When QE Leads To Deflation: A Look At The "Confounding" Global Supply Glut

[piezoe]

At the beginning of your quote you must give the source, or alternatively a footnote that states the source. You should not rely on the reader to ferret out the source from the context or hyperlinks contained in the quote itself.

In your recent quote of a zero hedge article you wrote" Here's the Boston Fed's take on adding QE to the number of tools available permanently, not just for emergency!" you then inserted a dashed line and jumped immediately into the zerohedge quote. Thus your post said directly and very clearly that the zerohedge post was the Boston Fed's take. Which is of course not true. It isn't clear until one begins reading the quote that something is obviously amiss. What one is reading can not possibly be the Boston Fed's take. By the time one gets to the statement quoted by zerohedge from the Barnes paper it is clear that one is reading someone else's opinion of the Boston Fed's Take. And at that point it is easy to find the source of your quote by clicking on the hyper links. By going to your source, the zero hedge article, one realizes that they have not been reading even the zerohedge contributor's opinion of the Boston Fed's take, but rather their opinion of what they apparently believe is the Boston Fed's take, but isn't necessarily!!!

This is wrong. Please start giving your sources and stop relying on the reader to ferret them out, not because this is a lot of work for the reader -- it isn't -- but because what you are doing is potentially misleading and borders on the unethical.

You stated: "You claiming the Fed does not endorse papers posted on it's official website is silly." Let me point out to you that the Fed and its branch banks sponsor a great deal of first rate economic research that is published and available in the public domain. The Fed is very clear about these papers not necessarily representing or agreeing with official Fed policy, but being the work of the authors. You may go to any of the Fed websites to find the Fed's disclaimer with regard to research papers listed on and linked to via the official Fed websites.

 

[Tsing Tao]

You should not rely on the reader to ferret out the source from the context or hyperlinks contained in the quote itself.

Why not? Is there a message board forum generally accepted rule set out there or something?

In your recent quote of a zero hedge article you wrote" Here's the Boston Fed's take on adding QE to the number of tools available permanently, not just for emergency!" you then inserted a dashed line and jumped immediately into the zerohedge quote. Thus your post said directly and very clearly that the zerohedge post was the Boston Fed's take. Which is of course not true. It isn't clear until one begins reading the quote that something is obviously amiss. What one is reading can not possibly be the Boston Fed's take.

Again, why not? Doesn't it come from the website of the Boston Fed? Wasn't it written by an employee of the Boston Fed? Michelle Barnes is the Senior Economist and Policy Adviser at the Boston Fed. So how can it not be the Boston Fed's take?

By the time one gets to the statement quoted by zerohedge from the Barnes paper it is clear that one is reading someone else's opinion of the Boston Fed's Take. And at that point it is easy to find the source of your quote by clicking on the hyper links. By going to your source, the zero hedge article, one realizes that they have not been reading even the zerohedge contributor's opinion of the Boston Fed's take, but rather their opinion of what they apparently believe is the Boston Fed's take, but isn't necessarily!!!

Double speak is a second language to you, isn't it. It's quite obvious that the commentary is the opinion of the Boston Fed. You seem quite embarrassed by it. Do you work there, too?

This is wrong. Please start giving your sources and stop relying on the reader to ferret them out, not because this is a lot of work for the reader -- it isn't -- but because what you are doing is potentially misleading and borders on the unethical.

I gave the link in the first few words. Welcome to the world of the internet. I could have put the link in the first few words saying "According to Zerohedge, this is the Boston Fed's take", but it's the same thing. Stop getting all pissy because it didn't meet with your APA standards and focus on the content.

You stated: "You claiming the Fed does not endorse papers posted on it's official website is silly." Let me point out to you that the Fed and its branch banks sponsor a great deal of first rate economic research that is published and available in the public domain. The Fed is very clear about these papers not necessarily representing or agreeing with official Fed policy, but being the work of the authors. You may go to any of the Fed websites to find the Fed's disclaimer.

Let me point out to you that the author of the article is the Senior Economics and Policy Adviser at the Boston Federal Reserve. Saying that's not the position of the Boston Fed is complete absurdity.

 

[piezoe]

There are only a few people that are authorized to speak for the Fed. Michelle Barnes is an extremely bright and capable economist, and her paper presented well reasoned arguments regarding how the Fed, going forward, might use their balance sheet to supplement the Fed's traditional, main, monetary policy tool. I applaud her paper. She does not speak for the Fed however. I did not say her position is not the position of the Fed, but you must understand that it is not necessarily the position of the Fed.. The official position of the Fed with regard to Barnes' paper is succinctly stated on the Boston Fed's website.

 

[TooOldForThis]

Please explain how the Fed pumping huge amounts of money into the system increases the bank accounts of rich people and profitable corporations.

Okay so you clearly don't understand anything about how the economy works and probably can't be taught anything about it. I'll put an explanation for the benefit of someone else who happens on this thread.

Suppose that Alice owns a 30-year treasury bond. This is an "investment"; it goes up and down in price as interest rates change. It is not cash held in a "bank account". Now suppose that the Fed buys treasury bonds with newly created money. In order for the Fed to do this, someone has to sell their bond, I'll suppose that it's Alice's bond that is paid for. The result of the operation is that instead of a bond (investment) Alice now owns cash (bank account).

So you mean it forces people into more risky investments than they would otherwise accept under normal monetary conditions? And this is a good thing?

Yes.

This ship has sailed. Everything from farm land to commodities to equity markets (all asset classes) have already been bid to the moon. Have you seen bonds lately? How about HY? What happens when this ends? What you're advocating is the push to create more and more bubbles.

Present short term interest rates are damn near zero. But when I look at the dividends paid by stable companies the interest rates are quite attractive.

The bubble isn't over until *corporate* bonds are driven to high prices. They're not high yet, given the low Fed interest rates.

LOL! It's so easy to claim what "might have been". Here's mine: If the Fed hadn't done QE, we'd have had a very painful few years, but would have been on the track of a real recovery by now with debt flushed out of the system in the manner in which debt is usually flushed out when no one can pay - bankruptcy. ...

Europe tried your theory while the US did QE. Result is that the US economy is quite a lot better than that of Europe. You lose.

Instead, we've had no recovery outside of asset markets, main street is still suffering, and we still have all the debt (more, in fact) and huge financial bubbles.

While the US is doing a *lot* better than Europe (which explored the consequences of your bad advice), the US has not yet recovered. Hence QE continues.

We're still at all-time lows in interest rates and under "emergency policy", countries around the world are still flirting with long-term deflation (wage deflation) ...

True. The low interest rates are the objective of Fed policy given that the recovery is still weak. The Fed has been doing this for close to 100 years. They have a hell of a lot more experience at it than you do.

... companies are borrowing at all time low rates just to fund buybacks in their stocks, ...

Of course companies borrow money when interest rates are very low and of course they buy their own stocks when those are also low. Net effect is that someone who owned the stock ends up with cash and has to invest it. This is part of the increase in the velocity of money that is the objective of the Fed as well as improvement in the financial condition of wealthy people (also an objective).

... food stamps at all time highs, unemployment still quite high (especially when you remove the over 55 jobs added - which are the balance of all jobs added in the last 5 years), GDP is crawling along, federal debt is over 18 Trillion, ...

Fed doesn't do food stamps, LOL. But other than this, the things you're listing are why QE is continuing.

... the Southern periphery of Europe has double digit unemployment, with youth unemployment in countries like Spain or Greece around 40% or even higher!

Europe pursued the hard money policies you're espousing. Instead of having high food stamp usage and unemployment, some of their governments face failure. Do you want the US government to face failure? In any case, the US situation is not analogous to the southern Europe crap because the US borrows in money it can print.

... Japan is STILL in deflation despite decades of the policies you claim to have "helped" us,

Your basic problem is that you do not understand numbers. Japan did not do significant QE. Before the recession, the US Fed held about $800 billion in treasury notes. By June 2010 it was up to $2100 billion an increase of 160%. The Japanese Fed actions were about 5x smaller. Instead of trusting the opinions of moronic journalists, you need to look at the numbers yourself. Japan now regrets having used too little easing. See, for example:

Why Japan Loves Quantitative Easing
http://www.zerohedge.com/news/2015-...ntitative-easing-–-and-strongly-recommends-it

... and even China is now talking about doing QE, with 27 central banks this year to have cut rates or initiated QE like programs for their own economies.

So let me get this straight. The countries that did not follow the US in QE back in 2008 are now trying it. And yet you think the US policy was a disaster? Your own post admits that China and "27 central banks" are in disagreement with you. You're deeply ignorant on this subject; the world's central banks are not.

 

[Tsing Tao]

There are only a few people that are authorized to speak for the Fed. Michelle Barnes is an extremely bright and capable economist, and her paper presented well reasoned arguments regarding how the Fed, going forward, might use their balance sheet to supplement the Fed's traditional, main, monetary policy tool. I applaud her paper. She does not speak for the Fed however. I did not say her position is not the position of the Fed, but you must understand that it is not necessarily the position of the Fed.. The official position of the Fed with regard to Barnes' paper is succinctly stated on the Boston Fed's website.

The Fed's position is whatever they authorize posted on their official website. Just like any other company or government entity.

 

[Tsing Tao]

Okay so you clearly don't understand anything about how the economy works and probably can't be taught anything about it. I'll put an explanation for the benefit of someone else who happens on this thread.

Clearly I and everyone else here will benefit from your incredible foresight and wisdom. Oh, and your civil tone will do wonders for discourse.

Suppose that Alice owns a 30-year treasury bond. This is an "investment"; it goes up and down in price as interest rates change. It is not cash held in a "bank account". Now suppose that the Fed buys treasury bonds with newly created money. In order for the Fed to do this, someone has to sell their bond, I'll suppose that it's Alice's bond that is paid for. The result of the operation is that instead of a bond (investment) Alice now owns cash (bank account).

Soo....by printing money and buying bonds, all the Alice's of the world get more money in their bank accounts? Seriously, that's your answer to how the Fed printing money gets rich people more money? Wow...you weren't kidding when you professed brilliance!

Yes.

Let the record show that "TooOldForThis" believes chasing everyone into risky assets they would normally avoid in order to get yield is a good thing.

Present short term interest rates are damn near zero. But when I look at the dividends paid by stable companies the interest rates are quite attractive.

Yes, you just have to buy those companies at all time record prices...but don't let something silly like that bother you. Stocks go up forever!

The bubble isn't over until *corporate* bonds are driven to high prices. They're not high yet, given the low Fed interest rates.

No, not at all. AAA corp bond yields at 100 year lows...but hey, there's probably still room to go.

Europe tried your theory while the US did QE. Result is that the US economy is quite a lot better than that of Europe. You lose.

Europe let all debt that couldn't be paid default? I seem to recall bailouts and the like. The only thing they didn't do is QE, which they are doing now (and getting nowhere). The US economy has always been better than Europe, so the fact that it's better now doesn't say a whole lot considering how bad Europe is. You lose.

While the US is doing a *lot* better than Europe (which explored the consequences of your bad advice), the US has not yet recovered. Hence QE continues.

Let's talk about what metrics are doing a *lot* better than Europe. Please, which ones?

True. The low interest rates are the objective of Fed policy given that the recovery is still weak. The Fed has been doing this for close to 100 years. They have a hell of a lot more experience at it than you do.

The Fed has been doing QE for 100s of years? I thought the Fed just started QE for the first time ever about 6 years ago. Man, you're teaching me a lot!

Of course companies borrow money when interest rates are very low and of course they buy their own stocks when those are also low. Net effect is that someone who owned the stock ends up with cash and has to invest it. This is part of the increase in the velocity of money that is the objective of the Fed as well as improvement in the financial condition of wealthy people (also an objective).

Company buy backs have been at company all time highs. Would you like another chart? When companies are borrowing at low rates just to buy stock back and not invest in growth, that's a problem - one even the Fed admitted to being concerned over lately. What buybacks are at "low prices"? Can you name some?

Fed doesn't do food stamps, LOL. But other than this, the things you're listing are why QE is continuing.

Uh, QE ended. In case you didn't get the memo. And those "things" are still where they were. So...more of the same, right? Let's do more QE?

Europe pursued the hard money policies you're espousing. Instead of having high food stamp usage and unemployment, some of their governments face failure. Do you want the US government to face failure? In any case, the US situation is not analogous to the southern Europe crap because the US borrows in money it can print.

Europe borrows in money it can print, too. As for Europe pursuing hard money policies, can you name some?

Your basic problem is that you do not understand numbers. Japan did not do significant QE.

WTF? Really? And it's me who doesn't understand numbers? Japan has been monetizing ALL of Japanese debt. They've killed the JGB market. They're now buying stocks straight out. Not significant QE. LOL!

Before the recession, the US Fed held about $800 billion in treasury notes. By June 2010 it was up to $2100 billion an increase of 160%. The Japanese Fed actions were about 5x smaller. Instead of trusting the opinions of moronic journalists, you need to look at the numbers yourself. Japan now regrets having used too little easing. See, for example:

Why Japan Loves Quantitative Easing
http://www.zerohedge.com/news/2015-03-08/why-japan-loves-quantitative-easing-–-and-strongly-recommends-it

You can't compare Japan, which is 1/4th the economy of the US, with the US in terms of dollars. What's the matter with you?

So let me get this straight. The countries that did not follow the US in QE back in 2008 are now trying it. And yet you think the US policy was a disaster? Your own post admits that China and "27 central banks" are in disagreement with you. You're deeply ignorant on this subject; the world's central banks are not.

If you knew anything at all as to why they're doing it you'd know the answer for yourself. They're exporting deflation to each other in terms of devaluation. It's competitive devaluation, actually. I cannot wait for your responses. This has been quite an education.

 

[TooOldForThis]

Clearly I and everyone else here will benefit from your incredible foresight and wisdom. Oh, and your civil tone will do wonders for discourse.

Oh it was obvious from your posts that you're entirely ineducable. All I will do is give simple answers that other people can understand but you, the genius who goes up against 27 central banks, you I will simply mock.

Soo....by printing money and buying bonds, all the Alice's of the world get more money in their bank accounts? Seriously, that's your answer to how the Fed printing money gets rich people more money? Wow...you weren't kidding when you professed brilliance!

You really shouldn't be ashamed that you don't understand how money is created. Probably 90% of the public has no idea either.

So let's look at it from your point of view. You know that the Fed "prints money". Who the heck do you think ends up with that money? Probably the Council on Foreign Affairs, LOL.

Let the record show that "TooOldForThis" believes chasing everyone into risky assets they would normally avoid in order to get yield is a good thing.

Yes, the problem with this sort of depression is that wealthy people become excessively risk adverse. Part of the solution to that is to chase then into investments that are more risky.

Your basic problem is that you are deeply ignorant on this subject. I'll bet you haven't read the literature on it. Certainly you didn't understand it. One of the problems with ignorant people is that they don't know when they're ignorant. The human brain fills in gaps admirably well; your understanding of economics is limited but it seems complete to you! So there you go, publishing nonsense on the internet about how stupid 27 central banks are at their inability to understand things that are so obvious to you.

For the case of the 2008 financial crisis, here's an academic paper on the subject:

Time Varying Risk Aversion
Guiso, Sapienza and Zingales
European University Institute, Northwestern University, University of Chicago
June 2013, National Bureau of Economic Research
We use a repeated survey of an Italian bank's clients to test whether investors' risk aversion increases following the 2008 financial crisis. We find that both a qualitative and quantitative measure of risk aversion increases substantially after the crisis. ...
http://www.kellogg.northwestern.edu/faculty/sapienza/htm/risk_aversion.pdf
http://www.nber.org/papers/w19284

During a bubble, people become too little averse to risk. So the Fed makes risk more expensive to them. And during a depression, the public becomes too much averse to risk. And so Fed policies push against that.

The basic problem of economics is that humans exhibit a very strong herd behavior. Ideal Fed policy is to push against that herd instinct. Right now millions of stupid people are out there avoiding risk when they should have avoided risk back in 2007. And the Fed is pushing them to accept risk. That's the Fed's job.

Yes, you just have to buy those companies at all time record prices...but don't let something silly like that bother you. Stocks go up forever!

Decent dividend paying stocks are paying around 5%. This is not an "all time record price". You think it is because you've become too risk averse due to the 2008 crisis. The Fed is pushing against you.

No, not at all. AAA corp bond yields at 100 year lows...but hey, there's probably still room to go.

LOL! Unfortunately for your argument, your chart stops at 1930:

If you go to the trouble of finding a chart that runs from roughly 1919 to 2015 you will find that AAA corp bond yields are not at 100 year lows; the rates were lower for most of the 1940s and 1950s:

Image source:
https://research.stlouisfed.org/fred2/series/AAA

Europe let all debt that couldn't be paid default? I seem to recall bailouts and the like. The only thing they didn't do is QE, which they are doing now (and getting nowhere). The US economy has always been better than Europe, so the fact that it's better now doesn't say a whole lot considering how bad Europe is. You lose. Let's talk about what metrics are doing a *lot* better than Europe. Please, which ones?

You admit that Europe didn't try QE and now is. Good. It takes a long time for QE to have effect but the alternative is to continue to suffer.

You note that the US economy "has always been better" than that of Europe. Let's accept this. So we need to compare the graphs of the US economy with the graphs of those of Europe. Sure, Europe might have higher unemployment rates or lower long term growth in GDP but what matters for this discussion is what those curves have done since QE was instituted. See numbers in next post

Since you apparently don't read much economics, I'll provide you with a chart of how unemployment rates have changed in the US and Europe since QE was started. Between 2009 and June 2013, US unemployment declined by 1.7%. Almost every country in Europe had increasing unemployment between those dates. This is why Europe is envious of how QE has performed in the US, and sure, if you weren't aware of it, I can see how you could be confused about what QE has done in the US:

Image from:
http://www.bls.gov/fls/intl_unemployment_rates_monthly.pdf

The Fed has been doing QE for 100s of years? I thought the Fed just started QE for the first time ever about 6 years ago. Man, you're teaching me a lot!

The Fed has been doing "open market operations" for most of 100 years, not "100s" of years, LOL. They decided to call it "QE" 6 years ago but it's little changed from what's been done.

The first open market operations were done by Great Britain back in the days of the gold standard. At the time the objective was to avoid having big gold moves out of the country. Google around and you can find a history of it.

 

[TooOldForThis]

Reply continued...

Company buy backs have been at company all time highs. Would you like another chart?

I believe this is true but it's not at all a problem. Part of the reason it's done is that dividends are double taxed. But in any case, this is part of the Fed intention; they're pumping money into the economy. And when those shares get bought back, money gets stuck in someone's bank account (and the problem of the corporation having too much money in its accounts is partly reduced). If Alice sells her shares, she now has to invest them elsewhere or buy stuff with it.

When companies are borrowing at low rates just to buy stock back and not invest in growth, that's a problem - one even the Fed admitted to being concerned over lately.

I agree that share buybacks have increased but the increases dates to the 1980s, long before QE was started. As to the Fed being worried about it, could you provide a link to this? My guess is that the Fed thinks of share buybacks as being an alternative to dividends.

Along this line, when you talk about how over-valued the stock market is, you need to include these stock repurchases with the dividends. I have no trouble finding stocks paying handsome dividends and simply do not see the stock market as being horribly over valued.

What buybacks are at "low prices"? Can you name some?

The S&P500 today is at around 2100. That's higher than it ever was in 2008, 2009, 2010, 2011, 2012, 2013 or 2014.

Do you really think the stock market can set new highs without the previous prices being low? Hundreds of companies bought back shares in 2009 at prices much lower than they are now.

Hey, if stocks were dropping, your argument would make sense. In that case, companies would have bought shares at high prices. Instead they bought them at low prices. I think you're hopeless.

Uh, QE ended. In case you didn't get the memo. And those "things" are still where they were. So...more of the same, right? Let's do more QE?

Not sure what you're babbling about here.

Europe borrows in money it can print, too.

You should call up the Greek ambassador and tell him that all they have to do is to turn on their printing presses! Your financial genius would save them a lot of grief!

As for Europe pursuing hard money policies, can you name some

Hard relative to the US.

You can't compare Japan, which is 1/4th the economy of the US, with the US in terms of dollars. What's the matter with you?

So now I need to teach you how math works? Let me repeat with an extra phrase added:

Before the recession, the US Fed held about $800 billion in treasury notes. By June 2010 it was up to $2100 billion an increase of 160%. The Japanese Fed actions were about 5x smaller [that is, an increase of about 30%.].

If you want to compare dollar values, you can get them from the wikipedia article on QE. You'll find that through 2010, the US printed a *lot* more than 4x as much money as the Japanese did. Furthermore, the US was buying mortgage backed securities right from the start. Japan got started late with real money printing. And the Japanese economy was in trouble long before the 2008 crisis so they do not make a good model for the US.

If you knew anything at all as to why they're doing it you'd know the answer for yourself. They're exporting deflation to each other in terms of devaluation. It's competitive devaluation, actually.

So long as all countries do it at the same time and in the same amount there is no competition. Deflation does not need to be exported. The US has been through this before. Back in the days of the gold standard a business "depression" happened when people suddenly became risk averse and wanted cash. The solution was to print more money. During the bimetallic standard days, the US did this by purchasing silver with greenbacks, and then minting them into silver dollars, and then forcing the banks to keep a reserve of silver coin in their basements. This is "easy money" and the technique is ancient. QE is just the latest name for it. See the "Cross of gold" speech at wikipedia:
http://en.wikipedia.org/wiki/Cross_of_Gold_speech

It's competitive devaluation, actually.

At least you're right that the idea is "devaluation". It's exactly the idea and that is exactly the objective of the Fed. To get there, they need inflation and when the public all wants cash in the bank, inflation is really hard to create. Funny the rich didn't seem to have any problem making inflation in the 1970s; I'm sure the Fed wishes they could cook up some of those spirits. But doing what they're doing will eventually force people to get away from cash and go towards real assets. And as things rise in price, wages will increase and real estate prices will increase. These are exactly the things necessary to get rid of the real estate problem.

On the other hand, the solving of bubble problems with inflation is difficult for the people who live off of interest. First they get 0.01% interest on their bank accounts, then the value of their money gets cut by inflation. And the Fed mostly represents the rich. So what they're doing is giving the rich a method of avoiding that inflationary haircut by doing the things that will bring the economy out of its slump.

If the Fed did what you want, it would be better for savers (interest rates would rise and we'd experience less inflation later on). But it would be harder on the debtors and since there are a lot more debtors than there are creditors, the political result might eliminate the Fed. So they pursue this QE policy. Not quite what the rich want and not quite what the poor want. And I think they're doing a pretty good job. And the central banks of 27 countries agree with my assessment.

 

[Tsing Tao]

Oh it was obvious from your posts that you're entirely ineducable. All I will do is give simple answers that other people can understand but you, the genius who goes up against 27 central banks, you I will simply mock.

Mock away, but try to make your answers slightly better than the last reply - because I'm not sure you succeeded in making yourself look all that "hot" in comparison. If you would like to focus on one point at a time for the sake of simplicity, it might be easier for discussion. Or we can continue addressing each point each post. Just a suggestion.

You really shouldn't be ashamed that you don't understand how money is created. Probably 90% of the public has no idea either.

So let's look at it from your point of view. You know that the Fed "prints money". Who the heck do you think ends up with that money? Probably the Council on Foreign Affairs, LOL.

The Fed's primary dealers, who it purchases supply from. I notice you left that basic answer out of your analysis.

Yes, the problem with this sort of depression is that wealthy people become excessively risk adverse. Part of the solution to that is to chase then into investments that are more risky.

...:eek:

Your basic problem is that you are deeply ignorant on this subject. I'll bet you haven't read the literature on it. Certainly you didn't understand it. One of the problems with ignorant people is that they don't know when they're ignorant. The human brain fills in gaps admirably well; your understanding of economics is limited but it seems complete to you! So there you go, publishing nonsense on the internet about how stupid 27 central banks are at their inability to understand things that are so obvious to you.

You keep saying the same thing over and over, but so far no substantial support to your commentary.

For the case of the 2008 financial crisis, here's an academic paper on the subject:

Time Varying Risk Aversion
Guiso, Sapienza and Zingales
European University Institute, Northwestern University, University of Chicago
June 2013, National Bureau of Economic Research
We use a repeated survey of an Italian bank's clients to test whether investors' risk aversion increases following the 2008 financial crisis. We find that both a qualitative and quantitative measure of risk aversion increases substantially after the crisis. ...
http://www.kellogg.northwestern.edu/faculty/sapienza/htm/risk_aversion.pdf
http://www.nber.org/papers/w19284

So your supporting papers say that after a crisis, people are adverse to risk? Positively shocking. Next you're going to tell me that people buy stocks in a bull market. What is the world coming to?

During a bubble, people become too little averse to risk. So the Fed makes risk more expensive to them. And during a depression, the public becomes too much averse to risk. And so Fed policies push against that.

During a bubble, people are chasing risk. It's only when the bubble bursts that people become adverse to risk. Bubbles are not good, no matter what sorcery you're trying to spin here.

The basic problem of economics is that humans exhibit a very strong herd behavior. Ideal Fed policy is to push against that herd instinct. Right now millions of stupid people are out there avoiding risk when they should have avoided risk back in 2007. And the Fed is pushing them to accept risk. That's the Fed's job.

Please show me where in the mandate of the Federal Reserve it discusses anything about risk, the herd mentality or that it's the Fed's "job" to push the public into risk. Anywhere at all.

Decent dividend paying stocks are paying around 5%. This is not an "all time record price". You think it is because you've become too risk averse due to the 2008 crisis. The Fed is pushing against you.

Dividends at 5% is not price. That's yield. Price is what you can buy the stock at, which in many cases is all time highs. Would you like to try again on that one?

LOL! Unfortunately for your argument, your chart stops at 1930:

Yeah, I don't know what happened to the chart I posted. It certainly did not stop at 1930. Apologies on that. But even in your chart, bond yields are touching 70 year lows. And you think they're still high. I don't get that at all.

You admit that Europe didn't try QE and now is. Good. It takes a long time for QE to have effect but the alternative is to continue to suffer.

How do you know the alternative is to suffer? Where is your proof of this? How do you know that QE is the cure? It certainly hasn't done it for us. We're still pushing 1% GDP (as of Q1 reading) and we had 6 years of it. Japan has been doing it for decades and they're in the toilet.

Since you apparently don't read much economics, I'll provide you with a chart of how unemployment rates have changed in the US and Europe since QE was started. Between 2009 and June 2013, US unemployment declined by 1.7%. Almost every country in Europe had increasing unemployment between those dates. This is why Europe is envious of how QE has performed in the US, and sure, if you weren't aware of it, I can see how you could be confused about what QE has done in the US:

Image from:
http://www.bls.gov/fls/intl_unemployment_rates_monthly.pdf

I don't "read much economics"? Perhaps you need to change your moniker to "TooStupidForThis". Please explain to me how the Fed directly affects the unemployment rate. Before you trumpet the success of the unemployment rate, consider these charts, if you will:

LFPR since before QE:

Workers added during QE, by demographic (age)...

Recovery! Europe should be green with envy.

The Fed has been doing "open market operations" for most of 100 years, not "100s" of years, LOL. They decided to call it "QE" 6 years ago but it's little changed from what's been done.

You're saying the Fed has been purchasing MBS and bonds for 100 years? Please, I just wanted to clarify that you're actually saying this...Because open market operations (POMO) is not necessarily QE.

 

[Tsing Tao]

Reply continued...


I believe this is true but it's not at all a problem. Part of the reason it's done is that dividends are double taxed. But in any case, this is part of the Fed intention; they're pumping money into the economy. And when those shares get bought back, money gets stuck in someone's bank account (and the problem of the corporation having too much money in its accounts is partly reduced). If Alice sells her shares, she now has to invest them elsewhere or buy stuff with it.

Glad you finally relented on a point. Because prior to this you said company buybacks were occurring at low stock prices. Companies tend to fund buybacks at market peaks, so it's just the opposite, actually.

So it's part of the Fed's intention that people can sell their shares to companies that are buying them back through taking out low interest rate debt, and not investing in growth. If that is so, then why have a number of Fed governors come out recently and lamented that companies are not using low interest rates to invest in infrastructure, but instead buy shares?

I agree that share buybacks have increased but the increases dates to the 1980s, long before QE was started. As to the Fed being worried about it, could you provide a link to this? My guess is that the Fed thinks of share buybacks as being an alternative to dividends.

Along this line, when you talk about how over-valued the stock market is, you need to include these stock repurchases with the dividends. I have no trouble finding stocks paying handsome dividends and simply do not see the stock market as being horribly over valued.

Chart of buybacks. You'll note that your comment about the 1908s is horseshit.

You'll also note as to how corporate buybacks seem to occur at market tops, or right before significant declines.

As for the Fed commentary,

Here's Warsh (former fed gov) and Druckenmiller...Stanley Fisher also came out with a comment in one of his recent speeches that stated he was slightly worried at the pace of buybacks vs. spending on assets (machinery and other equipment, modernization, etc.) But I can't for the life of me find that particular speech. If that means you refuse to accept it, then I understand. You refuse to accept anything else, so why not that?

The S&P500 today is at around 2100. That's higher than it ever was in 2008, 2009, 2010, 2011, 2012, 2013 or 2014.

Do you really think the stock market can set new highs without the previous prices being low? Hundreds of companies bought back shares in 2009 at prices much lower than they are now.

Hey, if stocks were dropping, your argument would make sense. In that case, companies would have bought shares at high prices. Instead they bought them at low prices. I think you're hopeless.

So you're going to stubbornly stick to the point that corporate buybacks are at low prices despite the chart above...?

You should call up the Greek ambassador and tell him that all they have to do is to turn on their printing presses! Your financial genius would save them a lot of grief!

You stated that "Europe did not borrow in money it could print". They borrow in Euros, and print Euros. You were incorrect. Man up about it.

Hard relative to the US.

So you can't name any policies, then. Noted.

So now I need to teach you how math works? Let me repeat with an extra phrase added:

Well, you certainly need to teach me how it works in your world.

Before the recession, the US Fed held about $800 billion in treasury notes. By June 2010 it was up to $2100 billion an increase of 160%. The Japanese Fed actions were about 5x smaller [that is, an increase of about 30%.].

Again, of course they're going to be smaller. They're a much smaller economy.

If you want to compare dollar values, you can get them from the wikipedia article on QE. You'll find that through 2010, the US printed a *lot* more than 4x as much money as the Japanese did. Furthermore, the US was buying mortgage backed securities right from the start. Japan got started late with real money printing. And the Japanese economy was in trouble long before the 2008 crisis so they do not make a good model for the US.

That's right, they've been doing QE for well over a decade, and still in the same spot. Wonderful example.

So long as all countries do it at the same time and in the same amount there is no competition. Deflation does not need to be exported. The US has been through this before. Back in the days of the gold standard a business "depression" happened when people suddenly became risk averse and wanted cash. The solution was to print more money. During the bimetallic standard days, the US did this by purchasing silver with greenbacks, and then minting them into silver dollars, and then forcing the banks to keep a reserve of silver coin in their basements. This is "easy money" and the technique is ancient. QE is just the latest name for it. See the "Cross of gold" speech at wikipedia:
http://en.wikipedia.org/wiki/Cross_of_Gold_speech

What is all this about? I ask you what time it is and you tell me how to build a watch. Competitive devaluation is when more than one economy is devaluation it's currency at the same time. When all countries do it at the same time, it's completely competitive devaluation. What are you smoking? They might all be going down together, but they're all trying to solve the very thing they're all perpetuating.

At least you're right that the idea is "devaluation". It's exactly the idea and that is exactly the objective of the Fed. To get there, they need inflation and when the public all wants cash in the bank, inflation is really hard to create. Funny the rich didn't seem to have any problem making inflation in the 1970s; I'm sure the Fed wishes they could cook up some of those spirits. But doing what they're doing will eventually force people to get away from cash and go towards real assets. And as things rise in price, wages will increase and real estate prices will increase. These are exactly the things necessary to get rid of the real estate problem.

The debt overhang in the 1970s wasn't where it was today. You can't solve a debt problem with more debt. Apart from that, I will agree with your theory - which is all that it is. However, wages don't seem to be following suit.

On the other hand, the solving of bubble problems with inflation is difficult for the people who live off of interest. First they get 0.01% interest on their bank accounts, then the value of their money gets cut by inflation. And the Fed mostly represents the rich. So what they're doing is giving the rich a method of avoiding that inflationary haircut by doing the things that will bring the economy out of its slump.

What bubble problems? You said bubbles were good, and risk taking was the panacea of the Fed! As for the Fed representing the rich, did you clear that statement with Piezoe? Because that makes him crazy.

If the Fed did what you want, it would be better for savers (interest rates would rise and we'd experience less inflation later on). But it would be harder on the debtors and since there are a lot more debtors than there are creditors, the political result might eliminate the Fed. So they pursue this QE policy. Not quite what the rich want and not quite what the poor want. And I think they're doing a pretty good job.

Completely agree, with exception on the "pretty good job". You can be a Fed apologist/cheerleader if you want, but time will prove you wrong (unfortunately we'll all pay the penalty for the arrogance, too). The poor are the debtors, not the rich. They're the ones getting killed. Those on fixed income, etc.

And the central banks of 27 countries agree with my assessment.

The other banks are just trying to combat the deflation the only way they know how. They don't agree or disagree with this thread.