Ben Bernanke is speaking at the National Press Club today and his pre-released speech says basically that QE2 is working:
Since August, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen from low to more normal levels. Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. All of these developments are what one would expect to see when monetary policy becomes more accommodative, whether through conventional or less conventional means. Interestingly, these developments are also remarkably similar to those that occurred during the earlier episode of policy easing, notably in the months following our March 2009 announcement of a significant expansion in securities purchases. The fact that financial markets responded in very similar ways to each of these policy actions lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy.
I have mentioned this kind of reasoning before: Post hoc, ergo propter hoc. It means that first A happened and then B happened, then A must have caused B. I think the fallacy in such reasoning is rather obvious. Let me translate what he is really saying:
Since August when we began to flood our primary dealers in Wall Street with newly printed money the market went up because they used the money to buy financial products, including stocks. We are trying to cause price inflation because the majority of the FOMC is concerned about price deflation. If we cause price inflation then we will fool everyone into thinking that because prices are going up, such as in the stock markets, that it is real growth even though it’s just price inflation. Even better the national debt can be paid down with cheap dollars. Yields on Treasurys initially went up because the bond vigilantes aren’t stupid: they know it will cause inflation so they wanted higher yields. But, ha, ha, the Euro went into the tank because of the PIIGS and money flooded back in to the US and drove Treasury yields back down, for the time being. Screw the vigilantes. The same thing happened when we tried QE1, but as we all know, that failed and we are desperately trying again because we don’t have too many arrows left in our quiver. Hey, if it had worked, would we be doing QE2? We are desperate because if unemployment doesn’t come down, the Obama Administration will be screwed and I’ll lose my job. We are ready to do QE3 because we don’t have a clue what else to do.
[...] Bernanke Speech Translation [...]
Love the translation Jeff. Now we just need someone to make one of those computer generated animations using your verbiage.
Great idea! Thanks. Jeff
How it comes ? Trichet says words which ruins his own currency against dollar. Just logically does it sounds strange ?
He should learn from americans “always say only good news”
Jeff,
Is this statement true?
deficit spending = money printing = inflation. Which eventually leads to higher interest rates.
In a real sense, this is true now. QE1,2 and any more QE will lead to inflation (immediate effect seen in food and energy commodity prices), even though we may have deflation in other asset classes (e.g. real estate).
My question is – how did this not matter for a very long time (almost 2 decades)? My premise is that because it did not matter, the United States Government kept on piling more and more debt.
How would we ever solve this debt problem by just cutting spending? cutting spending avoids adding any more debt to this already insurmountable level, but the debt level taken is still there and we owe interest on this as well, which compounds.
Sundar: the Fed’s “open market” operations (i.e. buying bonds) has caused a 28 year (so far) bull market in Treasury Bonds. I don’t think that bull market is over yet. So interest rates do not necessarily need to rise, and in fact the whole point is to manipulate the bond “market” into believing that rates can only correct a little before returning to the trend (bonds up, rates down).
The Fed can print money to buy as many bonds as they want, lifting all offers. How can anyone go short against that?
Keith: Wouldn’t a runaway situation of Fed buying as many bonds as they want, debase the currency and thereby lead to hyper-inflation?
The muni bond market is at a very critical juncture.
http://www.youtube.com/watch?v=wpr4BohzaaI&feature=player_embedded – 60 minutes analyzing the situation of the next big potential bail-out in the pipeline.
My point is this: Debt that cannot be unsustainable, that which has violated all the self-correcting market forces eventually has to collapse. I can’t see any other way out of this situation that we’re in.
I’m just wondering if I’m missing something here.
Sundar,
You bring up good points. How will they ever pay down the debt? It will take many years but it could be done. By just freezing spending at it’s current level we could balance the budget in a few years (according to Cato). Then as spending is cut more is left to the private sector to invest and make the economy grow. Even with lower taxes the govt would have surpluses which could pay down debt.
BTW I think food and oil prices right now are more a function of supply and demand not price inflation.
Thanks,
Jeff
Jeff,
Thanks for your reply. Freezing spending now and then cutting it later sounds like a good plan – but how is this possible if there is debt at every level? (city, municipality). What if the government decides to bail them out? If government doesn’t bail them out, standard of living in these places as we know, will decline. If they do bail them out, then already simmering inflation will burn even more. They’re really stuck – rock and a hard place.
Also I feel that we have look at growth holistically to understand if it can be achieved through the economy. Economy as we know it today, depends on the efficient movement of goods and services between the buyer and the seller through the medium of market. This movement is very much dependent on oil. Oil, in many senses is the lifeblood of the economy.
http://www.youtube.com/watch?v=UUmwy0VTnqM&feature=player_embedded – In this video, a few experts (oil/political/economical) are discussing the lingering problem that nobody wants to deal with. The future is bleak indeed.
Sundar,
Why would the standard of living of a B/K city harm its citizens’ standard of living? It would certainly harm the bondholders. When Orange County went B/K in the 90s their economy went on.
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While oil is important so is food. But the most important things to any society are freedom, free markets, capital, capitalism, and entrepreneurs.
Also I don’t buy the peak oil argument. The market will ration resources efficiently and higher prices will drive more production. Peak oil is a Malthusian fallacy.
Thanks for your comments.
Jeff,
I’m a peak oil novice so I don’t have a strong inclination towards either way. Although a few facts are certain – the ‘easy to access’ reserves are declining. This is stated by high level spokespeople working for the big oil companies. Hence the deep ocean exploration for oil fields. This stresses the technology we have to the maximum, as was evident with the Deep Water Horizon Spill.
There’s another fact called net energy output – meaning energy expended to the energy obtained as the output. The energy needed to be expended is increasing as the access to oil resources are getting harder and harder. So there’ll be a point where it would be pointless to get that oil, because more is being spent.
That’s why I would not prefer to have absolute faith in the growth model.
[...] must digress a tad by giving The Daily Capitalist’s translation of Bernanke’s remarks: Since August when we began to flood our primary dealers in Wall Street with newly printed money [...]
Keith, Sundar: i agree. rather than fight the Fed by shorting treasuries, i’d rather ride that same flood: precious metals are an important part of any intellectually honest portfolio.