The most significant market adjustment since Bernanke used the “Unlimited” word is not in stocks, bonds or PMs. It’s in inflation expectations. Have a look at this chart. Focus on the incredible spike in the past 24-hours.
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The sick part of this is that if Bernanke saw this graph, he would cry with tears of happiness. This is exactly what he was praying for. Ben thinks that inflation is a good thing. That it will cause demand to be pulled forward as people realize that things are going to cost more tomorrow than they do today.
I suspect Ben is right. Higher inflation expectations in the US will filter around the globe. Post the extraordinary steps Ben took yesterday, people will be stocking up on “stuff”. Things like rice, flour, cooking oil, soy, wheat and sugar. If you can eat it, buy it now. It will be more expensive in a month. While your at it, fill up the gas tank, the price is going up next week and every week for the next few months.
Ben doesn’t care about that stuff. He ignores this altogether. Maybe he’s right, after all, food and energy are really not so important to the 7Bn folks who happen to be passing through this decade, right?
Some day the history books will study this period of time and ponder how so many people gave up control of key elements in their lives without ever having a say in the outcome. How could one person have gotten so powerful? Somehow we have anointed Ben as the new God. An omnipotent decider that is nether elected or whose power is somehow checked. Don’t think for a minute that he’s one of those benevolent gods, he’s not.
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Ok, so it’s inflation, and lots of it. Agree. But I’d say that ‘just’ higher inflation can be sustained (if one can put it that way) for quite some time, particularly to set off the ongoing force of deflation from all the deleveraging still to come. (Per Mish & Steve Keen: ‘money’ +includes+ marked-to-market credit.) So even though that will hurt masses of people, Inflation by itself will not fatally hurt the financial system, as there will still be no hyper-inflation for a long long time to come. Or will it, in your view? Or do you envisage a kind of partial hyper-inflation will occur (if there can be such a thing) in food, energy and hard assets only?
OK. I understand that printing money leads to inflation, but I also thought you needed demand to bull prices higher?
I am reading family incomes are down over the last several years.
So how can people with declining incomes bid prices up, assuming supply is the same? I am inclined to believe there will be a lot of inflation in the future but how can that happen if personal incomes don’t rise as well?
I wish someone could layout a scenario/timeline as to how they believe this will all play out. My crystal ball just isn’t good enough.
Insufficient income to buy necessities today instead of waiting for tomorrow? This is what credit cards are for.
As for a crystal ball–it is now apparent that no serious corrective measures will be taken until we have a total disaster. And maybe not even then. My rule of thumb in life has always been, “Everything drags on for longer than you expect–even when you think you have taken this rule into account.” (Yes, it is a recursive rule.) And, it has never seemed more apt.
Inflation in the things you need, deflation in the things you don’t..
The fed low rate meme is just covering up higher prices instead of price discovery…I’m getting 3.25% on a 600K house…200k at 6% works out better for me..
Why not pay .10% on reserves to really get inflation? I don’t see this helping main street at all..
Did the treasury backstop of Mbs at end of year have anything to do with it?
Ben Bernanke lied to the american public, specifically savers and the graph above shows that clearly
Savers will see no benefit in this at all! It’s sheer lunacy to think otherwise. Savers will go extinct, college kids will never be able to save, the poor will get poorer, paychecks will be less, pensions cut….etc
Their was no reason for QE by the fed..consumer confidence report today sealed the folly today
There is no way out of this mess created by all the money printers except declaring bankruptcy which will happen eventually when the increasing production of the paper (or digital) exchange medium can’t keep up with the need to make interest payments on the money borrowed to keep the system afloat.
The characteristics of this inflationary period that are different from others is that very few people can find jobs that produce a livable income, we don’t have a decent manufacturing base enough to hire people to produce goods people want either here or around the world in the quantity needed to invigorate the economy and more and more people will be without incomes to purchase the remaining goods as they lose their jobs and/or their remaining money runs out and loses purchasing power due to the ever increasing effects of the inflating of the existing money supply which is devaluing the money being created along with the already existing money in circulation (a never ending suicidal cycle of desperation).
Prices on EVERYTHING will rise (and continue to rise until the new and existing money supply can filter into the economy and be balanced with the amount of goods…which will never happen) because more dollars are chasing either the same amount of goods or even less goods as factories close up due to lack of demand.
People with shrinking, or no, incomes will have to severely reduce their standard of living to afford the absolutely necessary goods they need to survive given their fixed, or non-existent, supply of money. Prices will not fall, in terms of the inflated currency, but discounts will be available to those offering more valuable assets for exchange, eventually even tobacco, ammo, and other non-perishable items needed for protection and survival.
Eventually the inflated currency reaches hyperinflation levels and loses exchange value faster than it can be exchanged for wanted goods and/or services. This is the state called ‘lack of confidence’ in the medium of exhange. This happens before the inflated currency becomes totally worthless and people just use the paper currency to burn for heat (as is Weimar Germany) or to stuff their clothing for insulation or for toilet paper.
Your only protection against the evaporation of your paper assets is to convert them immediately into gold coins, silver coins (for exchange purposes), bullion for greater quantities of wealth (they are very heavy) that you can hide in a safe place you can eventually get to, and all the items you will need (and still find and afford) to survive and protect yourself physically from the rampaging herds of desperate people that didn’t understand in time what was happening to their medium of exchange before it was too late.
See my blog for lots of info on the collapse of the world’s economic system:
http://goldtradercommentsaugust2010.blogspot.com/
I post current articles daily and have YEARS OF INFORMATION on the current and previous blo(s)
so scroll back through them for lots of good info, and links to other good sites that will help and inform you.
so Ray Dalio says the same thing! “in all deleveragings, in the end they print money.”
Are we already in the end?
I dont see how stockpiling food improve economy, quite opposite there wont be money in peoples hand left for other things that move it. But what I find even more interesting is how exactly can this push people to more spending – in era where we can freely switch to any other currency or precious metals.
So IMO It can only achieve 2 things: inflate debt and help exports but at the cost of imports and its only temporary bending curve because eventually salaries will have to go up to match prices increasing cost of products in turn and we are back in circle. Btw spending in US have always been quite crazily high anyway.
Hi Bruce,
In my opinion, although it may sound counter-intuitive, perhaps this QE3 will mark the top of all the risk assets.
1. Till now, all the risk assets have been in fact supported by the hopium that there will be QE3. Now bulls have got what they want. Maybe it’s time to look at the fundamentals. I don’t think the fundamentals are bullish.
2. Back in the dark days of 2008-2009, not many people thought QE could push up the prices of risk assets. But now everybody knows QE is bullish. Can you find many people who are bearish after the Fed announced QE3? I doubt. Perhaps markets will just go the other way.
3. In the long run, I believe printing money is inflationary. But in the short term, the prices of agricultural products are decided by supply and demand. If you look at the prices of corn and soybean, in 2009, their prices were still as low as in the last quarter of 2008 because of bumper crops. Bad weather will not last forever. Several bumper crops will knock down the prices of agricultural products. Brazil and Argentina will begin sowing in October.
4. From 2008-2010, when the Fed was conducting QE1 and QE2, China also implemented expansionary monetary policy. Chinese firms used the money to stock copper, oil, iron ore, etc, which supported the prices of industrial commodities. Do you think China will open the monetary spigot again this time? I doubt it.
5. QE3 is only 40 billion per month. The term of Bernanke the knob head as the Fed’s Chairman will end in Jan 2014. Will Bernanke get re-appointed? I doubt that. Will QE3 continue after Ben goes? That’s still a big question mark.
I’m looking forward to responses from you and other readers.:)
Could not agree with you more. Financial advisors now will have all their retail clients who were in cash rushing into buy all the dips from smart money.
The only thing Ben assured here is nosebleed levels of volatility. As Bruce says, the VIX is about become very volatile. Those going all in on gold and silver pricing in hyperinflation are about to be in for a rude awakening.
This is the mother of all sell the news events in my opinion.
The Fed induced gains in the market caused by narrowing spreads, and rising asset prices caused by the need to reinvest after selling to the Fed does not easily translate into jobs. Money freed up is reallocated to other(similar) investments and not consumption. The so-called wealth effect from increased stock prices is far less than what we’ve come to see when home prices go up. All Ben is accomplishing is confusing those that think the stock market going up is the same as the economy improving and worse yet, increasing the potential for stock market losses down the rode when the euphoria of the Fed purchases wears off as it must.
Yes, I have to buy SOME food and energy. I buy in bulk, shop at no-frills discount and substitute cheaper items for packaged meals or steaks. I have a woodstove in my basement – and wood is nearly free – to cut down on electricity costs. And so on…
But I’m STILL not going to go out and borrow to buy a (still) overpriced home, an RV I can’t afford, home renovations I don’t need & can’t afford or a high-priced new car (my old one is good for 20 years).
Not when I’m worried about my JOB, the yield on fixed-income is near zero and I have a paper loss on my house.
Bernanke has shot himself in the foot.
“Bernanke has shot himself in the foot.”
error due to understatement, correction: Bernanke has shot us in the foot.
The escalating QE war – when everyone is devaluing their currency then no one is devaluing their currency…
I’m holding my gold and silver positions. The Federal Reserve has done me a big favor.
Yes. And I’m happy for you.
But I still have tears over this. I’m as certain as I can be that Ben is making a mistake.
I don’t think the evidence of his mistake will come soon. But it will come.
I do not believe Bernanke et al will be able to continue this policy. Simply let us say, back of the envelope, reserves are going to increase 1% per month or your money will depreciate whether you see it in prices immediately or not 1% per month. Who is going to buy credit instruments where a substantial loss in purchasing power is guaranteed? Who is going to write a mortgage where they are guaranteed a loss of 9% per year for the foreseeable future. Who will buy substantial amounts of real estate once they realize that when the buyer goes to sell the private mortgage interest rate will be much much higher if available at all. What foreign country will buy our paper at 0% when reserves are increasing at 12%?
PRINTING MONEY IS A SLOW MOTION DEFAULT OF BORROWERS. WHO WILL LOAN MORE MONEY AT 1-3.5% TO ANY ENTITY PUBLIC OR PRIVATE IN A SLOW MOTION DEFAULT? THE CREDIT SYSTEM WILL BREAK FASTER THAN ANYONE IS ANTICIPATING AND MUCH FASTER THAN PRICES CAN INCREASE. LOOK AT WHAT HAPPENED IN THE LONG BOND THE LAST FEW DAYS.
“How could one person have gotten so powerful?”
Our 2nd president, John Adams, answers this question perfectly:
“All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation.”
I would add that congress is the leading example of this.
Bruce, I wish you would post more often cause you are spot on!
Let’s say this is a fair summary of what Helicopter Ben is thinking will happen with “QE Unlimited”:
1) Fed will push interest rates down by buying MBS.
2) Interest rates will drop even further than where they are today.
3) Lower rates will stimulate more homebuying and construction.
4) Increased housing demand will raise home prices.
5) Fewer homeowners will be “underwater” (homes worth less than mortgages).
6) Banks will refinance more existing mortgages at lower rates because the homes are now worth more.
7) Homeowners start to regain the “wealth effect” and will start to spend more and the end result will be that businesses will hire more employees.
That a fair summary?
Here’s the issues, IMO.
IF (3) happens, people (buyers) have to be qualified. That’s gotten a lot harder, and the pool of qualified buyers is a lot smaller than it was.
(4) has no chance of occurring. There’s an unbelievable volume of ”shadow inventory’ out there – REO’s, Foreclosures, properties vacant and ‘in limbo’ for lack of a better term. All this “QE Unlimited” is going to do is to is to bail out the “Banksters” and the RE Loan Servicers again – so they can up the volume of foreclosures that they currently can’t afford to take back on their book, while kicking large numbers of people out of their homes. And of course many of those newly poor people will have ruined credit as a result of the process, so there’s no new customers there.
The only way the new home sellers will be able to compete is to drop their prices down closer to what the ‘Shadow Inventory’ properties are being sold for, which which means that you are just reinforcing the bar for establishing a baseline for lower housing prices, or at best stabilizing the bottom for housing prices.
So (5) does not happen.
So (6) does not happen.
So (7) does not happen – unless you happen to be a “Bankster”. Then you are golden.
he’s buying the junk MBS off the banks thru a conduit of fannie and freddie who just lowered thresholds on the loans they were going to push back to banks….the whole charade is again to benefit the banks, not the people….
http://www.housingwire.com/news/gse-eases-mortgage-buyback-rules-refinancing
Can somebody please explain how is ECB led bond buying different from FED led bond buying. What is the difference in the ECB approach and the FED approach to tackle the cuurent crisis.
The Fed announced they would buy MBS. The ECB will buy short term sovereign debt, but supposedly only when/if the country first officially requests such aid via a mechanism like the ESM. Meaning the country would have to agree to stringent austerity measures before the ECB would buy its debt. This is the so-called ‘conditionality’.
The US fought a bloody civil war to allow decisions that affected the nation to come from Washington DC. Europe hasn’t…yet
Europe certainly has had so called civil wars. There have been centuries of it. But interestingly enough these European countries won’t have to have their decisions come from Brussels or Berlin, as long as their respective governments keep their budgets in-line with market expectations. A little different than the USA.
Bernanke doesn’t care about inflation — $4 gas, whatever. Obviously. His #1 priority is supporting the stock market. Obviously.
How the hell is creating $40b per month to buy MBS going to result in sustainable job creation? Has anyone ever simply asked him to explain the mechanism there?
And here is something else that I’d like to see explained: Why didn’t the Fed announce it would buy Treasury debt directly? Monetization. Because it would’ve been politically less defensible? Perhaps due to the controversy about that going on right now in the EU? Meaning without significant action by Congress to meaningfully reduce the deficit (and how in the world is that possible?), it was seen as politically risky — due to the upcoming election? — to just create money and give it to the federal government?
Everyone else looses, but especially the savers, the middle class and the poor, since necessities are being inflated and require purchase. Big ticket items won’t be bought due to uncertainty over the future. Pain for No Gain.
Hi there i am kavin, its my first time to commenting anywhere, when i read
this post i thought i could also make comment due to this sensible post.
19-September-2012: The Bank of Japan unexpectedly expanded its asset-purchase fund by 10 trillion yen
http://www.bloomberg.com/news/2012-09-19/boj-follows-fed-to-bolster-stimulus-as-economic-recovery-falters.html
QE Wars!!
Another great article, Bruce, repeating the same things I’ve so often said.
It’s a little pathetic, but this is crisis period full of real financial risk, but one of extreme public complacency. People whine and complain a lot, but re-elect the same politicians that they’re complaining about. It reminds me of the “Information Highway” period just before the tech blowup, when everyone believed that all of our problems were going to be solved by being connected. ;^D
Most don’t even know, or probably care, what the FED is (a cartel of private banks), it’s dubious origins (concocted by the most powerful bankers of the time at a secret meeting on Jekyll Island, Georgia) or that laws for establishing the FED and the income tax were passed the same year, 1913 (must have been a coincidence. ;^)
They are also ignorant of the fact that the fractional reserve banking system becomes a tax that goes into the pockets of the banks, when most items are charged on credit. And hits the financially strapped the hardest. Or that the 29.99% rate that credit companies charge if a payment is missed (and they are gambling that many will miss one – it’s part of their declared “business model”) was a rate that was illegal (loan sharking) in the 1930′s.
It’s the social networking age of give me an iPhone and a Facebook account, and it will all work out (because I’ve got 8,963 friends and somebody’ll take care of the details, I’m sure. Maybe that FED guy, what’s his name, will fix everything!)
Periods of complacency seem to presage the really big downturns, the roaring twenties, the late 1990′s, the real estate bubble (Remember this one: the head of the Federal Reserve said today that their study showed real estate markets rarely collapse, that prices tend to stagnate when they’re elevated. Or the famous, the subprime crisis is “contained”. ;^)
Every “soft landing” requires a new bubble to get things going again! The tech bubble was fueled by savings (and went right into the pockets of professional traders – simply a massive transfer of wealth from the middle class to the upper class. ;^)
The real estate bubble was fueled by home equity, and like wise, the homes that were lost to foreclosure were transferred to those who could pay cash (those who lost them will probably never be able to buy another one.)
Now, Bennie and FED’s would like to see an economic expansion fueled by what’s left of the middle and lower classes taking on more debt. Sounds reasonable, to a banker! ;^)
@Small.Business.Guy.1
Actually, I don’t think Ben is that stupid. In fact, I think he’s quite of a magician. It’s a classic case of don’t watch what I’m doing, listen to what I’m saying. No, I think that Bennie is orchestrating a brilliant smoke and mirrors move, and most are buying it, even though if you followed the money, everything he’s done has been to keep the banks from going belly up.
Even though the FED is a cartel of private banks, and even though the FED is the well known lender of last resort, and its primary purpose is to support, bailout and enrich the banks, period, Ben knows that this is a period of great unpopularity (to put it mildly) for banks, bankers, their bailouts and their bonuses!
The four B’s! Bad, bad bankers! ;^D
So, what does he do, he quits even mentioning the banks (which would have been under water if they had had to write off all their bad loans, which Bennie bought! Follow the money!), and starts talking about a conveniently created “dual mandate”, boost the economy while fighting inflation and lower unemployment.
R-i-i-i-i-ght, and that was your plan the whole time, I suppose. Mmmmmh…and that’s why you bought all those bonds from the banks, so they could put the cash into the stock market, commodities, and gold, and make up for some of their losses. Which, of course, made the top 10% happy as well.
So, he managed to hoodwink the public, the MSM, and he became much more popular with the rich, congress, and the multinationals (who employ only a fraction of the workforce BTW ;^), and that’s where the power base is anyway, as we all know, or should know. Look at our choices for president! ;^D
And everyone buys it! He’s very good. He looks very serious and dignified, and no one calls his bluff! Ron Paul, who was going to be a tiger, turned out to be a paper tiger after all. ;^)
Well, the rich have gotten richer, so they’re happy to play along, hoping for more free money. 70% of the wealthy surveyed think Bennie is doing a bang up job! ;^) The MSM is happy to go along, as well, because they’re doing fine as well, and they’re owned by the rich.
The poor that’re getting shafted probably don’t know any better, and many seem to think the rich are their bosom buddies, who are going to create nice jobs for them (not!) because they said so on Fox News! ;^D
And that’s what he’s still doing, in fact. Of course, he wants the economy to pick up and unemployment to be lower, but that will also help the banks and his balance sheet. All the bad mortgages he bought from the banks could be unloaded at a profit, so, of course, he wants inflation to pickup. And if he manages to blow an new bubble, he’ll get all the credit and consolidate his power base.
And that will be that. Or the whole thing could blow up and he could say, as he has recently, that he didn’t have powerful enough tools to lower unemployment. Just give this good-hearted, unelected old banker more powerful tools, and he will fix everything!
“Give me control over a nations currency, and I care not who makes its laws.”
~Baron Mayer Anseim Rothschild
“I care not what puppet is placed on the throne of England to rule the Empire on which the sun never sets. The man who controls Britain’s money supply controls the British empire, and I control the British money supply.” ~Nathan Rothschild
“…By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”
~John Maynard Keynes