Permanent zero is official policy

Cross-posted from Credit Writedowns

Today, the Federal Reserve told us that interest rates will remain at zero percent for two more years, making official the policy I have dubbed permanent zero. In response we saw a massive rally in treasuries starting at about 225PM ET and equities starting at about 240PM ET as interest rate expectations ratcheted down. The Ten-year is at 2.18 and the Dow rallied 430 points.

Permanent zero is what many market participants expected. On Sunday I wrote about the chatter saying:

Here’s what the FOMC said (I have underlined the most important parts):

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.

Three members voted against here. Two months ago I said political concerns meant the Fed would probably not go full QE until 2012 and that the first move toward rate easing and QE3 would be permanent zero:

My understanding about what [Pimco’s Bill] Gross believes is that the Fed could see QE3 "guaranteeing" a 2 year or 3 year yield at a certain level—say 50 basis points. Moreover, the Fed would not necessarily have to buy any Treasuries to defend this target. Gross understands that the private sector “would do it” for the Fed via the language and confidence in the "guarantee"…

My sense is that this will not be called quantitative easing or credit easing or anything like that. Those terms are dead because they are now politically radioactive. But operationally, the policy will be the same. This time the Fed will target price instead of quantity.

P.S. – The Fed is likely to soft peddle this policy change because of comments from people like former Atlanta Fed President William Ford questioning Can the Fed Go Bankrupt? The Fed will want to stay to the shorter end so as not to risk its balance sheet by moving out the curve with interest rate caps. However, there could be internal dissent, so the Fed could start off by signalling to the market that it will conduct what I have been calling ‘permanent zero’. Eventually people will be forced to accept this – and the term structure will flatten further and further out the curve. That’s how Japan got to a 1% 10-year yield because expectations of zero rate policy continued to lengthen in time.

Again, politically the Fed is constrained. But, my call on 2012 is starting to look wrong because the global economic environment is weakening quickly. If the economy deteriorates further, expect the timetable to speed up.

I believe this is the first salvo in a renewed easing campaign by the Fed. Right now everyone is acting like this isn’t QE. But I told you two months ago that it is.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. MyLessThanPrimeBeef

    We will get use to the notion of zero.

    From The Sextants in Beijing:

    Around this time China adopted foreign notions of logic and trigonomerty, although for a time being they rejected the use of zero, another foreign import.

    This from When Asia Was The World:

    According to Ibn Sina’s autobiography, when he was a youth, his father sent him to be tutored in “Indian Calculation” (the use of zero) from a local grocer…

    Like I said before, a real Zen master is found in the marketplace, not some mountaintop. Lesson #2, we will get used to the notion of zero.

  2. Yearning to Learn

    QE3 is clearly in our destiny, and has been for some time. And double agreed that there is no way they can call it QE3. If they did, Gold would shoot to $4,000/oz and worse oil would shoot to the moon as well.

    A question for you: how long do you think this will boost the stock market? (I think most of us can agree only minimal improvement to the “real” economy will happen here, however it can of course boost stocks and bank earnings… staving off further liquidation).

    I have been of the opinion that QE1 would work better than QE2 which will be better than QE3 and so on. law of diminishing returns.


    1. Andrew Baumgardt

      I fail to see how this helps the banks long term as banks make more money when the yield curve is steep. A flattening yield curve will not be good for bank earnings as margins get compressed.

      1. Typing Monkey

        You’re right–it doesn’t directly help banks.

        What it will do, though, is cause rampant speculation in the currency markets. THIS IS PRECISELY WHAT THEY SHOULD BE BENDING OVER BACKWARDS TO PREVENT!!!

        Apparently these idiots are running out of things to screw up and markets to distort.

    2. Cedric Regula

      Plenty of problems even tho it has been working so well in Japan all these years and Japan has the happiest banks in the world.

      One problem is japanese savers will no longer be able to put their money in America and make a little interest on it.

      Course that would be a problem for Americans too, if they ever have any money, and a problem for fixed income parts of pension plans, social security, 401ks, annuities, and insurance companies that depend on fixed income investment as part of the biz model.

      Then we’ll have to just wonder about all the good things there are to do with cheap money in a liquidity trap. Give our bankrupt banks some cheap money to play with and strangle them with a flat yield curve on treasury debt and see what they can come up with. We should trust their judgement by now.

      Who knows with stocks. With no growth we can always bid up PE ratios. That’s always good for us.

      Yes, commodities starting to look relatively cheap.

      There’s probably more problems too, we’ll have to find out.

      Smart move calling QE III by a different name tho. That’ll fool everyone when it still walks, talks and quacks like a duck.

      Good part is maybe we’ll get a recession and the banks will implode and maybe everyone will start to demand that the Fed downsize FIRE and stop playing around with ZIRP and QE for the next 40 years. Then have someone else figure out where the economy and tax base went.

      1. Typing Monkey

        “Good part is maybe we’ll get a recession and the banks will implode and maybe everyone will start to demand that the Fed downsize FIRE and stop playing around with ZIRP and QE for the next 40 years.”

        1. The banks imploding is not a good thing. Their downsizing without imploding would be far, far preferable.

        2. The history of the recent Fed is to keep proclaiming its own genius and touting its own clearly deficient models while doubling up on its bets. It is going to likely play with QE (aka money printing) until it is dissolved.

        ZIRP is actually out of its hands–the bond markets will eventually dictate what the interest rates will be. Rates will easily hit double digits within a few years (IMO), no matter what the Fed says it will do. Somebody is going to make a fortune in their SWAPS agreements….

        1. Cedric Regula

          I agree the market might take control of rates, unless the Fed decides to run it’s balance sheet to, say, $20 trillion or so with QE or Stealth QE or Shopping Mall QE before we decide to shut them down.

          Also agree it was/is a great time to consolodate banking in a controlled manner. Got an address of anywhere where we can write up and mail this idea to? :)

  3. Taymere

    How this effects mREITS and other leveraged spread players:

    I just had the wild idea that it would be reasonable to let most the short term swaps roll off without buying more as they expire, or even to pay to terminate them and use only swaptions instead for the next two years in light of the FOMC statement that they are on hold till mid 2013. From today’s 2q11 10q AGNC SEC filing there are $8.8M and $59.6M fair value swaps expiring in less than one year and less than three years respectively. If say $50M of that is rendered unnecessary by the Fed announcement then $5BN worth of MBS would then have a NIM equal to their coupons. That would be 1/8th of the $40BN portfolio immediately yielding ~1.4% more NIM than it was when it was hedged which is a big big big deal. No wonder mREITS rallied 10% after the FOMC announcement.

    What do you guys think? Would it be reasonable just to run with only swaptions that could be exercised in the event that borrowing costs spike for reasons independent of the Fed for the next few years in light of the FOMC statement? We would still need at least swaptions in case WWIII or some other event forces the Fed to renege on it’s mid 2013 pledge. Opinions?

  4. gs_runsthiscountry

    EH, I counter your new found term “Permanent zero”, with what I like to call our economy “stag-covery.”

    Much better than say, “jobless recovery”, “recession” or “wilted brown shoots.”

    btw: The word “Fee” in lieu of “Tax” or “Revenue” is not politically dead, some terms do have staying power.


  5. Alex

    I read the headline and couldn’t even read the article beneath it. I think I’ll hide under the covers until this is over.

    Yves, could we get two cute pictures every day from now on?

  6. Glen

    So how do I get to belly up to the Fed window to borrow some of that free money?

    Seems like I’m a better investment that GS, TBTF banks and Wall St right now. We’ve given them TRILLIONS since 2008 and it’s done NOTHING except pump bonuses back up to record levels.

  7. Doug Kelley

    The truly sick thing is how this further disenfranchises the middle class. Since banks can get funds from the Fed at next to no cost, why offer any interest at all to depositors who have an unpleasant tendency to want to use their money occasionally?

    This leaves middle class people who manage to somehow save a little money no other option than to dump it in something like real estate or the stock market that is all too prone to fraud and manipulation, let alone usurious fees every time you turn around.

    This is how countries fall apart — not with a bang, but with a whimper.

      1. Cedric Regula

        It’s been thought of already, and all currency flight targets outside of the US, Europe and Japan are beginning to threaten to shoot foreigners with money on sight.

        So they caught us. But one would have to ask what’s the point?

        1. F. Beard

          ZIRP is an odd way to eliminate usury but if it makes you mad maybe it ain’t so bad.

          Usury is forbidden between fellow countrymen in Deuteronomy 23:19-20 so maybe all my sympathy for savers has been misplaced.

          Besides, they are usually a surly lot who would like nothing better than a Deflationary Depression so they can buy assets on the cheap even at the risk of a World War.

          1. Cedric Regula

            You sure are a weird little guy.

            Even I know people didn’t retire in Biblical times. They just dropped dead at 30 while hauling some stones around for some Roman prick. They never even knew what fixed income investing for retirement was.

          2. F. Beard

            Well, the ideal solution would be to bailout everyone, including savers. That would take fiscal action by Congress. But since that isn’t likely to happen then fixing the borrowers will have to do, I reckon.

            It’s nice to see your concern for old people. Then you are opposed to SS cuts?

          3. Cedric Regula

            I hate SS cuts if you haven’t seen my numerous posts here or on Angry Bear which hosts the cross bearers of the blogosphere for SS.

            I worry about old people because I might be one some day.

            My parents are now and they live off of it, even tho Dad did have a few good years in the 60% tax bracket before being LBO’d into early retirement at age 55.

            I worry about other old people too, cause I noticed it’s really depressing seeing them sitting on blankets on the streets or alleys whenever I go down to Mexico.

            I worry about young people becoming old people because after traversing part of the route I finally figured out why FDR was so smart about that. There is a basic undiscovered law of economics. Either the cost of living rises to your income, or your employer and inflation lowers your real income to your cost of living. Forced SS drives a wedge more powerful than mere humans to keep that from happening completely. Jesus would like that.

            As far as fixing borrowers, I’m not the one who can afford it. I get my haicuts for $12. Or sometimes for $5 in Mexico when I go to my half price dentist.

          4. F. Beard

            Either the cost of living rises to your income, or your employer and inflation lowers your real income to your cost of living. Cedric Regula

            That’s the fault of the government backed and enforced counterfeiting cartel, the banking system, I’d bet.

          5. Cedric Regula

            It was with CA housing, but it would probably still happen bad enough under a barter system.

          6. F. Beard

            Barter is not the only alternative to the current system. Common stock is an ideal private money form. Corporations would most likely have to issue their own common stock as money if they did not have the counterfeiting cartel to borrow from. Instead, they are borrowing from the cartel to buy their stock back.

          7. Cedric Regula

            But the economic force on the poor individual is still to squeeze together purchasing power and cost of living. If you ever heard the term “living wage” that’s what they are talking about. And living means now, not later. So skip the medium of exchange, it’s not relevant in the here and now.

            If you can beat the game by a little, then you need real store of value or real investment return.

            There is actually a real economist who talks in terms of “economic wedges”, so it’s not completely my theory, tho I discovered the theory before I discovered the economist with the theory. Forgot his name tho. Some Ivy League prof.

          8. F. Beard

            If you can beat the game by a little, then you need real store of value or real investment return. Cedric Regula

            That’s the beauty of common stock; it can serve as a medium of exchange as well as being a real store of value.

            Banks and conventional money are really just an unnecessary and parasitical go-between between owners of real capital including labor.

          9. Cedric Regula

            Yes, well, corporations say they have a “rich currency” whenever they are about to do a takeover transacted by stock swap, or a secondary IPO, but I haven’t heard them say that in at least two weeks now.

          10. F. Beard

            Btw Cedrick,

            I apologize for my snark earlier. I must have confused you with someone else. Sorry.

  8. Because

    Sorry, but until you people learn to ignore the FED, you won’t get anywhere. They are a market actor, player. People don’t get that. The FED follows the market and the market is going in for a repricing after they figured out the global economy thus has slowed. So the FED is allowing them to reprice.

    What you got with the FED is nothing more than a statement on current political climate. No action, means no changes. QE is irrevelant. It is nothing. It is a slight of hand. Moving liquidity around the curve does zilch.

    Now time for all long term rates to head toward 0% and then for the government to tell its debtholders whether they will spend to rebuild the economy or not, or whether they will not and then the debtholders destroy the United States once and for all time. A implosion in Europe could speed that up real quick.

    1. psychohistorian

      I like the way you laid it out and then postulated about the implosion in Europe which IMO and others is underway.

      So here we have the Shock Doctrine event and what is the response going to be.

      Myself, I can’t stop laughing at what the citizens of the world are going to be asked to do to placate the Gawds of what should be the utility of finance and those global inherited rich behind the curtain.

      What is the purpose of all of this stupidity? Will no one stand up and say stop?

      Do we start sacrificing virgins next?

      Is all this going to come down to us on tablets or do we look in some bag.

      They got room now because they took off the part about killing and coveting your neighbors goods.

      It is a sad commentary on the advance of civilization that it can’t even live up to the values of good myth.

      1. solo

        I quite agree. Aside from the wealthy few, stagflation is the most that can be hoped from QE3. The political situation is devoid of hope for all but the misanthrope. The worms animate the corpse.

      2. Just Tired

        I think that something got lost in the translation when the stone tablets with the ten commandments were translated into bits and bytes. But you’re the historian — I’m just a psycho!

      3. Jason Rines

        Hey Psycho, want to really know why Moses was pissed when Aaron ordered all the people to gather their gold and build a Golden Calf?

        Because only having the ability to have one major trade when you needs thousands of them to get through a dessert with a million people is suicide…

        The world is now at the same place but no Moses to order it be melted down. Six billion people trying to get to the promised land with no supplies…

        London isn’t burning for nothing. London are the people’s form of self-suicide instead of facing the dessert. Of course it is an ugly way of melting down the Golden Calf.

        Events become pretty easy to predict when human nature doesn’t change.

        Soon, there will be riots, burnings and explosions in all the major cities. Then the governments will accelerate the national blame shifting and regional war in the ME will happen (2013) followed by the start of WWIII in the Korean Peninsula. Going to be a fun decade for sure.

        1. rps

          235yrs after the American Revolution, The English citizenry awakens to the propaganda of the predatory aristocracy. Austerity for the little people and decadent weddings for the Queens family with the lame excuse, “it’ll cheer the masses glum lives.” Class warfare has hit London. Perhaps they’ll disembowel the vulturous monarchy of all their illiict wealth that is openly hidden on the Mad Hatter Queen’s privately owned islands. Maybe a new printing of Thomas Paine’s Common Sense is in order?

          1. compass rose

            I’m not sure “common sense” applies to an island nation that obsesses on which billionaire Windsor is shagging which commoner with what progenic issue.

            And I’m not sure that the riots in London were about much of anything other than testosterone-crazed young men, aged 18-26, throwing their weight around.

  9. Hugh

    There does not appear to be anything new here, just the Fed doing what it has been doing, that is the ZIRP. Now you can argue that this has always been a stealth QE program, and especially with QE2 was what was really juicing things, but this changes the working definition of QE and this needs to be recognized in the discussion.

    Personally, I think today was bear market volatility and folks making good on their shorts. Again, the FOMC added nothing new. It was just a handy excuse. If it had not been available, another one would have been found.

    The real import of the ZIRP is that it acts as a subsidy for banks who can borrow at 0%, buy Treasuries and pocket the spread between the two and as cheap liquidity to speculate and blow bubbles on Wall Street. In either case, it serves to siphon more wealth into the hands of the very rich.

  10. Paul Tioxon

    It is clear that the original shock doctrine are the upheavals by the people in the form of revolt. Slave uprisings, servile revolts, colonial rebellions and assorted riots and revolutions, have always put the fear of a bloody termination to the rule of aristocratic elites everywhere. And for good reason, the people always out number the exploiters by such large numbers, that like the business cycle, the revolt cycle is a regular feature of European history. So much so, the liberal position that change is a feature of the political landscape, bias towards the material advantage and general improving lot of the mass of humanity.

    The three pillars of academic social science, sociology, political science and economics, are supposed to provide the essential measure of the material well being of the people in order to forestall any more French Revolutions, or Russian Revolutions. And all of the main features of the modern nation state transformed them into states that provided for the general welfare of the people, not just the glory of the crown, the sanctity of the church or privileges of the aristocracy.

    But that political accommodation was abandoned with the falling profits and loss of the control of capital from the state to private interests, in the aftermath of the disintegrating WWII consensus. The commanding heights of capitalism are now a battle ground among the powerful, with no end in sight. There is a global system of business, that is transnational, mobile, and not dependent on any particular alliance for its safety and most of all predictable steady stream of profits. There is an interstate system that does not and can not contain the unrestrained and unregulated flows of capital, due to competition with nations that will accommodate whatever demands are made of them.

    Private capital has been calculating political initiatives for the retention of their privileged positions as surely as social workers developed policies for the amelioration of poverty. What was a liberal standard operation procedure to maintain the social order, provide for increasing profits and allowing for a material improvement of the standard of living for the people has been placed in the service to suppress wages, voting and the expanding power of the welfare state. In a country where typically, over ninety percent of the people work, all of the time, decade after decade, with few severe exceptions due to depressions, there has been a turn around from the Treaty of Detroit to the Extortion Of The Debt Limit. And the people are being forced endure the liquidation of the equity of a lifetime of work for the sake of maintaining an appropriate level of return on investment, as dictated by Standard and Poors, Wall St culture and capitulating elected politicians.

    The Fed is waiting for a political consensus, leadership and most importantly, an integrated political authority that can regulate the transnational flow of capital. Europe is creeping towards political integration, with a proposed central taxation authority. One currency for one market is not the same as one geopolitical government. The unlimited frontiers of global, mobile, private capital are paid for by the constraining poverty and diminishing sovereignty within the boundaries of each and every nation state, that is left in the wake of fleeing capital. The Fed is in a holding action that does not maintain full employment policies in any meaningful way.

    1. rafael bolero

      Nice summary. Somewhere in there must fit the words, starvation, exposure, pestilence, and murder, right? For the masses. Who knew the apocalypse was financialized? The global rich are also kind of invisible, due to mobility, so it is hard to find them to cut off heads this time.

    2. Jason Rines

      Paul, I believe the Fed realizes that their won’t be a unified political consensus. It is going to continue devaluing the currency. The Fed’s 100 charter expires in 2013. I believe it made these decisions long ago.

      I am just speculating but the massive risks and the looting in the banking system were encouraged not merely out of Greenspan’s ego centric deficiencies, but two reasons:

      1) The Sr. leadership gave up on reform by the mid 1990s, may as well go down in “live for today, for tomorrow we die” flames of glory. I have to admit, it was one hell of a party, even for a plebe like myself. Getting the champagne tab for the Miller Lights I drank pisses me off though.

      2) The Sr. leadership are personally invested in China and other EMR’s.

      3) Junior leadership may have caught onto the game but now concern themselves with their own life boats.

      2013 will become DraconiaLand. Of course half-witted intellectuals will blame the Tea Party.

      The chuckle I have is that both D’s and R’s think that between 2013 and 2016 after TP is blamed they go back to business as usual.

      The USA is now where the Soviet Union was in 1988. America 2.0 will be born but like the Russians tell me, it will not be fun, but is not as fearful an event as some of us here in the States make it out to be.

      1. Cedric Regula

        If the Russians were brainy techies they did the brain drain exit to europe and the US. My brain is too tired nowadays to function anywhere, but is it supposed to flow the other way now?

        I mean, should we start buying up Chernobyl real estate on the cheap, if we only got the mental horsepower left to be a rentier?

        I’m assuming Citi is not there already, of course. I can’t play in that price league.

    3. JTFaraday

      “as surely as social workers developed policies for the amelioration of poverty.”

      Oh they did, did they? One saved soul at a time, I suppose.

      You also make it sound as if there are no costs involved in traipsing around the globe in hot pursuit of the most obedient slaves. Not true, and moreover, if it were true, they would not now be trying to hard to undermine *you.*

      I wonder how much of the money that was made traipsing around the globe was found in hot money inflows and outflows, in blowing asset bubbles, and how much was made actually making use of the ostensibly lower cost human infrastructure.

      This may have been a distinction without a difference to managers seeking to goose their short term profits and their pay packages, but one can’t help but wonder what a global finance system continually in crisis does to the combined corporate executive/finance sector cabal’s ability to make this game continue to pay a premium.

      “And the people are being forced endure the liquidation of the equity of a lifetime of work for the sake of maintaining an appropriate level of return on investment, as dictated by Standard and Poors, Wall St culture and capitulating elected politicians.”

      Don’t act as if all of the American middle class baby glut is so innocent. A portion of that cohort, one with disproportionate political power given that the upper middle class is the only economically defined popular constituency of the D-Party to which some people so insistently continue to cling, had no problem eviscerating the American workforce so long as their passive investment portfolios were getting goosed in the all assets up environment that they no longer enjoy, now that they’re headed for retirement.

      It could be Adam Smith is right, and it all comes out in the wash in the end.

  11. EmilianoZ

    Now I understand what the mini-crash was about. It had nothing to do with the downgrade or low consumer spending. It was a message to Bernanke, if he needed one.

    There will be no end to escalating gas and food prices, on zero return on your bank account.

  12. rps

    In Einstein’s theory of general relativity, a zero became a black hole. The infinite density of the black hole represents a division by zero. The Fed is a black hole with the belief that they manipulate infinity and zero. Just as TEPCO claimed that the The Fukushima Daiichi nuclear disaster was under their control, so too will the Fed’s policy induce an uncontained disaster of US currency into nothingness;infinity and zero to sides of the same coin.

  13. Mickey Marzick in Akron, Ohio

    Now we know where the other $4 trillion in “cuts” is coming from – savers and fixed income instruments. And it’s guaranteed until the middle of 2013. Anything Congress and/or the Administration can wring out of US is a bonus.

    That’s how to instill “business confidence” – at least for the TBTF. Continuity, more of the same, stability. What uncertainty?

    The coming decade is beginning to play a lot like the “lost decade” in Japan as economic recovery is a distant goal with high unemployment exerting downward pressure on cost-push inflation [wages] which, in turn, impacts demand-pull inflation. Price stability is clearly the preferred option…

    Unemployment is Obama’s problem. The FED has ensured that he will be gone by 2013. Staying the course is simply not going to work as a campaign strategy and additional stimulus will be DOA in a deficit-preoccupied Congress. Extension of unemployment benefits is going to be a hard sell after 2013. Slackers, all of them! But we will have price stability.

    Perhaps the “exogenous” SHOCK, as Harry Seldin has already suggested, that upsets this scenario will be the debt crisis in Europe. We will have to wait and see.

  14. Wyntunnel

    Until people stop believing in fairy tales such as God, invisible hands, Allah, or Bono, we are far up the poisoned creek without a paddle. The degree to which wealthy people BELIEVE that their success is a direct result of their moral superiority being rewarded by said Deities has always been, and will continue to be, a significant part of the problem. The flip-side of the coin is the degree to which everyone else panders to the social rules set up by the wealthy in the hopes of demonstrating their worthiness for club membership. It is next to impossible, in any industry, to achieve leadership roles without towing the party line, without paying tribute to the dogma of the present leadership, without throwing one’s ethics out the window. Cause you know, people have children to feed and mortgages to pay… There are exceptions to the rule, but I can’t really think of any at the moment, especially not in governement.

    1. JTFaraday

      “The degree to which wealthy people BELIEVE that their success is a direct result of their moral superiority being rewarded by said Deities has always been, and will continue to be, a significant part of the problem.”

      Paris Hilton thinks no such thing, and moreover, she makes a virtue of flaunting it. This is an educated class ideology.

      Finger the right F-ers.

      1. Wyndtunnel

        True enough about Paris Hilton but I was thinking more along the lines of bankers, CEOs along with elite athletes and almost anyone who makes a decent to exorbitant living as a film actor, musician or artist. We focus on Wall Street but of the 60 000 or so Ultra High Net Worth individuals in America and Europe a good number of them are featured regularly in tabloids and reality tv and somehow they always escape being fingered as part of the super villain class.

        1. Cedric Regula

          That bugs me too, but even so, they are more fun, don’t externalize a million times their cost, and you can always not pay the price of admission and avoid them if you want.

          Try making thru that list of attributes with a banker.

          1. rps

            They must offer the “possibility” that you too can be wealthy. And the barbed-wire brain masses buy the propaganda. Every young male living the unnatural violent ghetto life have two choices; gangs/drugs and/or the false sports “dream” of enormous wealth. One way to prevent the poor rising up and demanding their fair share of the pie, offer than hope. “He that lives upon hope will die fasting.” Ben Franklin

  15. Wyndtunnel

    On another note.

    Globalization is essentially about destroying economic biodiversity. Bad idea.

    1. rps

      Globalization is about who controls drug trade routes and distribution. U.S. Military bases around the world is self explanatory

  16. jm

    Let me see if I have this right. The economy continues to be sluggish because, in part, the last round of QE resulted in commodity price inflation which, in turn, further dampened consumer demand. To address this, the Fed is setting the table for another round of QE which will do squat for aggregate demand but will likely lead to more commodity price bubbles.

    We live in a wonderful world (if you’re wealthy enough to speculate in commodities, that is).

    1. Cedric Regula

      You got it. Oil inflation will cure inflation with a recession.

      We don’t even need a Fed anymore. But we’ll keep ’em around anyway for being swell guys and also because they are helpful for telling us about econ stuff we may not figure out on our own.

  17. Jenny W

    Boomers like me have been thrown under a huge bus. The money we diligently saved has been robbed by the market and the part we put into savings is getting virtually nothing in interest, making the future the stuff nightmares are made of.

  18. b.

    Yves, what is your take on John Hussman’s description of Fed leverage?

    “In order to achieve a non-inflationary increase in short-term interest rates to even 0.25%, the Fed would effectively have to reverse the entire amount of purchases it executed as part of QE2.”

    To my tenuous grasp, he implies that teh Fed does not even have a choice with respect to interest rates – they have to keep them down, and presenting that constraint as a gift to the markets it simply a sales job.


    1. Cedric Regula

      Hussman forgot about the new fed “tool” which is paying interest on reserves. They can keep the QE 1&2 stuff on the balance sheet, use the interest it generates and pay interest to banks to entice them to hold reserves at the Fed at would in effect become the desired short term target Fed rate.

      There is an upper limit imposed by the amount of interest the Fed portfolio generates. Last year I think it was $78 Billion.

      1. b.

        I think he too those interest payments into account?

        “Moreover, as of Wednesday July 7, the Fed’s consolidated balance sheet shows $2.87 trillion in assets, versus $51.7 billion in capital, for a leverage ratio that is now up to 55.6-to-1. This isn’t getting any better, and is far beyond where Bear Stearns, Lehman, Fannie Mae or Freddie Mac were at just prior to their respective insolvencies. Of course, nobody is going to shut down the Fed just because it is approaching technical insolvency, but we ought to recognize that anytime interest rates rise, the interest being paid on Treasury debt is quietly being used to cover the Fed’s capital losses.
        “The accounts for achieving this are on the liability side of the Fed’s balance sheet. As of Wednesday, there was $67.3 billion in the Treasury general account (which is the account where the Fed books interest earnings on its Treasury portfolio, which is normally repaid to the Treasury for public use). Per recent accounting changes at the Fed, losses on its portfolio of Treasury securities are treated as a negative entry in that account, essentially covering the losses with funds that would normally go back to the Treasury. The “Treasury supplementary financing account” has another $5 billion in liabilities to the Treasury. This is the account set up at the Fed’s request where the Treasury issues a “special” series of Treasury bills outside of its normal funding requirements, and deposits those funds with the Fed. Given that the Fed cannot afford the embarrassment of a transparent balance sheet, the liability items to the Treasury presently amount to a $72.3 billion cushion that can be used to cover portfolio losses for the Fed. The concern here is not so much the risk of Fed insolvency per se, but the fact that the public is quietly being used as a backstop for what we continue to view as reckless Fed policy.”

        1. Cedric Regula

          I think here he is getting into whether the fed could go insolvent or need treasury backstopping. I don’t get into it at that detail level, so I don’t know the answer there. I do know accounting for portfolio losses of capital has got to get weird because every year the fed does turn over it’s portfolio interest less operating cost to the treasury. So that’s having the worst of both worlds.

          But to your first question, within an upper bound, the fed can raise interest rates using the pay on reserves tool using the interest they generate.

          Also, the problem they make for themselves when they buy longer term bonds is if rates do rise on longer term debt – which is supposed to be market driven – the treasuries drop in current market price (you still get face value if held to maturity).

          So if they did have to sell early, they don’t soak up all the money they put out there when they originally bought the bond. I guess that causes balance sheet problems, but being more of a person than an accountant, I’ve been more worried about the inflationary impact of that. Granted the world doesn’t appear to be in the mode for that anytime soon, but you don’t throw half the system away permanently because you only need the money printing part for now. That’s why in the past they always used short term t-bills. The maket price stays nearly constant – so what goes out equals what comes back.

  19. Jim Haygood

    Don’t neglect the ‘permanent zeros’ already out there:

    1. Alan Greenspan
    2. Ben Bernanke
    3. Jean-Claude Trichet

    Thanks to stuffing their balance sheets with impaired debt, and sound debt at secular lows in yields, the highly leveraged Fed and ECB most certainly will sink into negative net worth.

    Since their liabilities (e.g. currency) are unredeemable, THEY DON’T CARE. This is the tertiary phase of the global fiat/Ponzi bubble — when official fraud and insolvency are openly flaunted as a badge of honor.

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