The analysis of current Fed policy has included the usual parade of mistaken pundits [whose views have] been obscured by… an agenda based upon their politics or their business models [and then there]…are the correct answers which are pretty obvious to anyone with any training in economics. Here is that reality. Words: 734
So says Jeff Miller in an article* on his site (http://oldprof.typepad.com) under the title QE3 Misconceptions and How to Profit.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Miller goes on to say, in part:
- The basic objective is to change behavior on the part of borrowers and lenders. The stock market is only one method for evaluating the impact and the “wealth” effect is only a minor transmission mechanism.
- The key to understanding QE3 is to think about marginal effects, not the all-or-nothing, “light-switch” thinking of those without economic education. If you lower the price of something, it has a marginal effect. Lower interest rates encourage more borrowers, qualify more borrowers, and increase the size of qualified loans. The price changes affect (marginally) the interest rates on all related bonds. The increased Fed balance sheet creates more excess reserves for banks and nudges them toward more lending. Lower rates make business investments slightly more attractive. This all takes place at the margin. This is the incentive for risk that Bernanke talks about. None of it has anything to do with pushing the average investor into risk assets, the popular pundit theme.
- The Fed is not monetizing debt if the purchases of securities are temporary.The concept of “printing money” should relate to an increase in the money supply — M2 or MZM. These increases have been modest — too low in fact. The hyper-inflationistas have been wrong for a decade or so, but that does not stop their chorus.
- Reversing course depends upon the demand for US debt, both Treasuries and Agency securities. Readers should note that those who have questioned this theme in the past, asking who will buy our debt at the end of prior QE’s have been completely wrong. I do not understand why Bill Gross could be so mistaken, but he was. He does not seem to distinguish between the total volume of US Treasury trading and the net issuance. Or maybe he has his own agenda. Meanwhile, the average investor does not understand the total volume of Treasury trading. (See this piece for an illustration.)
Quantifying the Effects
There are some solid econometric efforts to quantify the QE3 effects. Here is a Bloomberg article that is helpful by sharing some results:
In a model-driven assessment based on the past impact of QE1 and QE2, Deutsche Bank Securities chief economist Peter Hooper says this is what the Federal Reserve printing another $800 billion – slightly less than the gross domestic product of Australia – will do:
- Reduce the 10-year Treasury yield by 51 bps
- Raise the level of real GDP by 0.64%
- Lower the unemployment rate by 0.32 percentage points
- Increase house prices by 1.82%
- Boost the S&P 500 by 3.06%, and
- Raise inflation expectations by 0.25%”
…The Deutsche Bank conclusion is correct. The general direction and order of magnitude of these effects makes sense given past QE policies.
A Deeper Look
In fact, I expect the current QE round to be more effective than the past versions. Why? The focus on changing expectations.
In the past, any good economic news was greeted with the notion that the Fed would step back. The current policy changes this. The Fed is committed to economic stimulation, even if it pushes inflation somewhat above the 2% target level.
HAVE YOU SIGNED UP YET?
Go here to receive Your Daily Intelligence Report with links to the latest articles posted on munKNEE.com.
It’s FREE and includes an “easy unsubscribe feature” should you decide to do so at any time.
Join the crowd! 100,000 articles are read monthly at munKNEE.com.
Only the most informative articles are posted, in edited form, to give you a fast and easy read. Don’t miss out. Get all newly posted articles automatically delivered to your inbox. Sign up here.
All articles are also available on TWITTER and FACEBOOK
For those who don’t like the the Fed inflation measurement methods, you can just multiply by ten or apply whatever other silly adjustment you think is right. Meanwhile — learn to live with it! This is the new policy.
The basic conclusion is that:
- The business cycle is going to be extended significantly. We are in the third inning or so.
- It is a good time for tech stocks and deep cyclicals.
- Financial stocks will enjoy a nice yield spread.
- Europe will be helped.
- The timing is a bit different from past QE’s. Since everyone is busy misinterpreting the policy, bashing the Fed, and politicizing the decision, the immediate market impact has been muted.
- This time the real test will come via the actual economy, not the speculative commodity buying of the those with a simplistic view of Fed policy.
- The upside catalyst will come when we see some stronger economic reports, as we [have seen in the latest] ISM numbers.
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
The choice facing the leaders of the world’s largest economies is a simple one: Either they engage in massive money printing, or they let the world slip into another great depression. This article examines why they have no choice but to print money, something which will have significant consequences for everyone. Words: 560
This short video – on the sustainability of government spending – should be watched by everyone, including those not yet old enough to vote. It should be shown in every high school and college classroom.
Our civilization would not be able to handle such a transition from an expansionary credit based economy where goods and services were readily available into a paradigm of credit contraction, supply shortages and destitution and this is what is coming. There is no way to prevent it – only to defer it until a later date – and that day will soon be upon us. Words: 590
The outcome of the election of 2012 will [only] determine the rate of speed at which we approach the [financial] cliff [because] neither political alternative is willing to change course, to steer away from the cliff. The cliff is so high that whether we go over it at 200 mph (Obama) or whether we merely slip over the edge (Romney), the end result is the same — fatal for the economy and perhaps our entire political system. It is the fall that will kill us. [This article explains why that is going to be the case.] Words: 1135
The deficits aren’t going to stop anytime soon. The debt mountain will keep growing…Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things….The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for….[and] the Federal Reserve will hear their prayer. When will the economy reach the wall toward which it is headed? Not soon, I believe, but in the meantime there will be plenty of excitement. [Let me explain what I expect to unfold.] Words: 1833
…The US Government and its catastrophic fiscal morass are now viewed by the world as a ‘safe haven’. This would easily qualify for a comedy shtick if it weren’t so serious….[but] the establishment is thrilled with these developments because it helps maintain the status quo of the dollar standard era. However, there are some serious ramifications that few are paying attention to and are getting almost zero coverage from traditional media. [Let me explain what they are.] Words: 1150
With the U.S. election just months off, political pressures will mount to favor fiscal stimulus measures instead of restraint. Such action can only accelerate higher domestic inflation and intensified dollar debasement culminating in a Great Collapse – a hyperinflationary great depression – by 2014. [Let me explain why that is the inevitable outcome.] Words: 2766
Whether our current economic crisis will end with massive inflation or in a deflationary spiral (ultimately, either one results in a Depression) is more than an academic one. It is the single most important variable for near and intermediate term investing success. It is also important in regard to taking actions which can prepare and protect you and your family. [Here is my assessment of what the future outcome will likely be and why.] Words: 1441
Daniel Thornton, an economist at the Federal Reserve Bank of St. Louis, argues that the Fed’s policy of providing liquidity has “enormous potential to increase the money supply,” resulting in what The Wall Street Journal’s Real Time Economics blog calls “an inflation inferno.” [Personally,] I think it’s too soon to make significant changes to a portfolio based on inflation fears. Here’s why. Words: 550
The developed economies of the world have opened the money spigots…[and this] massive money and credit creation is sitting in the banking system like dry tinder just waiting for a spark to set it ablaze. How quickly it happens is anyone’s guess, but once it does we are likely to be enveloped in a worldwide inflation unlike anything before ever witnessed. [Let me explain further.] Words: 625
Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660
The U.S. already has more government debt per capita than the PIIGS (Portugal, Italy, Ireland, Greece and Spain) do and it just keeps getting worse and worse thanks to both political parties. We are on the road to national financial oblivion yet most Americans don’t seem to care. They don’t realize that we have enjoyed the greatest prosperity we will ever see…and that when the debt bubble bursts there is going to be an immense amount of pain. That is a very painful truth, but it is better to come to grips with it now than be blindsided by it later. [Let me explain.] Words: 1140