/GDP, at least in the numerator and unless the denominator falls precipitously.

    "...many citizens might not want the deflation that seems to go with low output and low wages necessary to export..." I might argue the US wage earner has gone through Greek style internal competitiveness for some decades as wages tended to lag productivity. Stimulating exports would help a small sector of our consumption based economy. Wealthy nations produce to consume, that implies net imports and probably debt based consumption. If one man's liability is another's asset, then you can see how the demise of the middle, consuming class has ensued. The latter tend not to have self liquidating debt, merely a wage...if they are fortunate enough to retain a good paying job.

    I agree, deflation is still a threat. Apparently that's not dollar friendly (in terms of debasement.) Remember, despite the BoJ's best efforts and Japan's deep pockets, the yen is a very strong currency and safe haven. If recent history is any teacher, the same could be true for the dollar especially if fiscal cliff adds to the downside risk monetary policy is trying to avert. It likely will and the numerator will climb...the Japanese model.

    The Japanese outcome is unsure because Japan is a net exporter (not consuming a good chunk of it's own goods), but if we do not begin lending we will consume less of our own output. Both nations seem to be in deflation.
    Sep 24, 2012. 11:45 PM | Likes Like |Link to Comment
  • Bernanke Guarantees Zero Percent Chance Of Deflation  [View article]
    Sure, normally increasing base money would increase the money supply as the sheer volume of dollars in circulation would dilute or debase the dollar and raise prices. In fact it seems to have done just that to some extent in commodities, not accounting for variances in demand and geopolitical factors in the middle east. This is typical monetary policy during a normal business slowdown with functioning credit markets. This is not the case today.

    The problem is this form of inflation is producer input costs driving prices that have trouble finding an employed, creditworthy, or otherwise willing to spend buyer with a wage that has kept up with productivity over the years. Such consumer based aggregate demand on an expanded money supply (and access to it) drives investment, capacity utilization, and employment. Commodity driven inflation produces spotty price hikes and not the general rise in prices we hope to see, including home prices. Massive liquidity injections do not float all boats and core inflation remains very tame (maybe even falling.)

    Sure, the Fed can battle deflation on paper as oil prices evolve through other prices due to transportation costs, etc. But, don't be fooled into thinking we have some healthy inflation, especially the kind that might "shock" the consumer into buying a home. Japan seemed to have trouble stoking inflation using the same theory. (Yes, their population tended to save, typical in a deflationary environment, and owns Japanese debt.) Deflation (probably held just out of reach) and deleveraging is still with us, and with $1.5tn in excess reserves the best we can do is barely hold onto 2% core. It's not technically deflation, but it's not healthy either.

    One might argue the US money supply is pent up behind the huge dam of higher lending standards, fewer creditworthy borrowers, the lack of trust among counter parties, and maybe even some fear of lending at low rates. This is no run of the mill business cycle, the credit markets are still clogged. Monetary policy is no panacea, and with the cliff looming we should be in for more downside risk.
    Sep 24, 2012. 11:14 PM | Likes Like |Link to Comment
  • Why QE3 Won't Jump Start The Economy  [View article]
    Christ, Deep, after reading that and a handful of other articles, one would think the Fed is destroying the shadow banking system through QE...or maybe as I have posited (i.e., just a thought), they are allowing that unregulated sector to deflate. The author talks about the Fed beating the wrong horse, it should be focused on expanding capital flows in shadow banking instead of thwarting it. And, if as Flow says, IoER encourages dis intermediation, one could be forgiven for believing the Fed knows and wants this to occur.

    Stimulating capital flows in the shadow banking sector is also a goal of the monetarists, who see monetary policy as a panacea and argue the Fed can stoke inflation to some targeted level through asset purchase. Ironically, I guess the Fed can stoke inflation buying the very safe assets they claim are now in short supply and responsible for the deleveraging in shadow banking, the back bone of the credit markets and driver of the price level, apparently. Thus far, inflation (core) does not seem to be the case. But, again, the above author tells us the shadow banking system is an inflationary buffer even though it assists money velocity and uses it's own money like assets (somehow) creating hundreds of trillions in notional value...but it's collapse is a very real deflationary threat.

    Then, of course the Austrians chime in with their ideas about the true money supply and begin lambasting Bernanke and QE3, as well. We wanted it, we got it, now we hate it...and who the heck is telling the truth?

    I do have a very simplistic model of how the shadow banking system works, but (according to the intense data presentation, research presented, and sharp rhetoric above), it might be too simple to really have an independent and accurate opinion as to whether shadow banking is dead or whether it matters at all. My guess is, intermediation between savers and end users of cash will continue, regardless. And Bernanke is simply working the CB system as he should. The shadow banks who are "customers" of the CBs will adjust. After all, isn't that what the private market is best at?

    So, will QE work? I guess it depends on who you believe: what others are saying or "your own lying eyes," as they say. :)
    Sep 24, 2012. 09:07 AM | 2 Likes Like |Link to Comment
  • Why QE3 Won't Jump Start The Economy  [View article]
    Thanks for the description, Mark.
    Sep 24, 2012. 08:50 AM | Likes Like |Link to Comment
  • Wage And Salary Growth Is Accelerating  [View article]
    QE working already? That was fast...

    Interesting metric, I like it. Thanks for the report.
    Sep 24, 2012. 05:29 AM | 1 Like Like |Link to Comment
  • Why QE3 Won't Jump Start The Economy  [View article]
    Thanks, Deep, that's exactly the kind of article I was looking for. And to better understand what Flow is discussing below: IOeRs and dis intermediation, and QE affect on the system to include inflation and unemployment. Lemme grab some Joe.
    Sep 24, 2012. 05:13 AM | 1 Like Like |Link to Comment
  • QE And Inflationary Expectations  [View article]
    Freddy, sure. I am confident the Fed can reign it in. But, leaving easing in place until a firm recovery is well underway might pose a threat? At the very least, they will tolerate a little more at some point.
    Sep 23, 2012. 10:42 PM | Likes Like |Link to Comment
  • Why QE3 Won't Jump Start The Economy  [View article]
    Somehow the GSE has to be compensated for it's sale, this should credit a demand deposit somewhere...increasing the money supply. That may or may not be inflationary.
    Sep 23, 2012. 10:38 PM | Likes Like |Link to Comment
  • Why QE3 Won't Jump Start The Economy  [View article]
    Mark,'re correct. Not sure how that consolidated balance sheet allows the Fed to just print, but it's something I haven't considered. I never followed the $ trillion coin concept.
    Sep 23, 2012. 10:35 PM | Likes Like |Link to Comment
  • Why QE3 Won't Jump Start The Economy  [View article]
    Deep, yes this re-inflation is what I am look at now. Do we want to re-inflate to a pre crisis trend line? If so, how does it work with asset purchases.

    Apparently there are some out there who think the Fed can inflate at will. I guess some believes expansion of the balance sheet is inflationary, or that commodity prices generate investment and employment. Or that somehow reviving the shadow banking system is inflationary. I am trying to understand the latter phenomenon.

    In any case, markets said no to MBS, became less liquid, and tried to sell them off to de-leverage driving the price down. The Fed saved them.
    Sep 23, 2012. 10:29 PM | 1 Like Like |Link to Comment
  • QE And Inflationary Expectations  [View article]
    Yea, I'd have to digest your possible outcomes, but it does seem inflation can be a threat is the Fed keep easing in place too long and economic activity picks up.

    I am really trying to understand the transmission mechanism offered by the shadow banking system, as they were key players prior to the mess we are in and may be key to getting out of it. Not quite there, yet.
    Sep 23, 2012. 01:40 PM | Likes Like |Link to Comment
  • Why QE3 Won't Jump Start The Economy  [View article]
    "(#2) Purchases and sales between the Reserve banks & non-bank investors directly affect both bank reserves and the money supply."

    This happens because the GSE (being a non bank) has an account at a Fed member bank with a reserve account. So, not only are reserves credited to the member bank, but the GSE's demand deposit (part of the money supply) is also credited by the same amount. I presume this means the GSE can spend that money (increasing velocity) underwriting new mortgages. The resulting securitization process makes more assets available for investment, thus spurring velocity in the shadow banking system. Is that about right?
    Sep 23, 2012. 01:30 PM | 2 Likes Like |Link to Comment