Van Hoisington On Why QE2 Will Be Either A Small Or Massive Failure

Tyler Durden's picture Submitted by Tyler Durden on 10/11/2010 17:52 -0500

Cash For ClunkersDeficit SpendingExcess ReservesFederal ReserveFisherFreddie MacGross Domestic ProductHyman MinskyHyperinflationM2Monetary PolicyMoney SupplyQuantitative EasingReal estateRecessionrecoveryRobert PrechterVan Hoisington

In his latest letter Van Hoisington cuts through the bullshit and asks the number one question (rhetorically): why are bank excess reserves (aka the ugly, liability side of Quantitative Easing) still so high. He answers: “Either the banks: 1) are not in a position to put additional capital at risk because their balance sheets are shaky; 2) are continuing to experience large write-downs on commercial and residential mortgages, as well as on a wide variety of other loans; or 3) customers may not have the balance sheet capacity or the need to take on additional debt. They could also see no expansionary prospects, or fear an uncertain regulatory future. In other words, no viable outlets exist for banks to loan funds.” Which leads him to conclude quite simply that while risk assets may hit all time highs courtesy of free liquidity, the economy, also known as the middle class, will be stuck exactly where it was before QE2… and QE1. Van also looks at that other critical variable: velocity of money – “Velocity is primarily determined by the following: 1) financial innovation; 2) leverage, provided that the debt is for worthwhile projects and the borrowing is not of the Ponzi finance variety; and 3) numerous volatile short-term considerations.” As an uptick in velocity is critical for any wholesale reflation (as opposed to merely hyperinflation) plan to work, this is one metric Van is unhappy with. Lastly, Hoisington also looks at the fiscal headwinds facing the country (which more so than anything terrify the Goldman economics team), and presents his vision on the bond-bubble argument.

Still Vulnerable

Hoisington Investment Management
By Lacy Hunt and Van Hoisington
October 8, 2010

Despite extreme economic intervention by federal authorities, real GDP has increased by a paltry 3% since the recession ended in June 2009, less than half the 6.6% average growth in the comparable periods of the prior ten recoveries.

Inventory investment, a trendless component of GDP, has accounted for nearly two-thirds of the entire rebound in economic activity from the worst economic contraction since World War II. Over the past four quarters, inventory investment has moved from contracting real GDP at a 5% annual rate to boosting it at a 2% annual rate. Real final sales (GDP less inventory investment) grew at a very meager pace of 1.1%, less than one-fourth the average 4.5% rate of increase in the comparable rebounds. Whether measured by GDP or final sales, economic growth needs to expand at least at the pace of population growth to sustain a steady standard of living. In this rebound, per capita real final sales grew by 0.2%, much lower than the earlier ten postwar expansions when the growth in real per capita sales was a robust 3.2%. Thus, the U.S. standard of living has remained stagnant at a very depressed level. The upward inventory thrust is complete, and probably over-extended (Chart 1).


Going forward, the only hope for economic growth is through proper monetary and fiscal policy. Unfortunately, monetary and fiscal policy has yet to contribute to sustainable growth. The greatest probability is that new monetary and fiscal policies will not prove any more successful than prior ones. Instead, unintended consequences will negatively impact output. Thus, our view is that economic conditions will remain depressed, with the probability of a relapse to negative growth of greater than 50%. Moreover, policy makers are proposing actions that have never been tested, complicated by the fact that current economic circumstances have not existed for eight decades.

Another Failed Attempt–QE2

The flaccid nature of this business recovery should serve notice that economic conditions are far more precarious than generally understood. Federal Reserve forecasts were obviously flawed and have now been significantly lowered since they placed great emphasis on the presumed stimulative power of massive deficit spending and numerous aggressive monetary actions. The Fed is contemplating another round of quantitative easing (QE2) because the weakness of the economy has surprised them. They are feeling the political pressure to act, even though the problems facing the economy are not related to monetary policies.

The Fed’s position seems to be that more of the same economic policies are needed, even though they have failed to produce the advertised results. As microeconomist Steven Levitt (author of Freakonomics) documented, conventional wisdom is generally flawed since it fails to ask the right question about economic problems. We view the Fed’s econometric model as the personification of conventional wisdom.

For instance, as a result of QE1 the banks are holding close to $1 trillion of excess reserves. The important question is why are banks unwilling to put these essentially zero earning reserves to work. Either the banks: 1) are not in a position to put additional capital at risk because their balance sheets are shaky; 2) are continuing to experience large write-downs on commercial and residential mortgages, as well as on a wide variety of other loans; or 3) customers may not have the balance sheet capacity or the need to take on additional debt. They could also see no expansionary prospects, or fear an uncertain regulatory future. In other words, no viable outlets exist for banks to loan funds.
A parallel situation exists in the corporate sector. Non-bank corporations are sitting on huge cash reserves. In the past two quarters liquid assets amounted to 7% of total assets, the highest level since 1963 (Chart 2). This cash reflects a lack of compelling uses for the funds, as well as the need to hedge against risks, including those of dealing with potential vulnerable counter-parties. The fact that substantial bank and corporate funds remain idle is a strong signal that U.S. economic problems exist outside the monetary sphere.


The problem with the U.S. economy is fourfold: 1) The economy is grossly overleveraged, with many asset prices falling; 2) fiscal policy is counter-productive and debilitating to economic growth as government expenditure multipliers are near zero; 3) proposed tax increases are already curtailing economic activity and tax multipliers approach -3%; and 4) increased bureaucracy with many new and yet unwritten regulations from the Dodd-Frank bill, along with health care regulations, make business planning nearly impossible.

With existing excess liquidity in banks and companies, and the above-mentioned key economic problems, it should be clear that QE2 and the purchases of additional assets by the Fed will, like previous purchases in QE1, serve only to bloat excess reserves without advancing income, spending, or jobs. From this point in the cycle, for QE2 to generate expansion, money growth and therefore debt levels would have to rise.

According to economist Hyman Minsky, there are three phases of credit extension: hedge finance, speculative finance, and Ponzi finance. In view of the extremely leveraged conditions, additional credit would be almost exclusively of the Ponzi finance variety – loans with no reasonable prospect of repayment. Indeed, Ponzi finance appears to typify the bulk of the loans being made by the Federal Housing Authority to unqualified home buyers, replicating the practices underwritten by FNMA and Freddie Mac during the heyday of the sub-prime lending extravaganza whose consequences linger. But, for the purpose of argument let’s assume that with additional excess reserves the banks lend to other potential Ponzi-like borrowers. This could lead to an increase in the money supply, but the net result may still not stimulate faster growth in GDP because velocity would fall, as it did from 1997 to 2007 (Chart 3).


The Velocity Impediment

For a rise in excess reserves to boost GDP, two conditions must be met. First, the money multiplier must become stable. Second, the velocity of money must not decline. The second condition is not likely in view of the theory and history of velocity. Velocity is primarily determined by the following: 1) financial innovation; 2) leverage, provided that the debt is for worthwhile projects and the borrowing is not of the Ponzi finance variety; and 3) numerous volatile short-term considerations.

Since 1900, M2 velocity has averaged 1.67, and has demonstrated distinct mean reverting tendencies (Chart 3). Velocity has been declining irregularly since Ponzi finance took over in the late 1990s. For leverage to lead to an expansion of velocity the loans must meet the requirement of hedge finance, i.e., where there is a reasonable expectation that the borrower can repay both principal and interest.

Fundamentally, the secular prospects for velocity have not improved even though velocity recovered by 2.1% in the past four quarters. This marginal uptick in velocity reflected an assist in federal spending along with the unparalleled recovery in inventory investment discussed previously. Without the gain in these two GDP components, velocity was unchanged over the past four quarters (Table 1).


Unintended Consequences

The Fed’s adoption of QE2 may lead to severe unintended consequences. There are two possibilities: 1) QE2 does manage to temporarily improve GDP via continued overleveraging of the economy with non-repayable loans, 2) QE2 goes into the history’s dustbin of failed projects, along with QE1, cash for clunkers, tax credits for first time home buyers, and other numerous failed attempts to boost the economy with rebate checks.

For QE2 to work, a renewed borrowing and lending cycle must take place, resulting in a further leveraging of the already highly overleveraged U.S. economy. Such additional leverage would not be beneficial since increasing indebtedness from these levels ultimately leads to economic deterioration, systemic risk, and in the normative case, deflation, as documented by Rinehart and Rogoff in their book, This Time Is Different. Therefore, at best QE2 can be nothing more than a short-term panacea exacerbating the serious structural problems already facing the United States.

A Branch of Congress

More important, however, is that by implementing QE2 the Fed could eventually lose its historical independence. The Fed is facing some economic headwinds over which they have no control, and thrusting itself into situations with enormous potential for unintended consequences. If the Fed takes additional actions that are as ineffectual as they have been previously, this could lead Congress to assume that the Fed should be given more direct instructions regarding the purchase of financial assets. Congress might assume that QE1 and QE2 were unsuccessful because they were too small, not that they are fundamentally flawed concepts. On such a path, monetary policy could then become a mere branch of fiscal policy–a road to economic perdition.
Fiscal Headwinds

As an example of the headwind the Fed faces, consider present fiscal policy. Between the taxes in the 2010 medical reform law and the sunsetting on the 2001 and 2003 tax cuts, several credible researchers calculate that taxes will rise about $3 trillion over the ten-year period starting in January ($1 trillion of medical law tax increases and $2 trillion of increases resulting from the sunsetting of the 2001 and 2003 tax cuts). The vast range of tax increases include rising marginal rates for all tax brackets: the return of a marriage penalty, a 50% reduction in child tax credit, lower dependent care, adoption tax credits, return of death tax to 55%, rising capital gains and dividend taxes, elimination of health savings accounts, special needs tax caps, return of alternative minimum tax impacting twenty eight million families, shifting of expensing by small businesses, elimination of charitable contributions from IRAs, and inclusion of employer-paid health insurance on individual W2s.

A tax multiplier in the mid range of estimates (-2) is a contractionary force of $6 trillion, or $600 billion per year on average for the next decade. For an economy that grew only $500 billion in the past four quarters (including the aforementioned inventory surge), this tax blow is too large for such a fragile economy to absorb, and beyond the scope of any monetary policy. In addition, a new array of bureaucrats necessitated by new regulations have increased uncertainties and problems, making planning by businesses nearly impossible, and paralyzing commerce. This lagging business regulatory environment is typical. As socio-economist Robert Prechter points out, the Glass-Steagall Act, which separated banking and investment activities, was enacted in 1933 after the worst of the depression, only to be repealed in 1999. Its repeal helped to facilitate the Ponzi financing boom of the 2000s. Thus, changes in regulations only appear after the proverbial “horse is out of the barn”, and do little except to inhibit business activity.

Thus, we believe that QE2 is an ill advised program that offers little prospect of boosting economic activity. If the program achieves success, any gains in economic activity will be for a very limited period of time with major risks that any short-term gain will be swamped by incalculably high costs in the future. These unknown, questionable experiments in monetary policy are being made to correct problems that are clearly of a non-monetary nature.

A Treasury Bond Market Bubble?

Over the past several months a number of articles have surfaced emphasizing the theme that the Treasury bond market is in a bubble. The implication of these articles is that yields are so low that they can only go higher, with the result of substantial capital loss to those owning the Treasury paper. It is true that psychology drives markets in the short run making anything possible, so rates may rise or fall, regardless of long-term fundamentals.

A bubble, however, refers to an asset with a price that is substantially beyond the asset’s fundamental or intrinsic value. This immediately raises the question as to what determines these values. A lucid description of this requirement is given by Dr. Seiji S. C. Steimetz in The Concise Encyclopedia of Economics. In his article entitled “Bubbles”, Dr. Steimetz defines the fundamental value of an asset as the present value of the stream of cash flows that its holder expects to receive, which includes the series of payments that the asset is expected to generate, and the expected price of the asset when it is sold.

Immediately, the Steimetz definition reveals a distinct delineation between stocks and bonds. The stream of cash flows for stocks, (i.e. dividends) is far less certain than the stream of semi-annual Treasury coupon payments guaranteed by the full faith and credit of the government of the largest economy in the world. In his article on asset bubbles Dr. Steinmetz gives no example of Treasury securities in a bubble, mentioning only common stocks and other types of assets. At maturity, the U.S. government also guarantees the par value of the Treasury bond. No such guarantee or maturity exists for commodities, real estate, common stock, or currencies in the hands of foreign holders.

Charles P. Kindleberger in his breakthrough book, Manias, Panics, and Crashes – A history of Financial Crises, is very explicit. He states, “ A mania involves increases in the prices of real estate or stocks or currency or a commodity in the present and near future that are not consistent with the prices of the same real estate or stocks in the distant future.” There is no mention of Treasury securities. Continuing, he adds “The term ‘bubble’ is a generic term for the increases in asset prices in the mania phase of the cycle.”

Determining Value For Treasuries

Investors are interested in the real or inflation adjusted present value of the stream of earnings from an asset, as well as the real value of the asset when it is sold. This is exactly the approach that Irving Fisher took in The Theory of Interest, published in 1930. According to the Fisher equation, one of the most tested and documented pillars of economics, the long risk-free yield (or the nominal yield) equals the real rate on long Treasury bonds plus the expected rate of inflation. Robert Loring Allen, in his 1993 biography on Fisher wrote: “Fisher’s theory of interest has assumed an honored position in the pantheon of explanations of the formation of interest rates, and indeed, in the functioning of the whole economy. No serious discussion of capital and interest can occur without considering it. If anything, over the years it has grown in importance.”

The real rate is very volatile and not predictable over the short-run. However, it averaged 2.1% over the long run and is mean reverting. Over time the long Treasury bond yield moves in the direction of inflationary expectations. Inflationary expectations lag actual inflation by a considerable period of time, sometimes more than several years. In addition, inflation is a lagging indicator. If the low point in inflation is well down the road, as cyclical analysis would suggest, then the low in bond yields lies ahead. Long Treasuries thus have substantial fundamental or intrinsic value and do not meet the criteria of an asset in a bubble.

Currently, inflation is tracking at a 1% annual rate and the bond yield is around 3.7%. Thus, the real yield is 2.7%, or 60 basis points above the 140-year mean (Chart 4). If the real yield were considerably below the mean and took place in an environment in which inflation was in the process of moving higher, the intrinsic value of Treasury bonds could be questioned. The real yield has remained above the mean for the past three decades. Thus, the mathematical tendency of a mean reverting series, sans economic theory, shows that the risk is that the real yield is headed below the mean and it could remain there for an extended period. For the Treasury bond market to be on the verge of a bond bubble: 1) the real yield would have to immediately lose its mean reverting characteristics that have held since 1871; 2) inflation would need to switch to a leading from a lagging indicator; and 3) inflationary expectations would need to lead actual inflation. All are unlikely.


Based on the Fisher equation’s superior analytic approach for determining value in the bond market, investors are still able to purchase long-term Treasury securities at prices which do not yet reflect their positive long-run potential.

Van R. Hoisington

Lacy H. Hunt, Ph.D.


h/t Adam

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by Gloomy
on Mon, 10/11/2010 – 17:54

A Spooked Economy in OctoberBy: Ron Paul | Monday, October 11, 2010

Last week we received worse than expected unemployment numbers, challenging recent claims that the recession has come and gone. Also, as the economy continues to suffer the after effects of the Federal Reserve-created bubbles of the last decade, there is renewed interest in gold. Fears that the Federal Reserve will pump even more money into the system had caused the price of gold to reach new highs. Also contributing to enthusiasm for gold is continued instability in the banking industry, symbolized this week by fraud allegations that have caused many banks to halt foreclosure proceedings, thus further destabilizing the housing market. Yes, October has a reputation for being a scary month economically and this month is shaping up to be frightening, as well.

The Fed has been wreaking havoc and devaluing our monetary unit steadily since 1913, and greatly accelerating it since the collapse of the Bretton Woods agreement in the 1970s. This severing of the dollar’s last tenuous link with gold allowed the Fed to create as much new money as it pleased, and it has taken full advantage of this opportunity.

In 1971, Gross Domestic Product (GDP) was $1.29 trillion. Today it is $14.6 trillion, nominally. But adjusted for all the inflating the Fed has been doing, it is only $2.73 trillion, which constitutes only a 1% real increase per year! So with all this extra money going around, we may appear nominally wealthier, but the reality is, we have barely moved at all. This is unfortunate especially for the prudent, conscientious savers, whose nest eggs are constantly being devalued. Unless of course, they have saved in something out of the Fed’s reach, like gold. While the economy has basically been in a holding pattern against the leeching of wealth by the Fed for 39 years, gold has seen an inflation adjusted increase in value of over 5% per year, if measured in 1971 dollars. This is due to the Fed’s ability to make dollars plentiful. And yet, this is the only tactic the Fed can come up with to rescue an economy already devastated by “quantitative easing”, as they call it.

The turmoil in the housing market demonstrates how disastrous it is to flood the economy with fiat money. Latest events with foreclosures are good examples of mistakes made in the market, in this case, by the banks, in the rush to soak up manipulated currency. This is why the truly free market depends on sound, honest money, free from false signals of artificially low interest rates.

The government finds ways to spend money even faster than the Fed can create it, bringing our national debt well past the point of the taxpayers ever being able to pay it off. Other nations who, in the past, have eagerly bought up any amount of debt we produced are now starting to resist. We are reaching a crucial point at which the dollar will no longer function, and in the absence of a functioning dollar, restoring sound money will be the only alternative.

The truly scary notion is that those in power might allow our system to collapse so chaotically to the detriment of so many people rather than simply obey the Constitution.


Login or register to post comments by Mark Beck
on Mon, 10/11/2010 – 21:30

Gold price is not unlinked, upside is dollar downside. Fundamental behavior. Unfortunately, not a currency confidence effect.

It is interesting to try and determine the strength in gold relative to dollar debasement. The vast majority of investors are blind to ongoing debasement as an effect. A strange form of denial. It is hard for holders of dollars to see value, or the absence of value. This is, however, the nature monetary inflation. It is a stealth tax (negative real worth).


The article bases FED action on economic theory. This no longer applies. The FED exists to fund government, it is monetizing the debt and will be until it controls enough of the buy. After which it will ‘own’ the market and control rates. The simple reality of monetizing the debt in the open. Rates must be controlled. The stall for time is to push rates to zero.

What does a zero rate look like to an investor? How about 0.02% The ultimate confidence game, pushed by primary buy resale. The market is controlled by the FED. So I would ask what does price really represent?


ARRA Grants have moved 3%, 50% to 53% in the past three months during the summer of recovery, why?


Funding states are the priority (government). But, more importantly, my feeling is Treasury does not have the proper cash flow for all of the outlays. To say it another way, the FED is telling Treasury to slow down or there will be disruptoions in the bond market.

The FED/Treasury are walking a very fine line. We are at the point now where any large disruption will cripple organized control.

Mark Beck

Login or register to post comments by Bringin It
on Tue, 10/12/2010 – 02:51

Gloomy – Thanks for the Ron Paul post.

Login or register to post comments by Sarah Conner
on Mon, 10/11/2010 – 17:59

There are no cures for this economy except bedrest and time. All of these other “elixers” just postpone the pain…

Login or register to post comments by John McCloy
on Mon, 10/11/2010 – 17:59

Great Ron Paul video discussing the ills of the Fed. There has never been a more clear and distinct choice for the reversion to American founding principles than Ron Paul.

Login or register to post comments by GlassHammer
on Mon, 10/11/2010 – 18:00

Might as well make it massive.

I have the same mindset when it comes to fishing.

This is why I fish with a hook the size of an anchor because to quote Bender from Futurama: “If I’m not going to catch a fish, I might as well not catch a big fish.”


Login or register to post comments by bugs_
on Mon, 10/11/2010 – 18:00

NIce to see an article touch on the money velocity component of this.  A lot here will have to re-read.

Login or register to post comments by IQ 145
on Mon, 10/11/2010 – 20:58

 The article is propaganda; it is entirely fallacious. The appeal to authority and the attempt to browbeat with statistics are classic. The point everyone needs to keep right in the front of their mind is that there is no known or predictable value to the unit of account.  At one time we had a dollar; it is now dead and gone. The dollar had a wonderful reputation, when they killed the dollar by making the unit of account disconnected from silver or gold; they kept the name. That’s all that survived; the name. Alll the wonderful lofty analysis about the value of bonds is BS because no one knows what the purchasing power of the numbers will be. The Zimbabwe stock market appreciated a great deal; but not in purchasing power. The article contains a statement that inflation is at 1%; this is completely false. Bonds are instruments of guaranteed confistication; they will not pay off in “real” terms; consider what this means, in purchasing power.  The major capital markets of the world, which include the precious metals markets, and the bond markets, are not little machines that respond to calibrated inputs to your choosen parameters with calibrated outputs; this is a delusion. These markets consist of people voting with their checkbooks every day; they operate on human emotional principles. I’m sorry if you don’t like it, but that’s the way it is. Buying bonds now in the expectation of capital appreciation, in real terms, (what other terms are there !!); is not a good risk / reward situation.  Human “opinion”, which is all there is, is swinging against you. In conclusion; it’s  not 1930; no rational estimate of the unit of exchange over the next five years, for instance, is possible.

Login or register to post comments by i-dog
on Tue, 10/12/2010 – 05:59

Oh good … I’m not going [totally] crazy … at least someone (with an IQ of 14.5!) agrees with me that this is a propaganda piece. God knows who rated it 5 stars … do Bennie and the Inkjets visit here?

Login or register to post comments by Spalding_Smailes
on Mon, 10/11/2010 – 18:05

Phil Davison, GOP Candidate, Delivers Stark County Treasurer Speech, 9 8 2010

#1 Fan Lol’


Login or register to post comments by buchesky
on Mon, 10/11/2010 – 19:50

Almost as good as Howard Dean’s “weeyahooie”, but not quite…

Login or register to post comments by doolittlegeorge
on Mon, 10/11/2010 – 18:11

okay.  let’s “cut through the bullshit of excess reserves” and end it once and for all.  REAL ESTATE IS GOVERNMENT BUSINESS. Banks once lending into that world SHOULD know that “this really is a one way street should it head south” and “when it did head south only one got the memo” in the form of JPMorgan, although I’m still trying to figure out Citi myself.  What happened with the Justice Department going “all in vis a vis foreclosure” is to be expected. PERIOD.  Yes, it surprised you, but that’s because some guy claiming to be “George Washington” is running your government desk.  Needless to say “the losses are in the trillions” and this DOES include the government.  OUR government.  With “bailout nation” full on we’re now moving to stage two, namely: “the stick up at the government bank.”  They also go by the name “campaign contributors” some of whom go back “decades” and have already given “hundreds of millions.”  What IS new is “the war” or more accurately “Obama’s war.”  There now is an “opponent of that war” as National Security Director.  Geee, “where did he use to work”?  Can you say “I’m now a banker and scared to death”?  If you’re BofA, Wells Fargo, and pretty much any local one “damn skippy.”  And of course “these are banks that give to democrats.”

Login or register to post comments by Babalooee
on Mon, 10/11/2010 – 18:11

Pleased to introduce you…Mr. Van Hoisington meet Mr. Ben Hosingnation

Login or register to post comments by ewmayer
on Mon, 10/11/2010 – 18:11

Matt Taibbi’s latest Rolling Stone blog entry is on QE2 – ZeroHedge gets a nod by way of the recent video of Bill Gross, “the bond king”, inadvertently admitting he gets a steady feed of insider info with which to front-run the Fed on its bond purchases:…

Login or register to post comments by gwar5
on Mon, 10/11/2010 – 18:20

But a failure — sweet.

The Central Planners are debating gold vs new world (fiat?) currency standard amongst the currency chaos.  Either way USD gets crushed in any revaluation or conversion to reset the clock. You can bet that within the IMF and G-20 the West is pushing for fiat and arguing respective exchange rates.

The Fed and Gov Corp. have, in fact, been acting like someone who is running up the credit cards right before they file Chapter 7.  They’ll point the finger at those well meaning internationalist types when we get cornholed. 


Login or register to post comments by Smokey1
on Mon, 10/11/2010 – 18:28

Heed anything Van Hoisington puts out there. That mfkr knows his shit cold. Lights out.  A history of being right and doesn’t give two shits whether Wall Street agrees with him or not.

Login or register to post comments by HarryWanger
on Mon, 10/11/2010 – 18:29

I think QE2 will happen but it won’t necessarily be a failure. Other than employment not getting better, we’re seeing stability in some key economic indicators. Before you fly off the handle, I said “stability” not growth.

So for QE2, it could be the boost we need. For example, remember that ECRI number that was so eagerly put up every Friday when it went below -10? Well, since it’s not posted here due to its IMPROVEMENT, it now sits at -7. Still negative but certainly reversing weekly.

Pretty much the same story with BDI and rail traffic – both are improving. Nothing to jump up and down about but a reversal from the downward trajectory of recent months.

So maybe QE2 does create the “wealth effect” we’re seeking. It’s like trying to push a heavy wagon, starts out slow until it gets moving, just needs another boost to keep up the momentum.

Login or register to post comments by minus dog
on Mon, 10/11/2010 – 18:55

“Other than employment not getting better, “

What exactly do you expect all these unemployed people to do?  BDI and rail traffic mean fuckall to these people.

We’re long past the days when someone could simply revert to being a dirt farmer.  The skills and tools aren’t there, and even if they were it is increasingly hard to do so without running afoul of the law or running aground on property taxes and having all your shit taken by the state.  Entrepreneurial activity is becoming more difficult by the day and millions of these people can’t sit around and wait forever for some mythical recovery in the job market.

Login or register to post comments by HarryWanger
on Mon, 10/11/2010 – 19:57

BDI and rail traffic mean fuckall to these people

Wait a minute – all I saw on this site every Friday was how ECRI was falling and certainly pointing to a “double dip”. Post after post. Some featuring Rosie as he pointed out continually. Post after post pointing out that analysts were stupid because they said it didn’t matter that ECRI was -10. 

But then something strange happened – it reversed and went higher and continues pointing higher again. Still negative but now at -7. 

So what’s it going to be? Should we follow the ECRI since when it’s -10 it does “mean fuckall to these people”? Or do we just play off when the scenario didn’t play out and say it doesn’t matter?

Login or register to post comments by honestann
on Mon, 10/11/2010 – 21:11

Unfortunately, virtually ALL official statistics are totally bogus, as well as virtually ALL private statistics that are based [in part] on official statistics.  Therefore, a large majority of analyses, even by some fairly honest and intelligent people, are massively misleading and wrong.

In pattern, the “recession” and “economy in general” are simply large versions of the following farce, which measures the economy of your neighbor next door.

Year after year, you wait to buy a new car, or improve your home.  Year after year, you observe your neighbor purchase larger and larger goodies.  First, a few years ago, it was a central air conditioning system.  Then it was a massive upgrade of his yard.  Then you saw some workers haul away his entire house full of adequate but ordinary looking furniture, then carry in replacements of gorgeous, obviously expensive new hardwood furniture.  The following year you see two new SUVs in the 3-car garage they just had added to their home.  Then just last year, you watched workers built a big, fancy swimming pool in their back yard.

Last week, they invited you to a party at their home.  You’re not a nosey person, but on your way back from the bathroom you wandered into an open room, his “office”, and noticed some statements on his desk.  The balance in the account on top said $3,850,000.  Four million bucks!!!

What you don’t see or know is, something went wrong with the FICO computer, and your neighbor has managed to borrow $8,000,000 in the past 5 years.

The fact is, over the past 5 years, his “annual income” has increased from $32,800 to $2,800,000…… when measured the way “official statistics” are measured.  What you don’t know about your neighbor OR your country is… that extra $8,000,000 isn’t really income, it is a loan.  Or to make this analogy more accurate, that $8,000,000 is a loan of counterfeit money from the mafia (albeit at reasonable interest rate, due to your mistaken FICO score of 999).

The only reason the economy has SUPPOSEDLY exited recession is… by ignoring debt, and by counting all sources of funds (including loans and counterfeiting) to be normal salary and income.

FACT:  The USSA is in a massive depression that can only get worse as long as the predators-that-be remain in power.

Login or register to post comments by reading
on Tue, 10/12/2010 – 05:34

This is the bounce you are getting excited about?

By the way the bounce from -10 was discussed here…feel free to search the archives.

Login or register to post comments by Hellholeratrace
on Mon, 10/11/2010 – 19:22

One thing I’ve noticed recently is that the malls where I live are getting crowded again. I think what may be happening is that those people who managed to hang on to a job are tired of not spending money because they’re plain addicted to it.  These people can show some paper wealth and maybe found a long lost credit card in their pocket. Hell, it’s probably because they quit paying their mortgage. I think any of this improvement will be short lived.  The boat still has a gaping hole in it. We may be able to speed up to stay afloat for some time, but the hole will just keep getting bigger to the point that we will eventually sink. Plus any little “shock” to these consumers will make them immediately stop spending. One thing we can’t underestimate though is the American people’s propensity to take on debt for instant gratification. But it really doesn’t matter because of my previous sentence about “shocks”. We may be able to reflate temporarily but the busts and crises will get closer and closer together until it’s game over, boat sinks.

Login or register to post comments by reading
on Tue, 10/12/2010 – 07:43

Be sure to pay attention to whether all the people at the malls actually have bags — I noticed more people during one visit a few saturdays ago but strangely lots of “lookers” but no real shopping (ie, bags).  It was pretty interesting — almost like a field trip.  I also noticed about an hour later the traffic was much lighter.


Login or register to post comments by contrabandista13
on Mon, 10/11/2010 – 18:41

He’s missing the whole point of his point…

I have a difficult time with these chaps that are so focused on the minutia.  I agree that there are unintended consequences of QE…  Duh….!  I further agree that there will be unintended consequences if further quantitative easing is implemented.  

In short, for those of you who understand what a backgammon prime is, America is primed.  It can give the cube and it can take the cube, it can even beaver the cube, however, however, the last pip will soon come off the board and we are screwed…  big time…!

Login or register to post comments by fiftybagger
on Mon, 10/11/2010 – 18:42

“Currently, inflation is tracking at a 1% annual rate”


That’s all I need to read, Van hosehead is a complete and utter moron…

Login or register to post comments by SDRII
on Mon, 10/11/2010 – 21:31

lost me too on that subtle throw away. Maybe this will help…


Login or register to post comments by IQ 145
on Mon, 10/11/2010 – 21:16

 Yeah, it’s a sophisticated form of propaganda; it offers an insight into how the authors convinced themselves of their thesis; but the conclusion, that people can buy bonds in the expectation of capital appreciation; has a very poor probability of transpiring; the mechanism of prediction they offer is useless.

Login or register to post comments by brushfire
on Mon, 10/11/2010 – 18:42

If you use the CPI as your inflation input, then real yields are positive and bonds are not in a bubble. If you account for real inputs that are not reflected in the CPI number, inflation is substantially higher (just north of 4% according to Shadow Stats) and real bond yields are negative. This places bonds unequivocally in bubble territory.

Login or register to post comments by minus dog
on Mon, 10/11/2010 – 18:57

You wonder what is up with some people, then realize they don’t actually go shopping for their own food.  Explains so much.

Login or register to post comments by cxl9
on Mon, 10/11/2010 – 19:32

Indeed. Also: what would yields look like if the government was not purchasing its own debt?


Login or register to post comments by CrashisOptimistic
on Mon, 10/11/2010 – 20:04

What sort of payroll / budget does Williams run at Shadowstats?  Does he publish a list of academic credentials necessary for getting hired at his vast agency to make the required phone calls to sample what % of total household spending a given category might be?  Is his survey team numbered in 100’s or 1000’s?

Don’t bother looking.  I’ll tell you.  He has no staff.  He makes no phone calls to conduct surveys of consumers to determine what they spend on and how much.

Why would he be quoted?

Login or register to post comments by 99er
on Mon, 10/11/2010 – 18:43

The money is going abroad.

(Reuters) – Asian authorities anxious about currency appreciation moved to stem foreign capital inflows on Monday while a European official stepped up rhetoric about a strong euro after IMF meetings failed to defuse tensions about exchange rates.

China temporarily raised reserve requirements for six large commercial banks, four sources told Reuters, a surprise move aimed at draining cash from the economy.

Thailand, also on edge about a rapidly rising currency that has alarmed exporters, said it may impose a tax on foreigners’ bond purchases.

With interest rates in the developed world at record lows, investors have poured money into higher-yielding emerging market assets, driving up local currencies in the process.

Login or register to post comments by IQ 145
on Mon, 10/11/2010 – 21:19

 THE fundamental error in all of investing; chasing interest rates.

Login or register to post comments by AUD
on Mon, 10/11/2010 – 18:45

“They are feeling the political pressure to act, even though the problems facing the economy are not related to monetary policies.”

I agree with the first bit, but the second is bunk, so I read no further.

Login or register to post comments by buzzsaw99
on Mon, 10/11/2010 – 18:48

QE is about wall street bonuses, period.

Login or register to post comments by buchesky
on Mon, 10/11/2010 – 20:00

Your avatar picture is sooo gross!  I think I recognize it from Total Recall.  Just wanted to let you know that it probably had the intended effect…

Login or register to post comments by Lux Fiat
on Mon, 10/11/2010 – 22:20

Kuato led the Martian mutant resistance to a tyrannical gov’t.  Don’t think that “gross!” is the intended message.

Login or register to post comments by ewmayer
on Mon, 10/11/2010 – 18:50

Harry, “wealth effect” is just another way of saying “free lunch”. If it really were consumers’ “irrational fear of spending too much and taking on too much debt” which were the driver of the current recession, then sure, “stimulating willingness to spend” by pumping up paper asset valuations could work … but this is a different kind of beast altogether, it’s that mythical beast the Keynesians thought they had banished forever, the “balance sheet recession”. And the only real cure involves painful detox by way of deleveraging and forcing all the bad debt out into the open.

That has pretty much become my quick-response sanity check of any economic or financial proposal of late: “Does it equate to a free lunch?”

By the way, all those who in Krugmanite fashion keeping screeching that “QE will work … it just needs to be big enough” conveniently forget that we just recently had what amounted to the biggest fiscal stimulus of the post-WW2 era – yes, I’m talking about the late, great Greenspan housing bubble. That produced a really frickin’ huge “wealth effect” of the kind you describe. How’d that work out for us?

Login or register to post comments by HarryWanger
on Mon, 10/11/2010 – 20:03

Can’t compare the housing bubble with QE2. That was a big ponzi get rich quick scheme and stupid people bought into it. And the banks were more than willing to let them participate. Two guilty parties.

The theory with stimulus is to create a wealth effect by investment into business. Force rates negative and the money has to go somewhere else. Hopefully, it gets invested into business development which in turn leads to hiring and jobs. That cranks the whole machine up again and gets it running. It has nothing to do with a “free lunch”.

Something has to give the economy (and jobs) a boost. QE2 is needed precisely for that reason. Otherwise, let’s just sit back and whine about no jobs, slow economy rather than trying to create growth which begets jobs and pumps the economy.

Login or register to post comments by Deep
on Mon, 10/11/2010 – 21:08

Harry you are very mis guided in your optimism. QE2 will do nothing. Our economy is built on credit expansion, when people are dead broke and living pay check to pay check, they are not going to take on more debt. This economy needs a reset, now i am not saying dow 2000 r 5000, the ultimate bottom i will let the market decide.

The sooner we take our medicine, the sooner the recovery. All this  bullshitQE2 talk, it will do nothing. we have massive structural problems that have to be fixed before we can have the next sustainable bull market.

Rates have been negative in Japan, have they not, what happend there.


Login or register to post comments by StychoKiller
on Mon, 10/11/2010 – 21:21

Sorry, when the insulation on the motor windings is burnt off, increasing applied voltage is precisely the wrong solution.

Put a freeze on Govt spending and regulation for long enough, and the motor would heal itself.

Login or register to post comments by MoneyMagician
on Mon, 10/11/2010 – 22:03

If you subtract, or zap away the bubbles, you get the real economy, which grows very slowly. 65,000, to 75,000 private job creation is actually pretty normal in the past 20 years. Sure the housing bubble damaged housing very badly below historical trend lines, but that’s what bubbles do. At least we got something out of the NASDAQ bubble. Fiscal stimulus will only increase the trade deficit, and monetary stimulus won’t do anything, because there is no new mania to fill. Of the jobs that are created, they are mostly health care, burger flipping fair. Manufacturing jobs have been bleed, and is still bleeding from the american economy. Regulations, and taxes are the culprit, along with bad global monetary policy. If you really think about it, the economy has been damaged for many years, think decades. QE2 is good for the stock market in raising nominal values.

Login or register to post comments by Burnsy
on Tue, 10/12/2010 – 03:08

I agree, QE2 is not as malicious and fraudulent as CDOs etc, of course not. But it is misguided. At what point are excesses allowed to be cleansed from the system, Harry? Household leverage is still close to all-time highs, government debt is at all time highs, zero % financing is back…this system is not healthy, and we should not prop it up again and again.

In a capitalist system, we can’t just skip creative destruction when it suits us because we want to avoid the social cost. The final social cost will be far worse, and far more dangerous if we never change our ways. Serious economic upheaval is potentially the precursor to another war. Keynes, a widely misunderstood eceonomist it seems, is used as an excuse to please campaign contributors and ignorant masses and insulate them from economic realities. Hopefully (I’m not holding my breath) more politicians will realize that the path we are currently on is wrong and speak the truth even if it costs them politically, and the masses econmically for a while. That is our best hope for long-term growth now.

Login or register to post comments by Hang The Fed
on Mon, 10/11/2010 – 18:57

When the system itself is what’s broken, strapping on some more band-aids can only work for so long.  I wouldn’t be inclined to offer nasal-spray to someone dying of cancer, so why do so many people think that it will work in this case?  I smell only the stink of corrupt flesh, infection, and death in what’s going on these days.  LOL, god’s chosen, we are…go on, now…pull the other one!

Login or register to post comments by Lucius Corneliu…
on Mon, 10/11/2010 – 19:13

This war is too important to be left to the politicians!

Is Bernanke General Ripper’s protege?


Login or register to post comments by gnomon
on Mon, 10/11/2010 – 19:22

QE2 will be the epitaph engraved on Bernanke’s tombstone.  And that epitaph will not be one of sweet remembrance.

Login or register to post comments by HarryWanger
on Mon, 10/11/2010 – 20:06

QE2 will be the epitaph engraved on Bernanke’s tombstone.

Why? I’ve laid out reasons why it could work, you tell me why it you think it won’t. Or in your words, why it “will be the epitaph on Bernanke’s tombstone?”

Login or register to post comments by Big Ben
on Mon, 10/11/2010 – 21:00

QE1 roughly doubled the monetary base. This has not caused inflation (yet), because the QE1 money went into excess banking reserves which are not used to purchase goods and services and hence have zero velocity. But this also means that they are not doing anything to create jobs or spur economic recovery. Basically all that it has done is to sow the seeds for future inflation.

QE2 would be more of the same.

Login or register to post comments by Iam Rich
on Mon, 10/11/2010 – 21:33

The article above has laid out the case.  The banks don’t want to lend, can’t find credit worthy businesses, or businesses are not looking for credit.  I think Art Cashin mentioned a few weeks back, “don’t give me credit, give me customers”.  Hence, QE2 ends up in commodity prices (gold to grains) and asset prices.  Increasing commodity prices = increasing business input costs = margin compression = no new jobs = no spending power = buy less stuff (Apple, Netflix, etc.) = contraction = QE3 = increasing commodity…

Certainly simplistic but -7 is still contracting.  BDI and rail traffic run right into over the road trucking cratering.  You would think after QE1 + QE2 + Tarp + $3T in fiscal deficit (fed gov’t alone…can’t forget we need to add in the states), we would be seeing a bit more stabilizing at + numbers.

Login or register to post comments by Gunther
on Mon, 10/11/2010 – 19:23

Only if the official CPI-numbers are taken seriously the bond-argument holds.

If one uses the ‘old’ methods of calculatig the CPI the real yield (10 year yield – CPI) is negative since 2000.

See the green curve here:


Login or register to post comments by Burnsy
on Tue, 10/12/2010 – 02:59

Exactly. Missed your post on my first reading and made the same point below.

Login or register to post comments by gwar5
on Mon, 10/11/2010 – 19:33

This is WW III, an economic war is going on, and there will be American collateral damage because “blood and guts” Bernanke is in charge and his housing supply line has been cut off.    

Wealth and resources are going East and they will emerge stronger, but maybe it won’t be an unconditional surrender.



Login or register to post comments by honestann
on Mon, 10/11/2010 – 19:52

Does anyone remember the term “moral hazard”?

Sadly, most current analysis gives little or no weight to the consequences of the “moral hazard gone wild” that IS the best description of the actions of the federal reserve and government of the USSA since 2008.

But in fact, the consequences of “moral hazard gone wild” are monumental – and have become integrated into the mindset of just about everyone who might be entrepreneurial.  Now just about everyone knows the “game” is terminally rigged in favor of big fictitious entities who can bribe, lobby and manipulate their way to riches at the expense of everyone else.  So the prime source of economic progress knows quite clearly their reward for taking risk and developing new business will most likely be… their carcass being picked apart by the predators-that-be.

This is the age of the dinosaur, the age when big, huge, bulky and inefficient dominates and fluorishes.  Of course, this is a totally impractical dynamic which must collapse under its own weight, like the USSR did.

But for now, the potential engine of economic recovery has been destroyed.  At best, it has decided to hide out and not venture into the wild.  Who wants to be targeted for destruction as reward for taking risk and trying to do good?  Not many.  And thus the economy of the USSA shall never recover… until after it totally collapses, and the dinosaurs become fertilizer and oil for some long distant recovery (if recovery is ever to happen at all).

Login or register to post comments by aka_ces
on Mon, 10/11/2010 – 20:19

Aren’t interest rates influenced by credit risk ?

Login or register to post comments by williambanzai7
on Mon, 10/11/2010 – 20:24



Login or register to post comments by zevulon
on Mon, 10/11/2010 – 20:29

bbank of america wouldn’t have willingly stopped ALL foreclosures on collateral (i.e. securitized mortgage backed homes) without having a heads up regarding massive QE2.0 on the horizon. 

Login or register to post comments by honestann
on Mon, 10/11/2010 – 20:52

Indeed, part of the justification for QE2 existing, and being “so massive”, is this fiasco.

Is it not amazing how brazen it has become, when all but an infintesimal minority quietly accept that overt criminals should be given trillions of dollars to offset the astronomical theft and damage they caused to others.  Talk about “totally out of control”.

Login or register to post comments by AUD
on Mon, 10/11/2010 – 21:18

And until the producers of commodities of real utility wake up and stop accepting a ‘bill of goods’ for their labour the situation will remain “totally out of control” & only deteriorate.

With foreign holdings of UST’s hitting new records almost every week, it seems the producers are sound asleep.

Login or register to post comments by honestann
on Tue, 10/12/2010 – 00:19

Actually, if current trends continue, the federal reserve will be purchasing nearly ALL federal government debt.  This is the blind alley the predators-that-be put themselves into.  No rational human would lend money for 10 to 30 years to the government of the USSA at anywhere near current rates, given QE2++ and hyper-irresponsible spending plans of the past several congresses and administrations.

We have already gotten to the point that the federal reserve cannot allow government interest rates to rise, because the government could not even pay the interest on those loans.  So now they are stuck — they cannot raise interest rates to the government, so they won’t.  What must happen eventually is for the two debt markets (private and federal) to split.  At that point, literally nobody will buy government debt (at such an aburdly low rate), and the federal reserve will be forced to finance the entire federal government.  Of course the dollar will be the primary victim, along with everyone who holds investments denominated in dollars.  Thus boom days for real, physical, [especially productive] investments is directly ahead.

Login or register to post comments by Pork Fried Rice
on Mon, 10/11/2010 – 21:53

They said flaccid… teehee

Login or register to post comments by FischerBlack
on Mon, 10/11/2010 – 21:57

So, really, the contrarian trade would be iron condors on SPY, GLD, and IEF for the November OPEX, betting that QE2 is neutral for most every asset class and vol is therefore overpriced —

a plan so crazy it just might work.

Login or register to post comments by Big Ben
on Mon, 10/11/2010 – 22:32

Since the start of QE1, a lot of money has gone into treasuries, bonds, stocks and commodities. So it is tempting to think that QE1 was responsible for this. However, before the housing bubble popped, a huge amount of money was flowing into mortgage backed securities. After the housing bubble popped, new investment money largely stopped flowing into MBS. Perhaps it was simply redirected into other investments. So maybe it was the collapse of the MBS market which caused all these other assets to rise, and not QE1. I really don’t know myself. I just don’t understand how increasing the excess reserves of banks would cause money to flow into all these other markets.

If this theory is correct, then QE2 might not cause any change in the investment flows that we are currently seeing. So things would continue rising basically as they are now. Unless QE2 triggers inflation, which (based on the what happened in the 70’s) would cause commodities to rise, long term bonds to fall, and stocks to tread water. All of this is just a wild guess…

Login or register to post comments by Coldfire
on Mon, 10/11/2010 – 22:16

How can now be a good time to buy Treasury bonds when it is unknown whether or not yields will ever return to their long-term average? (see Wrong Term Capital Management). The persistent pathology of the Fed’s money printing fetish admits the increasingly probable possibility that the very unit of account will be destroyed, destroying all instruments denominated in that unit. What makes you think Bermonkey hasn’t pulled the trigger already? Look at his eyes sometime; they’ve got the dead calm of the damned.

Login or register to post comments by Grand Supercycle
on Mon, 10/11/2010 – 23:27

S&P500 Financials index has not been bullish for some time. This is a warning.

Login or register to post comments by Stuck on Zero
on Mon, 10/11/2010 – 23:52

QEII will fail because the easy money gets invested in the BRICs. 

Login or register to post comments by Dreamwalker420
on Tue, 10/12/2010 – 00:04

The question, “Is quantitative easing working?” is a misnomer.

Is quantitative easing working for Americans?  For taxpayers?  For the economy? No. No. And no.  Then why do it?

Because quantitative easing works for the TBTF banks.  By using the Feds, the TBTFs transfer the liabilities of bad paper for good paper.  Simultaneously inflating the stock market.  In an environment where the banks are trying to “repair” their balance sheets the current solution is working at the expense of all other people … possibly all other people on the planet!

Would I advocate the same policy choices if I was the Chairman of Goldman Sachs.  Probably.  Rarely does an individual excersize his character above his own economic interests.  For instance, if the prostitue will take $20 … why pay her $300, regardless of the number of children at home to feed?  That is the nature of a free market economy.

Will the Fed continue on this reflation policy?  Absolutely.  The Fed exists solely to protect the interests of its member banks, the Primary Dealers.  To think that they give more than feigned adherence to inflation or unemployment is an absurdity … much like the distinctions between Republicans and Democrats!

Those without power seek it.  And those with power seek to retain it.

Can the economy become bad enough that the political will develops to change the status quo?  How bad does it have to get?

Obviously, in a total collapse, the government and economy are forced to change as starvaition spreads through out a society.  Which is stronger?  The US Constitution or Federal Reserve Notes?

Will Americans forfeit their sovereignty in order to feed their families?

The debate about armageddon scenario’s create little effectual policy adaptations given the greater complexity of potential outcomes in lose-lose situations.

Therefore, it seems more likely that the slow painful grind of the TBTF banks’ ability to control the economy and politics will continue for many more years to come.

Remember, slave owners are generally the only ones advocating slavery.

Login or register to post comments by Printfaster
on Tue, 10/12/2010 – 00:53

Just like in Weimar, in terms of the price of gold, monetary velocity is collapsing and there is nothing that the Fed can do to bring up monetary velocity, without total economic collapse.


Login or register to post comments by The Monkey
on Tue, 10/12/2010 – 01:12

Note: Van Hosington’s analysis comes complete with metrics & time history. Ron Paul’s is a “tad” more editorial (:

Login or register to post comments by Burnsy
on Tue, 10/12/2010 – 02:57

Based on the Fisher equation’s superior analytic approach for determining value in the bond market, investors are still able to purchase long-term Treasury securities at prices which do not yet reflect their positive long-run potential.

Yes, except the CPI does not accurately track inflation. So based on the government’s superior data-manipulating skills, you arrive at a false conclusion; real yields are negative and about to get more negative. Best of luck to you with the ‘positive long-run potential.’

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