Chairman Bernanke and the rest of the FOMC met, deliberated, and surprise, surprise...
There will be no taper on QE (the Federal Reserve's asset-purchasing program) this month:
http://money.cnn.com/2013/09/18/news/eco...index.html
I think I have a pretty solid grasp on this (and am making all of this a subject of a novel):
At the end of August, I tried to summarize my understanding:
This is going to be a massive block of text, but there's so much to talk about:
So from yesterday till now, the yield on the 10-year treasury fell about 17 basis points, the 20-year fell 11 basis points, and the 30-year fell 9 points. The Fed's stress tests don't take into account interest rates above 3% (I don't remember, need to check). As long as the debt ceiling is raised and taper doesn't occur, we are still in the zero-interest environment.
Such an implied new bond regime would mean a collapse in value of the debt derivatives securities that are keeping most of the Too-Big-To-Fails profitable, so that means financial system collapse, in addition to a myriad of other game-ending things like debt service getting out of hand with a few more full percentage points and we're up to having to pay trillions more in taxes (and not even touching the principle of the debt) - ending corporate buyback (which the Japanese have done for decades) from the ZIRP spigot which enables massive stock overvaluation and distortion of P/E ratios, spark inflation as money pinned down in excess reserves start getting loaned out and transitioning into the M1 money supply.
In addition to the domestic repercussions, any ZIRP debt invested in the European and Asian markets would evaporate, as we saw when Ben first announced taper in May, which caused the Nikkei to lose 7% instantaneously, before he went dovish and talked down the possibility of taper. So this has global implications, affecting literally billions of people. It's insane. It's hard to even imagine the full ramifications.
On a side note, gold fell to $1300 after the Syria situation seemed to cool down, and then rose $70 an ounce in one day as the announcement comes out.
A while back, I posted on how the Senate-Congress student loan compromise on Stafford interest rates, to me, indicates that our government itself is actively hedging itself against a rise. They are expecting it at some point.
In the Q&A session at the end of his Humphrey-Hawkins Congressional testimony back in July, Bernanke said - verbatim - "If we tighten monetary policy, the economy will tank."
The Office of Debt Management under the Department of the Treasury released its third quarterly report for the 2013 fiscal year: http://www.treasury.gov/resource-center/...Charts.pdf
which correlates days on which the S&P 500 rallies at nearly 100% with the Federal Reserve holding open market operations, that day. All the data about extending the weighted average maturity of the Fed's balance sheet and rollover risk is right there. Yet another tell that the government itself is hedging itself for the moment things happen.
Since 2008, there have been around 16 or so quarterly GDP reports - around 12 of which have been downwardly revised. Even if you the government at its word and say that GDP growth is at 2.5%, and believe the CPI accurately calculates inflation, which stands at 1.5%, then the economy only grew at 1.0%. If real inflation is even slightly higher than what the mutilated CPI states, then the economy has been contracting even with the epic trillions of dollars being spent by the federal government.
And. Higher interest rates logically mean that entire industries being sustained by false speculative demand, such as housing, will collapse. Just like how telecommunications companies in the early 2000s disappeared when Greenspan finally raised the federal funds rate and speculative money stopped flowing and a semblance of market equilibrium started to develop.
About 700k of the 900k jobs gained in 2013 have been from the fast food and bar sectors and have been part-time, with temp agency Kelly Services becoming the second biggest employer in the nation with full-time and manufacturing jobs being a net loss, though part of this may be due to ObamaCare being enacted and not necessarily correlated to QE.
Last week, we saw development in the Cyprus-style bail-in (ie, confiscation of deposits) when the FDIC voted 5-0 to no longer insure deposits at foreign US bank branches. The FDIC will be a great study in how government gradualism works.
So even if rates remain low for decades to come - it's zombifying ever greater portions of the economy, degrading the labor force, and making the ending even worse.
It will change the social fabric of this country (it is ALREADY being torn, most of us here are aware of it). Those who don't care about the markets, will find that the markets care about them. More municipalities are going to go bankrupt purely due to their pensions and public sector/private sector mismatches and not even if a major bank goes down - and that is going to affect people. Water and electrical services will go dark, police, ambulances, fire fighters, emergency response teams will not be there. This happens even in status quo conditions.
How do we know this? We know this because municipal bonds aren't subject to capital gains taxes (barring if you purchase them at a discount), creating an artificial preference for them over securities such as stocks which ARE subject to those taxes. That's it. And it STILL didn't help Detroit, or the 20 or so other defaulters since 2008. One of literally hundreds of ways the government suppresses the free market. To think the Occupy Wallstreeters, the Marxist economists, New Keynesian economists, and Democrat/liberal/progressive voters think the free market to blame... it just makes you speechless. They'll keep blaming something that doesn't exist until we're literally slaves.
For a few days, I actually experienced a little doubt that maybe the Fed would taper. But even if it DOES taper in the future - they will have to wind it back up. The basis for my claim? The fact that we're at QE3. We've already seen this before when the Fed ended QE1 and QE2, albeit Bernanke and Co. actually came up with something (slightly) innovative, in that they announced a slight pullback, not an outright end. They managed to mix things up and be less predictable by having the market try to figure out whether it was pricing in the future possibility of the taper before it actually happens.
The bottom line is that a real recovery will only happen when the market clears, and all the malinvestments that the government itself caused finally liquefy. But the pain that entails mean the political leaders of this country will never allow it to occur, therefore they are driving us toward the ultimate destination of currency destabilization/crisis - which if we observe from the German mark, the dollar will be rock solid, and then the end comes suddenly, at which point nothing can be done.
There will be no taper on QE (the Federal Reserve's asset-purchasing program) this month:
http://money.cnn.com/2013/09/18/news/eco...index.html
I think I have a pretty solid grasp on this (and am making all of this a subject of a novel):
At the end of August, I tried to summarize my understanding:
Quote:Quote:
All of this is predicated on a continuation of quantitative easing. If you understand its technical definition, you'll understand its nature relating to check-kiting and frontrunning, and how it is functionally legalized bribery of those who would otherwise be bond vigilantes.
Bernanke's tapering announcement exposed it by triggering a major bond selloff. The 10 year is fluctuating at around 2.9%, which is a two year high. Every rise of a full hundred basis points costs us $170 billion in taxes for debt service. Merely the mention of tapering caused that.
You blame the Pentagon budget? Well, we are now in a situation where we are (and already have) actually using our military to enforce dollar hegemony and its exchange value. Without all that spending and all these thousands of deaths, all those people depending on welfare would be starving.
Goldman Sachs, one of the primary dealers who act as the Fed's counterparties in its open market operations, came out with a client distribution in 2010 openly recommending the strategy of frontrunning by purchasing treasury securities.
Earlier this summer, I had the opportunity to meet someone working at Morgan Stanley's securities division (another primary dealer). He showed me, in confidence, internal memos to new hires explaining the same thing as GS did, and, in his words "If QE stops, government bonds go from AAA+++ to FFF---." The day that happens, no one shows up at the Treasury to buy those bonds... This is even being generous and giving the most leeway to optimism and saying the Federal Reserve does this on its own terms, not when investors independently decide they're going to get out of the way of the chainsaw.
This is without even going into its ramifications on the rest of the world. The same day as Bernanke's announcement, the Nikkei lost ~10%.
All right-wing fearmongering nonsense, right?
This is going to be a massive block of text, but there's so much to talk about:
So from yesterday till now, the yield on the 10-year treasury fell about 17 basis points, the 20-year fell 11 basis points, and the 30-year fell 9 points. The Fed's stress tests don't take into account interest rates above 3% (I don't remember, need to check). As long as the debt ceiling is raised and taper doesn't occur, we are still in the zero-interest environment.
Such an implied new bond regime would mean a collapse in value of the debt derivatives securities that are keeping most of the Too-Big-To-Fails profitable, so that means financial system collapse, in addition to a myriad of other game-ending things like debt service getting out of hand with a few more full percentage points and we're up to having to pay trillions more in taxes (and not even touching the principle of the debt) - ending corporate buyback (which the Japanese have done for decades) from the ZIRP spigot which enables massive stock overvaluation and distortion of P/E ratios, spark inflation as money pinned down in excess reserves start getting loaned out and transitioning into the M1 money supply.
In addition to the domestic repercussions, any ZIRP debt invested in the European and Asian markets would evaporate, as we saw when Ben first announced taper in May, which caused the Nikkei to lose 7% instantaneously, before he went dovish and talked down the possibility of taper. So this has global implications, affecting literally billions of people. It's insane. It's hard to even imagine the full ramifications.
On a side note, gold fell to $1300 after the Syria situation seemed to cool down, and then rose $70 an ounce in one day as the announcement comes out.
A while back, I posted on how the Senate-Congress student loan compromise on Stafford interest rates, to me, indicates that our government itself is actively hedging itself against a rise. They are expecting it at some point.
In the Q&A session at the end of his Humphrey-Hawkins Congressional testimony back in July, Bernanke said - verbatim - "If we tighten monetary policy, the economy will tank."
The Office of Debt Management under the Department of the Treasury released its third quarterly report for the 2013 fiscal year: http://www.treasury.gov/resource-center/...Charts.pdf
which correlates days on which the S&P 500 rallies at nearly 100% with the Federal Reserve holding open market operations, that day. All the data about extending the weighted average maturity of the Fed's balance sheet and rollover risk is right there. Yet another tell that the government itself is hedging itself for the moment things happen.
Since 2008, there have been around 16 or so quarterly GDP reports - around 12 of which have been downwardly revised. Even if you the government at its word and say that GDP growth is at 2.5%, and believe the CPI accurately calculates inflation, which stands at 1.5%, then the economy only grew at 1.0%. If real inflation is even slightly higher than what the mutilated CPI states, then the economy has been contracting even with the epic trillions of dollars being spent by the federal government.
And. Higher interest rates logically mean that entire industries being sustained by false speculative demand, such as housing, will collapse. Just like how telecommunications companies in the early 2000s disappeared when Greenspan finally raised the federal funds rate and speculative money stopped flowing and a semblance of market equilibrium started to develop.
About 700k of the 900k jobs gained in 2013 have been from the fast food and bar sectors and have been part-time, with temp agency Kelly Services becoming the second biggest employer in the nation with full-time and manufacturing jobs being a net loss, though part of this may be due to ObamaCare being enacted and not necessarily correlated to QE.
Last week, we saw development in the Cyprus-style bail-in (ie, confiscation of deposits) when the FDIC voted 5-0 to no longer insure deposits at foreign US bank branches. The FDIC will be a great study in how government gradualism works.
So even if rates remain low for decades to come - it's zombifying ever greater portions of the economy, degrading the labor force, and making the ending even worse.
It will change the social fabric of this country (it is ALREADY being torn, most of us here are aware of it). Those who don't care about the markets, will find that the markets care about them. More municipalities are going to go bankrupt purely due to their pensions and public sector/private sector mismatches and not even if a major bank goes down - and that is going to affect people. Water and electrical services will go dark, police, ambulances, fire fighters, emergency response teams will not be there. This happens even in status quo conditions.
How do we know this? We know this because municipal bonds aren't subject to capital gains taxes (barring if you purchase them at a discount), creating an artificial preference for them over securities such as stocks which ARE subject to those taxes. That's it. And it STILL didn't help Detroit, or the 20 or so other defaulters since 2008. One of literally hundreds of ways the government suppresses the free market. To think the Occupy Wallstreeters, the Marxist economists, New Keynesian economists, and Democrat/liberal/progressive voters think the free market to blame... it just makes you speechless. They'll keep blaming something that doesn't exist until we're literally slaves.
For a few days, I actually experienced a little doubt that maybe the Fed would taper. But even if it DOES taper in the future - they will have to wind it back up. The basis for my claim? The fact that we're at QE3. We've already seen this before when the Fed ended QE1 and QE2, albeit Bernanke and Co. actually came up with something (slightly) innovative, in that they announced a slight pullback, not an outright end. They managed to mix things up and be less predictable by having the market try to figure out whether it was pricing in the future possibility of the taper before it actually happens.
The bottom line is that a real recovery will only happen when the market clears, and all the malinvestments that the government itself caused finally liquefy. But the pain that entails mean the political leaders of this country will never allow it to occur, therefore they are driving us toward the ultimate destination of currency destabilization/crisis - which if we observe from the German mark, the dollar will be rock solid, and then the end comes suddenly, at which point nothing can be done.