May 10, 2013 at 6:29 pm #7548
QEuriouser and QEuriouser… is this how the QE story ends?
Interesting piece from the Testosteron Pit on how the QE experiment might end. It highlights the huge deposit bubble that has arisen as cash has failed to make it to the broader ‘economy’ and how this is being used to blow all sorts of bubbles apart from the deposit bubble itself:
…These deposits aren’t about people taking cash out of mattresses and depositing it in the banks. This story should not be about the banks not lending, because that’s not true. They are. They have been growing loans at a measured pace between 3.5% and 5% a year since 2011. That is absolutely consistent with the growth of the economy, and dare I say, the potential growth of the economy. The story is not that loan growth is not keeping up with deposit growth. It’s that deposits are growing too fast for the economy. That’s dangerous, and the Fed is directly responsible.
Bloomberg actually reported the real story it but buried it in a single line midway through the report.
At the same time, total deposits also reached a five-year peak of $5.04 trillion, according to the data, leaving hundreds of billions of dollars of potential fuel unused.
Needless to say they left out a lot and misinformed readers that savers were flooding bank accounts. That seemed to imply that the source of deposit growth is either the nation’s mattresses or maybe thin air, when the truth is that there’s only one major source for the rapid growth: the Fed. That’s the big story. The Fed is blowing a deposit bubble. If history is any guide, that will inevitably result in more–and more dangerous– capital misallocation, in other words, more and bigger bubbles. That’s always where too much, excessively easy, money leads.
The Fed has been buying $115-$120 billion of MBS and Treasuries from the Primary Dealers each month and will continue to do that until it ends or modifies this program. It buys those securities by crediting the dealers’ accounts at the Fed. That is the absolute genesis of central bank fiat money. Abracadabra- $2 billion to the account of Goldman Sachs! The dealers almost immediately move those funds into their deposit accounts at their affiliated bank under the same corporate umbrella or they transact business and trade with counterparties, whereupon the money gets deposited in the counterparty banks. That’s how the Fed creates deposits.
The Fed is growing deposits far faster than banks can deploy them. It is growing them far faster than the economy can use them. It is growing them far faster than anybody wants or needs. And so, as Bloomberg correctly points out, but buried where no one will see it, there are “hundreds of billions of dollars of potential fuel unused.” Therein lies the potential for big problems.
Loans have been growing at 3.5-5% per year since 2011. That’s consistent with what the economy demands and needs. Since US population is only growing at less than 1% per year, why should the economy grow any faster than 2-3%? Why would the Fed want to push deposit growth up at the rate of 9-10%, which is what the growth rate has been since the Fed began settling its QE3 purchases. That forces and encourages banks and those with access to easy credit like the Primary Dealers, other broker-dealers, and especially their hedge fund clients, to “invest” (speculate) in things that aren’t needed or are counterproductive. That includes buying commodities, or bonds yielding next to nothing, or higher yielding junk with substantially greater credit risk. That spawns bubbles, and bubbles eventually beget crashes.
He points out how all this ‘free’ money is boosting asset prices artificially while causing real pain the ‘real’ economy with the ZIRP that runs along side of it:
…From listening to Bernanke, I gather that the theory is that this money pumping will drive stock prices higher and thereby trickle into economic growth, from the “wealth effect.” He also thinks that the Fed’s actions will stimulate housing by keeping mortgage rates low. To some extent those policies have worked, or didn’t work but appeared to. Mortgage rates, while historically low, have actually risen since the Fed began its QE3 MBS purchases, both from when the purchases started in September, and when they began to settle in November. Bernanke has also historically been in denial that Fed money printing results in massive malinvestment and may drive commodity prices higher, which is what happened in the last round of QE. Ultimately I believe that’s what forced him to pause between QE2 and QE 3/4.
He is also in denial (or simply disingenuous) about the costs of financial repression, or as I call it, ZIRP Bernankecide. Retirees have been driven to the poorhouse and can no longer spend. Conservatively managed pension funds can’t generate adequate returns. Pensioner incomes will be cut. Insurers are being squeezed, driving up insurance costs. The Fed acts likes ZIRP is a win win. But the fact is that it imposes real, painful, and I would say immoral, economic costs, that are at least equal to, if not greater than the benefits that accrue to the Fed’s commercial bank clients. Over the long run, the transfer of the wealth of middle class retirees by suppressing their rate of return on savings in order to liquefy and make the banks profitable cannot be considered a good thing. It’s bad for the economy, and it’s terrible for public morals and mores. Under the circumstances and in view of the fact that financial fraud is never punished, cheating becomes an excusable, even acceptable mode of behavior not just at the top, but at all levels of society. It’s called Getmineistan, and that’s where we’re headed, and maybe where we already are.
The Fed pretends that low interest rates are a free lunch, that somehow the whole economy benefits on balance. That’s insanity. I have personally seen the lives of seniors destroyed because they can’t earn a decent return on their savings. Fed policy does not increase economic income, it merely displaces it to less productive uses. Is that how we want to encourage growth, by penalizing prudent savings and punishing the elderly who have saved all their lives and avoided risk? What kind of message does that send people? The wrong one.
Meanwhile the bull market will go on for as long as the Fed can ignore the hidden costs that its policies impose both on the economy, and to the fabric of society. Eventually those costs will become too great to ignore.
While I don’t know what will happen, if history repeats and commodity prices start to bubble up again before consumer prices and wages rise, the Fed will be in a Catch 22. So far, the Fed has had success in jawboning speculators into not buying commodities and driving commodity prices higher. It did it again today in its minutes propaganda. I’m sure the Fed was patting itself on the back this evening for getting the market to sell off as it did, and especially for the break in commodity prices, particularly oil, gold, and silver.
Eventually, the Fed crying wolf about ending QE sooner rather than later will no longer impress traders, who will return to buying oil, and agricultural and industrial commodities. Rising input costs would then pinch business profits. Consumers facing rising food and energy costs would cut back spending, hurting business sales. Rising food prices could also again trigger political instability around the world in places where food is the largest share of people’s spending. In fact, that’s already happening. Rising costs and pinched consumer spending would cause companies to need to cut back employment. That could lead to a vicious downward spiral.
What would the Fed then do? Could it afford to stop QE? QE is what is driving stock prices higher and will probably continue to drive stock prices higher until it ends. By stopping it, the Fed would deprive the dealers and their hedge fund clients of the fuel they need to continue pushing their bids up. Stock prices would fall. There would be a firestorm of problems in the markets and economy leading to a massive decline in stock prices and economic activity.
On the other hand, could the Fed continue or even increase QE in the hopes of giving a boost to consumer prices, increasing corporate pricing power so that they could continue hiring and even increase wages? That would probably stoke even greater commodity speculation, tightening the squeeze on companies and consumers. It would run the risk of a massive inflationary spiral with rising bond yields. How would the US government then pay the interest on its debt? Would foreign creditors still have the ability and will to continue supporting the Treasury Ponzi? Or would the Fed be left as the sole buyer? What would the implications of that be?
I don’t have the answers. Those would be a couple of worst case scenarios. Of course maybe the Fed can manage through all of this so skillfully that the economy will grow out of these problems before any of the bad outcomes happens. History says otherwise, but it often takes a generation before we bear the fruits of the Fed’s blunders. Maybe the process will devolve quickly, or maybe it would take years and years to play out. Humans have a tough time with perspective on things like this in terms of the great sweep of history. If we watch the minute hand of a clock, we can’t see it move. But night time comes. Economically, I think it’s dusk. Night is coming.
I have not a clue what is most likely to happen. History says that we come to the brink again, have a market crash correcting some of the excesses, wash, rinse and repeat. I just suspect that the excesses that corrupt Fed and government policy have created will be far more difficult to correct and recover from in this cycle than in the past.
I see the bigger issue as a moral question, not a policy question. If we do not take corrective action against those in power perpetrating massive financial frauds and making policy to benefit the powerful at the expense of the powerless, if we do not turn away from the idea that easy money is the cure all, that those at the pinnacle of economic power know what’s best for us, if the only answer is repeatedly to go through the wringer and transfer the savings of the middle class to the banking and corporate executive class, then we simply slowly descend toward the dissolution of civil society.
IMHO I think this article sums up the slow grind to economic oblivion that is waiting in the wings. There is nothing anyone can do really. Its truly game over. All that remains is how the elite will divide the spoils, and how quickly (or slowly) we all succumb to whatever madness lies ahead. So many cans have been kicked so far down the road all we now have is a mountain of scrap blocking any way forwards. Instead of being able to see our options clearly if all these cans had not been kicked, we have now effectively sealed our fate.
Of course historically this is the fate of all ‘closed systems’, especially when those systems are thought systems as proposed by David Bohm. In the attempt to continue BAU the elites of all societies past from Aztecs sacrificing anything they could lay their hands on, to Greenland Viking chiefs refusing to learn from the Inuit and continuing trying to increase their cattle and build bigger ‘cathedrals’ as their [strike]serfs[/strike] brethren froze and starved, to the Easter Islanders who just would not stop building those damn heads, every culture, every civilisation has gone down this route: when the only way out was to do something alternative and equitable they pushed even harder for BAU, breaking all the rules to get there. Rational actors? Dumb asses more like… 🙁
Sid.May 11, 2013 at 7:55 pm #7552May 22, 2013 at 5:19 pm #7601
Its a ponzi: statement of predicted stock rises ‘proves’ it in my mind, it is just the sort of hyperbole that catches the last empty bag-hoders in any ponzi scheme (I should know I’ve seen a few… ahem!).
From Tyler Durden @ ZeroHedge:
…To wit: “Our earnings estimates remain unchanged but we raise our dividend estimates and index return forecasts for 2013 through 2015. We expect S&P 500 will rise by 5% to 1750 by year-end 2013, advance by 9% to 1900 in 2014, and climb by 10% to 2100 in 2015. Our 2013 return implies a year-end P/E of 15.0x, a one multiple point premium to our fair-value estimate. We forecast dividends will rise by 30% during next two years. Dividend yield is likely to stay around 2%, in line with the 20-year average.”
5%, 9%,10% with 30% on dividends! What’s not to like! Joe SP (Sucker Punch) will eat it up, hell he’ll take out some re-fi now that the housing [strike]ponzi[/strike] boom is back on track. As ZH point out:
…All we can conclude from this is that neither Tepper nor Goldman are anywhere near done selling to muppets.
But don’t for a second think any of this is earnings driven. […] It is all based on prayer that Bernanke and his central planning magicians can keep on expanding the increasingly meaningless PE multiple, which incidentally would collapse if and when rate were to go back to historical levels now that corporate debt is at unseen before levels.
Lets not forget that ZIRP has effectively boosted future earnings on companies balance sheets:
By Keith Weiner on May 21, 2013 in Currencies and Banking, Gold, Sovereign Debt Crisis (via ZH)
…as the interest rate falls the discount factor used for an enterprise’s future earnings also falls. The same $1 in earnings in 2023 is worth more at a discount of 3% annually vs. 6% ($0.74 vs. $0.56).
As well as lessening the debt repayments of course.
One small QE for the FED, one giant Ponzi for mankind… :dry:
Sid.May 22, 2013 at 6:16 pm #7602
$1 Trillion of which is in ‘foreign’ banks (can there be such a thing in a ‘global’ economy?)
…And just to prove that ALL the unsterilized cash from both QE2 and QEternity has essentially gone to support offshore banks, here is the conclusive chart showing the change in Fed reserves and cash held by foreign banks:
Well it is the global ‘reserve’ currency after all… :whistle:
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