Archive for the ‘Quantitative Easing’ Category

The United States of Europe

Monday, January 26th, 2015

The U.S. has been imitating Europe for years, boosting government spending and racking up debt, creating a healthcare system that doesn’t work and adding costly new social benefits.

Now it’s Europe’s turn to imitate the U.S.  As expected, European Central Bank head Mario Draghi announced a quantitative easing (QE) program for Europe last week.

Does this look like deflation to you?

Does this look like deflation to you?

Over the past six years, the U.S. Federal Reserve Board’s three QE programs boosted the Fed’s balance sheet from less than $1 trillion to $4.48 trillion.  In comparison, the ECB’s QE program is modest; the ECB will purchase $1.24 trillion of existing sovereign bonds and debt securities over the next 18 months.

But any QE program would be modest in comparison with the Fed’s.  And, long term, maybe the first round of QE doesn’t work, the ECB will continue to imitate the U.S. and follow with additional rounds of bond buying.

The ECB’s action raises a few questions:

If Draghi believes that bond buying is going to help Europe, why hasn’t he tried it before now?  The ECB has tried everything but QE, but primarily relied on forward guidance, which amounts to talking about the economy.  Forward guidance would be an absurd economic policy anywhere, but in a central bank – but not as absurd as QE.  Forward guidance also doesn’t require the purchase of trillions of dollars’ worth of assets. (more…)

Swiss Diss

Tuesday, January 20th, 2015

“It is said that the Swiss love only money … this is not true. They also love gold.”                                                                                                                          Anonymous

 The last time we checked, Switzerland was still part of Europe.

Then again, Switzerland has long been different from its European brethren.  Switzerland is historically an observer, not a participant.  Neutrality gives the country points for ethics among the peace-loving folk – although it didn’t stop the Swiss from dealing with the Nazis during World War II. Swiss Franc

Switzerland is also “the vault of the world.”  It’s where money and wealth are omnipresent, but never talked about.  “Swiss” and “bank” go together like “Swiss” and “watch.”

But there’s a big difference between the Swiss National Bank and the European Central Bank.  While the ECB is likely to announce a quantitative easing program to fight deflation next week, Switzerland this week strengthened its currency with a surprise announcement that it was removing its cap on the value of the Swiss franc.

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Land of the Setting Sun

Friday, November 21st, 2014

Let’s pretend that the United States economy is a football team.  The coach calls the play.  The running back runs right up the middle and is thrown for a loss.  What does the coach do on the next play?  Run the ball up the middle for a loss.  And the play after that?  Run the ball up the middle for a loss.  And the play after that?  Run the ball up the middle for a loss.

Other teams see what’s happening to the U.S. economy.  So what do they do?  Run the ball up the middle for a loss.  In Japan, in Europe and elsewhere the losses mount.  What’s the conclusion?

  1. Running the ball up the middle every play will result in a loss, or
  2. We need to run the ball up the middle more often.

JapanThe answer, if you’re paying attention to central banks and the actions of Japanese Prime Minister Shinzo Abe is, of course, B., as logic and politics rarely travel on the same highway.

Formerly the world’s number two economy behind the U.S., Japan’s future couldn’t have been brighter back in the ’80s, when “Japan Inc.” was all the rage.  Today, if there really was a Japan Inc., it would have long ago declared bankruptcy.  The “Land of the Rising Sun” has become the “Land of the Setting Sun.”

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Why It’s Called “the Almighty Dollar”

Friday, November 14th, 2014

It may be a good time to plan that European vacation.  The long-weak dollar is gaining strength again, which means you may be able to afford good food, good wine and a quality hotel if you visit the Old World.

During the Fed Reign of the past five-plus years, the dollar was like that elderly lady in the commercials who says, “I’ve fallen and I can’t get up.”  Other countries tried to help by weakening their currencies, of course, but the resulting currency wars appear to have ended along with quantitative easing and now the dollar is strong and getting stronger.

Dollar Index
The good news is that the strengthening dollar will make foreign goods cheaper for American consumers (so much for boosting inflation).  American companies may also reduce prices or keep them from rising to remain competitive.

As a result, Americans will spend less on essentials like oil and will have more money left to spend on other things, which should boost the economy.  A strong dollar will also attract foreign investors to American assets, such as U.S. Treasury bonds.

The bad news is that consumer spending on imports will increase the trade deficit – in fact, it already has.  American companies that rely on exports or that have multi-national locations will be hurt.

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QE RIP

Friday, October 31st, 2014

So the Federal Reserve Board has made it official.  This is the end of quantitative easing.  It’s quits for QE.  Bond buying has gone bye bye.  Quantitative easing has been eased out of existence, tapered into extinction.  The QE case is closed.

If nothing else, QE has provided us with material for more of our blog posts than any other topic (55, not including this one!), so, given that we’ll now need a new source of inspiration, we’re almost sorry to see it end. Fed Portfolio

So is this an obituary for the greatest (in terms of dollars involved, if not in results) experiment ever in monetary policy?  Should we hoist up the “Mission Accomplished” banner, pop the champagne cork and make a toast to Ben Bernanke and his brethren?

Not so fast.  There’s still an epilogue worth drafting.  Closure is needed.  This may be our last chance to take a shot at QE, so we’re taking advantage of it.

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More Consideration of “Considerable”

Thursday, October 16th, 2014

Yes, we’ve already discussed the word “considerable” at considerable length, in relation to its use by the Federal Reserve Board in its recent policy statement.

But apparently we are on to something of a considerable size.  Maybe it was a slow news day, but The New York Times devoted an article to the Fed’s use of the word, noting that “Federal Reserve officials are looking for a new way to reassure investors that they are not ready to start raising interest rates.” 

Fed Chair Janet Yellen

Fed Chair Janet Yellen

Commenting on the “considerable time” reference in the policy statement, The New York Times article reported that an account of the meeting “suggests that officials are trying to find a new way to say the same thing.”

Think about that.  Unemployment remains high, inflation goals are not being met, the Fed is holding trillions in bonds it will eventually have to sell and the stock market is acting wobbly … but the Fed is looking for a “new way” to say “considerable.”

Fed Chair Janet Yellen could just say the Fed is not ready to start raising interest rates.  She could say the Fed is not planning to raise rates “for a long time,” which would be reassuring to investors.  Or members of the Federal Open Market Committee could go to an online thesaurus and come up with more than a dozen synonyms in seconds.

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Janet Yellen Takes Us Through the Looking Glass

Thursday, September 18th, 2014

“When I use a word, it means just what I choose it to mean — neither more nor less.”  

               Lewis Carroll, Through the Looking Glass

The word for today is “considerable,” as in interest rates will remain low for “a considerable time.”

How long is “a considerable time?”

Long enough, apparently, for investors, who boosted the stock market to yet another new record this week, after Federal Reserve Board Chair Janet Yellen announced that the Fed would keep interest rates near historic lows for “a considerable time.”  The Dow Jones Industrial Average crossed 17,200 for the first time ever, closing at a new high of 17,157.

Apparently, investors are like kittens, because, as Alice notes, “whatever you say to them, they always purr.”

Looking-glass-lewis-carrollCNN Money interprets, with certainty, that “considerable” means summer 2015 “at the earliest.”  Yet The Wall Street Journal, referring to the policy statement, admitted, “we have no idea what it says about the future of monetary policy.  We doubt even Fed Chair Janet Yellen knows.”

“Better say nothing at all. Language is worth a thousand pounds a word!”

Lewis Carroll, Through the Looking Glass                                        

Having read the policy statement, we conclude that it means whatever you want it to mean, as it contains more hedges than the Palace of Versailles.  Consider this single sentence …

“The Committee continues to anticipate (hedge 1), based on its assessment of these factors (hedge 2), that it likely will be appropriate (hedge 3) to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal (hedge 4), and provided that (hedge 5) longer-term inflation expectations remain well anchored.”

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Now Bad News Is Bad News

Friday, September 12th, 2014

With the end of quantitative easing due to take place next month, reality may once again have an impact on financial markets.

Since QE began more than five years ago, markets have soared on bad news and dropped on good news.  That’s because investors believed that bad news would prolong QE and good news would make it unnecessary.

And there’s been enough bad news over the past five years for the stock market to repeatedly surge to new record levels.20140911_claims

With QE ending in the U.S., but probably soon beginning in Europe, the Federal Reserve Board needs a different tool to manipulate the markets.  While Chairman Janet Yellen and others have been talking about “macroprudential supervision” as the next step, that line is selling like old fish, because no one has explained what Ms. Yellen means by “macroprudential supervision.”

The good news is that good news should finally be good news.  Fundamental performance and economic recovery should mean something again.

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Less than “Less than Zero”

Friday, September 5th, 2014

In June, the ECB lowered the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%.  This week, surprising just about everyone not named Mario Draghi, the ECB lowered the rate by another 10 basis points to -0.20%.

14950766600_d52f0bba78_zAs we wrote when the less-than-zero rate was announced, “banks will pay a fee on money they fail to lend out.  Whether or not that stimulates the economy, it could encourage banks to take more risk, approving loans that otherwise may not have been approved.  Isn’t that what caused the financial crisis?”

Zerohedge explained that while rates were already negative, “Now they’re even more negative. Because in the world of Central Banking if something doesn’t work at first the best thing to do is do more of it. Whatever you do, DO NOT question your thinking or your economic models at all.”

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Going Prudential In a Macro Way

Thursday, August 28th, 2014

Obfuscation is an art form in which the Federal Reserve Board excels.  It follows a few simple rules:

  • Never use a word or phrase that is simple and widely understood when a word is available that is less well known (e.g., “obfuscation” instead of “confusion”).
  • Act as though you know what you’re talking about.
  • Act as though everyone else knows what you’re talking about.
  • Ignore failure and act as though you’ve succeeded.  No one will know the difference.

The Fed’s expertise in obfuscation is clear in its choice of strategies that are allegedly designed to create economic growth, but are really designed to prop up the bloated stock market.Janet Yellen

First, we had “quantitative easing.”  The Fed couldn’t just call it bond buying.  What does “quantitative easing” mean?  Is it the opposite of qualitative easing?  Or quantitative hardening?  How does one go about easing quantitatively?  What exactly is being eased?

The Fed couldn’t just reduce its bond buying – it had to “taper” its bond purchases.

The Fed also flirted with “forward guidance,” which, as we’ve previously explained, is simply talking about what you’re going to do without doing it.  Mario Draghi, chair of the European Central Bank has perfected this technique.  Too bad The Fed hasn’t, because it could have avoided buying trillions of dollars in bonds it will soon have to sell. (more…)