QE ∞

The Keynesians and Monetarists who have so berated the Federal Reserve and demanded more asset purchases and a nominal GDP target to get GDP level up to the long-term growth trend have essentially got their wish.

This is a radical departure:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.  The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.  These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months.  If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.  In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

I tweeted this earlier in favour of the idea that the Fed would adopt open-ended asset purchases:

Those who didn’t anticipate the possibility of open-ended asset purchases should have looked much more closely at Bernanke’s words at Jackson Hole:

If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of large scale asset purchases may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.

Essentially, this is nominal GDP level targeting. The reason why Bernanke has framed it in terms of lowering unemployment is that his mandate relates to price stability and unemployment, not nominal GDP level. But as Bernanke himself noted in his academic days:

Estimates based on data from more recent years give about a 2% decrease in output for every 1% increase in unemployment.

To those who accept Okun’s Law, raising nominal GDP level and lowering unemployment are effectively the same thing. Bernanke seems to believe unemployment will fall in a (roughly) linear fashion as asset purchases increase. By itself, this is a problematic assumption as the past is not an ideal guide to the future.

Yet more importantly the data shows no real job recovery in the post-2008 quantitatively-eased world. This is the prime-age employment-population ratio:

And even if unemployment falls without triggering large-scale inflation as per the Fed’s design, this is no cure for the significant long-term challenges that America faces.

As I wrote back in November 2011, when nominal GDP targeting was just appearing on the horizon America faces far greater challenges than can be solved with a monetary injection. Financial fragility, moral hazard, energy dependency, resource dependency, deindustrialisation, excessive private debt, crumbling infrastructure, fiscal uncertainty, and a world-policeman complex. The underlying problems are not ones that Bernanke really has power to address.

And how long before rising food prices cause more riots and revolutions? After, all handing over more firepower to speculators tends to result in increased speculation.

Meanwhile, US creditors and dollar-holders (particularly China) would seem from past comments to be deeply unhappy with this decision.

President Hu Jintao:

The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level.

The dollars they accrued will lose purchasing power to every new dollar printed and handed over to the American banks in exchange for mortgage backed securities. The Chinese perspective on this will be that Bernanke is essentially engaging in theft. On the other hand, they should have considered this likelihood before they went about accruing a humungous pile of fiat dollars that can be duplicated at a press of a button. No, matter; China won’t get burnt like this again.

As PBOC official Zhang Jianhua noted:

No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.

Chances of future trade and currency wars between the United States and China seem to be rising as fast as Chinese gold accruals.

44 thoughts on “QE ∞

    • From here, gold goes up.

      I personally think the front that events will play out on is geopolitics. What we are witnessing is the end of the American-led world order, largely for economic reasons. That can come about in various ways.

      I wrote a lot about this earlier this year, look through my archives.

      • I agree and I’ve been reading your commentary and agree 100%. Frankly, I think it’s time for a change. I just hope we don’t all go crazy dealing with the transition. Good luck to us all. nyquil762

        • nyquil – I view the transition as offering a massive opportunity for many in this country, and it’s about time. Our current economic and political systems have locked people with low skills out of much of the gains over the past several decades and has instead rewarded those with connections, credentials and a lowest-common-denominator view of morality and fair play.

          The reset, if I can call it that, will reward those who are best able to produce actual goods and have built human networks based on trust and abaility. I am not talking about going back to a pre-industrial society – I recognize that technology and much of our way of life won’t change so much, but how we compute value, who we admire and respect, and the dignity earned and afforded more simple people will face a significant shift.

          I firmly believe that the strong connection between wealth and competence will emerge. Good luck to us all.

  1. At the beginning of his speech, he actually said, “The US economy has enjoyed price stability since the 1990’s”

    Again, the man is either crazy or a liar. Because nobody is that stupid. Nobody.

    It must also be pointed out that the commenters on CNBC are all starting to sound like “fringe” bloggers. Everybody and their mother was saying buy the markets, buy gold and buy commodities.

    QE4EVA!

    • Yea, but everybody that can’t buy these is going to get screwed.
      If you already have a villa, yacht and substantial financial assets you just change the type of investments you make. OK, whatever you earn is worth less… but it is a fraction of your wealth. For a guy that just finished college (and maybe got in debt to do it) and has no assets this is just going to gauge prices up and purchasing power of wages down. Good luck buying your first apartment in this situation…

      • Actually, i think it’s a great time to be a person right out of college (no assets). Most aren’t in debt enough (hopefully) to be handcuffed by obligations. Recent college graduates will not have developed horrible spending habits like most of us “boomers” (or even the generation x crowd). Hard work and brains will still get people places in this country. nyquil762

  2. “Purchasing” US$40B/mo. in MBS is sheer lunacy, the EXACT opposite that needs to happen. If they do succeed in goosing the housing market into a mini-bubble, it will be 25 year depression instead of the15 year variety.

    This certainly reveals how worried they are about the collapse of Europe.

    It’s all about expanding debt.

  3. @ Aziz: “Essentially, this is nominal GDP level targeting. The reason why Bernanke has framed it in terms of lowering unemployment is that his mandate relates to price stability and unemployment, not nominal GDP level”

    Precisely. Very sneaky. And based on the Jackson Hole meeting statement he does not have a clue. Interest rates are cheap, but nobody is hiring until the election is out of the way. How do you make investment decisions when there is political risk?

    The Chinese must be horrified. I notice they are reserving their fire power and being prudent about stimulus. This goes hand in hand with their perceived fiscal and monetary conservatism. The dawn of a Yuan reserve currency is rapidly approaching!. I will go out on a limb and predict December 2012 for an announcement of a Gold/commodity backed Yuan which is freely floating. This will destroy the USD.

  4. Seems likely the Chinese must have known, to some extent at least, the risk they were taking in accumulating that “humongous” pile of U.S. paper. It wasn’t all that long ago that they were a peasant society, (they still are to a great extent,) and low end manufacturing was the way for them to climb up, and earn that pile of paper when they had very little before.

    I agree with other commenters here that China’s star is rising while America’s seems to be falling. But China has enormous demographic, environmental and other problems and will never be able to feed itself. I wouldn’t count America out yet, despite all her real and growing problems. No one wants to move to China, plenty of people still want to move to America.

    • Mass immigration by wealthy highly intelligent people to the USA will solve the housing crisis in one go, and if they charge a tax on these people to contribute to the infrastructure they are benefitting from, they will assist the deficit. The dynamic infusion will stimulate innovation and the American dream

    • Never be able to feed itself

      Never is a long time. If there’s any country that has a lot of incentives and resources to figure out better food infrastructure technology, it’s China.

  5. Call me a conspiracy theorist but I think the powers that be are creating a new economic world order heading towards a political unity and a world state.

    • It really is not a conspiract. The EU project is considered a worthy project because it bridges nationalities and prevents war. Why wouldn’t be a global goal? We would certainly bridge racial and religious devides. Eventually the internet and global culture becoming homogenous, the political leaders will ask the youth of the future to vote. If the EU citizens enjoy EU travel, and work opportunities why wouldn’t global citizens want that? read Liberalism by Mises. He proposes free trade and labour mobility.

  6. Pingback: QE ∞ [Azizonomics] « Mktgeist blog

  7. Empiricists can’t argue the new QE is good or bad. Eevery member of the FOMC is an empiricist. Empiricism says it’s possible for money printing to create prosperity. A giant (unrepeatable) social experiment is the only way to find out if money printing creates prosperiity. Now they’re running their expiriment. Enjoy empiricists.

    All this money printing is ultimately the result of the universal acceptance of empricism. Empiricism is the problem.

    • Why’re you trying to tie reflationism to empiricism?

      The bottom line is that the reflationists are following their deductions that reflation will work without paying heed to the evidence that reflationism is and continues to be problematic.

      So deductionism can go both ways. I consider a lot of Keynesians and Neoclassicists to be deductionists (closer methodologically to Mises than to me) because they prefer to heed the output of mathematical models to the output of reality.

      • Krugman has already come out to say that QE3 should have been “more stronger”, for example. This is not empiricism, because we’ve never been in this situation before. This is pure deductionism, and he refuses to look at the evidence from multiple countries that show that helicopter drops to banks just don’t have that great an effect on growth.

        • “This is not empiricism, because we’ve never been in this situation”

          You’re confusing hypotheses with deductions. Hypotheses are not determined using deductions. Anything can be a hypothesis. Not everything can be a deduction.

    • QE3 is not a product of the deductive method. Every member of the FOMC is an empiricist. Their statistical models are grounded in empiricism. Their hypothesis is that money printing creates prosperity, and now they are testing their hypothesis with QE3. Social experiments, like QE3, are the product of empiricism.

  8. Pingback: Links: QE and non-QE « Rhymes With Cars & Girls

  9. Some rather interesting links, to my mind at least:

    http://www.macrobusiness.com.au/2012/09/rudd-vs-the-financial-times/

    and, the Numbeo Price/Income and Price/Rent Ratios table here: unsure of its intellectual integrity but curious seeing it nevertheless…

    http://australianpropertyforum.com/topic/9679862/1/

    I again stress the point, is it not totally unbelievable that in – relative global terms – the * medium term* (say 5-10 year period) of the US could actually being to seem more favourable if conditions begin to set right for factories to once again relocate back into the territory which, it must be said, could well be argued to have unleashed this whole era of globalisation which literally has produced more in terms of material prospertiy and decreases in poverty for the whole entire human civilisation than anything ever before seen in record of human history, according with the famous scholar idea of “embedded liberalism (http://www.wto.org/english/forums_e/public_forum_e/ruggie_embedded_liberalism.pdf) Darwin himself said it’s not necessarily the strongest, fastest or smartest that do best, but those who are most adaptable, in other words those who are most flexible…

  10. Interesting link – http://australianpropertyforum.com/topic/9679862/1/ – the Numbeo Price/Income & Price/Rent Ratios table are interesting, but are they reliable? Also, who to believe!? http://www.macrobusiness.com.au/2012/09/rudd-vs-the-financial-times/

    I again stress the point, is it not totally unbelievable that in – relative global terms – the * medium term* (say 5-10 year period) of the US could actually being to seem more favourable if conditions begin to set right for factories to once again relocate back into the territory which, it must be said, could well be argued to have unleashed this whole era of globalisation which literally has produced more in terms of material prospertiy and decreases in poverty for the whole entire human civilisation than anything ever before seen in record of human history, according with the famous scholar idea of “embedded liberalism (http://www.wto.org/english/forums_e/public_forum_e/ruggie_embedded_liberalism.pdf) Darwin himself said it’s not necessarily the strongest, fastest or smartest that do best, but those who are most adaptable, in other words those who are most flexible…

  11. I again stress the point, is it not totally unbelievable that in – relative global terms – the * medium term* (say 5-10 year period) of the US could actually being to seem more favourable if conditions begin to set right for factories to once again relocate back into the territory which, it must be said, could well be argued to have unleashed this whole era of globalisation which literally has produced more in terms of material prospertiy and decreases in poverty for the whole entire human civilisation than anything ever before seen in record of human history, according with the famous scholar idea of “embedded liberalism (http://www.wto.org/english/forums_e/public_forum_e/ruggie_embedded_liberalism.pdf) Darwin himself said it’s not necessarily the strongest, fastest or smartest that do best, but those who are most adaptable, in other words those who are most flexible…

    Just listen to this guy – he is not dumb!

  12. It’s basically become fashionable to deploy reductive reasoning to bash America and just totally ignore everything good about it; I’m not talking about Tea Party people or Ron Paul or basically any of the other ‘little picture’ stuff, but general reality like the US has a giant food bowl, a still amazingly sophisticated spectrum of scholars and a community that remains arguably the most open on Earth, even after accounting in my mind for all the negatives commonly known – all America needs to do is to advertise its good qualities.

  13. Aziz,
    thanks for the post. Been rss’ing your blog since the beggining.

    It’s obvious that something is going on here, the answer is – presidential elections in USA.
    The statistics are being faked, unemployment “falling”, repeated GDP revisions.

    Everyone remembers the debt ceiling increase while back (@14trln.), how big deal that was, how much there was of that in Bloomberg, how all Western mass media was escalating those news, now usa went past 16 trln. and no one even noticed and this is good illustration how mass media is under strong influence and control from the side. Hot news is what right people need them to be. Can you feel the rising temperature in presentation of the things going on in the Middle East? Obvious, something is not right here.

    Like I mentioned earlier, faking the statistics and on contrary introducing additional easing policy doesn’t go together with any logic of an adequate person. I see big changes coming.

    New generation is coming, they are not going to go down with this. I hope for good. I am optimist. I am the new generation.

  14. Pingback: Krugman, Newton & Zombie Banks « azizonomics

  15. Aziz, have you read Currency Wars by Jim Rickards? In his view, trade wars have already begun (they’re just in skirmish mode.) Also just a kickass read in general.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s