Junkie Recovery

A bad jobs report that left headline unemployment above 8% — and much worse when we dig under the surface and see that the real rate is at least 11.7%, if not 14.7% or an even higher figure when we take into account those who have given up looking and claimed disability — has made QE3 seem like an inevitability for many analysts.


U.S. Treasuries rallied on Friday after a weaker-than-expected August U.S. jobs report boosted hopes that the Federal Reserve would buy more bonds to help shift the economy into a gear that could create higher employment.

Goldman Sachs:

We now anticipate that the FOMC will announce a return to unsterilized asset purchases (QE3), mainly agency mortgage-backed securities but potentially including Treasury securities, at its September 12-13 FOMC meeting. We previously forecasted QE3 in December or early 2013. We continue to expect a lengthening of the FOMC’s forward guidance for the first hike in the funds rate from “late 2014” to mid-2015 or beyond.

Jim Rickards:

Fed easing on Sept 13th is a done deal.

Nouriel Roubini:

Quite dismal employment report confirming anemic US economic growth. QE3 is only a matter of when not whether, most likely in December.

Gold has shot up, too, the way it has done multiple times when the market has sensed further easing:

The thing I can’t get my head around, though, is why the Federal Reserve are even considering a continuation of quantitative easing. Here’s why:

If the point of the earlier rounds of quantitative easing was to ease lending conditions by giving the financial system a liquidity cushion, then quantitative easing failed because the financial system already has a huge and historically unprecedented liquidity cushion, and lending remains depressed. Why would even more easing ease lending conditions when the financial sector is already sitting on a massive cushion of liquidity?

If the point of the earlier rounds of quantitative easing was to discourage the holding of treasuries and other “safe” assets (I wouldn’t call treasuries a safe asset at all, but that’s another story for another day) and encourage risk taking, then quantitative easing failed because the financial sector is piling into treasuries (and anything else the Fed intends to buy at a price floor) in the hope of flipping assetsto the Fed balance sheet and eking out a profit.

If the point of quantitative easing was to provide enough  liquidity to keep the massive, earth-shatteringly large debt load serviceable, then quantitative easing succeeded — but the “success” of sustaining the crippling debt load is that it remains a huge burden weighing down on the economy like a tonne of bricks.  This “success” has turned markets into junkies, increasingly dependent on central bank liquidity injections. After QE3 will come more and more and more easing until the market has either successfully managed to deleverage to a sustainable level (and Japan’s total debt level as a percentage of GDP remains higher than it was in 1991, even after 20 years of painful deleveraging — so there is no guarantee whatever that this will occur any time soon), or until central banks give up and let markets liquidate. Quantitative easing’s “success” has been a junkie recovery and a zombie market.

As I see it, the West’s economic depression is being directly caused by an excessive total debt burden — just as Japan’s has been for twenty years; the bust occurred on the back of a huge outgrowth of debt and coincided with the beginning of a painful new era of deleveraging. And the central bank response has been to preserve the debt burden, thus perpetuating the problems rather than allowing them to clear in a short burst of deflationary liquidation as was the norm in the 18th and 19th centuries.

Central banks have been given ample opportunity to demonstrate the effectiveness of reflationism. And yet economic activity remains depressed both in the West and Japan.

39 thoughts on “Junkie Recovery

  1. While not an economist or banker, as a veteran investor I, regrettably, can find no error or weakness in this Azizonomics analysis and conclusion. What can/should governments, central banks, and investors do? And what are probable outcomes resulting from their action/inaction?

    • Personally, I wish central bankers and governments had let markets clear in 2008. Bailouts were a big mistake. Now, I wish they would work out a way to get the debt load down faster, reduce the debt.

      As for investors, you can still make money. But the kind of gains we saw in the 80s and 90s seem a long way away.

      • Agricultural Land. My land has doubled in 3 years. And you can at least eat the produce of land. And no one can steal it (Unless the Government does).

  2. In this rather profound chat a wise American professor actually predicts the emergence of high frequency trading in 1993

    • from 38 minutes you see a profound reaction by the Professor. He basic body language suggests – “why am I here talking this to these people”. And that was 1993. I shudder to think his thoughts now.

      43 :”banalisation is a way to reduce complexity”

      The movie “Idiocracy” is very prescient.

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  4. Since 2007, Fed’s balance sheet went from 900bn to 2.9trn = 2trn. Excess reserves, as you correctly point out, went from 0 to 1.5trn. Hence Fed only managed to pump meager 500bn into the economy. Debt outstanding by ABS issuers alone declined by 5x as much (from 4.5 to 2 trn). But that’s not want the Fed wants anyways. I simply wants to allow the Federal government to continue to run large deficits financed at close-to-zero interest rates. The US economy has reached the limit in terms of how much total debt (households + corporations + government) the economy can bear, and the Fed, in cahoots with government, still wants to force-feed it more debt. Because once total debt declines, it triggers severe recessions.

  5. Goldman: “We previously forecasted QE3 in December or early 2013”
    Roubini: “QE3 is only a matter of when not whether, most likely in December”

    With the elections out of the way QE3 is a certainty. Benanke won’t politicise QE3. He will just jawbone until then. The markets have “Melted” up without it. So why announce QE3.

    This reminds me of the Greenspan Jawbone era. Everybody hangs on deciphering words and not company fundamentals.

    As I have previously forecast. USD and Treasury collapse in December. QE3 announcement will be the icing on the cake for China.

    The Chinese are already seeing their Euros fade away. “Big bazooka” will be met with a “Sino Missile”. They already have stockpiles of commodities and gold especially to back their currency. And most of the worlds manufacturing capability and human capital. I can not buy anything that is not Chinese made. Although I do see Bangladesh T Shirts flooding the clothes shops. The Chinese did this 30 years ago, so are losing some comparative advantage.

  6. In a system where debt is money and paying the interest on the overall debt is THE name of the game, the Fed’s policies will always support an increase in the supply of debt [money] as well as keeping interest rates at manageable minimum.

    The purpose of QE was never to, “help the economy.”

  7. I finally read Jim Rickards’ “Currency Wars.” I recommend it, but feel that for many here, it will just be going over already known material.

    To answer your questuion.

    Bernanke was hired by the the dipshit bankers for one reason, to protect their asses and allow them to keep their loot. There is no other reason.

    Maybe Bernanke truely believes in the shit coming out of his mouth, but at this juncture, he is either an idiot or bat-shit crazy.

    Take your pick

    PS “Its a demand problem. We need to stimulate demand!” Said the UC Berkeley Econ professor making $200,000 a year.

    PSS The UC Berkeley grad schools just raised fall tuition for professional degrees (i.e. non teaching programs like Arch and MBA) by 50%. No inflation here. Look the other way! Don’t mind us out here in the Bay Area. We just went through 2 MAJOR asset bubbles in 10 years, I think we are more then able to go through 2 or 3 more and still pay $16 for a martini (that cost the bar $.75 to make)((It was made from organic vodka, distilled by naked hobbits and flavored with humming bird droppings!))

    Oh, one last thing, the Real Estate market in San Francisco is again going fucking bonkers. I know two sellers, one house never even made to market and the seller got more then what they were asking for.($50,000) The other seller had……………………..wait for it……………………………………..a little longer……………………………..10 bids on their house in one weekend.

    I’m thinking of finally breaking down and buying some gold. I don’t want to, but there is just too much crazy out there.

    • I haven’t bought any since $1100 or $1200, but yeah. I like your rationale. It will continue to absorb easing.

      Bernanke was hired by the the dipshit bankers for one reason, to protect their asses and allow them to keep their loot. There is no other reason.

      Bankers as a general class seem to (in aggregate) want global Japan — no liquidation, little devaluation of their credit market assets. (And of course no criminal charges for wrecking the global economy). And Bernanke seems to be delivering, sadly. I don’t think he intends global Japan — he is just trying to balance competing interests.

    • I came a little late but bought at 1590-1610 AUD. I don’t like buying when parabolic, but it seems to be ramping up hard now. So be careful.

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    • John S,

      I believe that there is a widespread misconception regarding excess reserves. Lowering the rate paid on excess reserves will not have a significant impact on bank lending, which is behavioral. In order to fully appreciate how this is so, you need to understand the structure of the Fed’s balance sheet and what determines the overall size of the monetary base. I encourage you to read this article from the NY Fed addressing this very topic:


      Furthermore and as Mike Shedlock notes, in fiat credit-based economies, lending comes first, reserves come second. Shedlock addresses this issue here:


      • i don’t think any CEO would borrow to fund acquisitions until after the elections. Until then, cash is sitting in the balance sheets. I think companies should return excess cash as dividends, but CEO’s like to empire build.

        Investment is stagnant because of the election cycle. Make election 8 years, so that they don’t precipitate boom bust scenarios. It will make people think harder about the policies of the Party they are voting for,

      • Cheers for the links, I’m new to this and still trying to wrap my head around basic concepts.

        Couple of questions:
        1. If interest on excess reserves doesn’t affect the monetary base much at all, why pay them? Do they have a positive or deleterious effect, in your opinion?

        2. What is your opinion of QE3? Helpful, harmful, or will have no effect?

        • John S,

          Paying interest on excess reserves serves as kind of a slow, back door recapitalization of the banking sector over time. Additionally, maintaining a 0.25% interest rate on these funds is likely preventing short-term yields from going into negative territory – a very serious potential problem for the US money market industry.

          As for QE3, my honest opinion is that it serves no purpose in terms of addressing structural problems in the economy. Yes, it will serve as a boost to asset prices, but that’s about it. Until the issue of private sector debt is seriously addressed (debt forgiveness and write-downs), you’re not going to see a return to growth and average to above-average (permanent) employment.

          It seems to me that the preferred course of action is inflation….

  9. This is how you kick start an economy.


    Obama should have done this 4 years ago. When he did not I knew he would fail.

    It is the economy you amateur!

    When business see the government returning taxes back into jobs they can TENDER for, they normally hire, gear up and invest in anticipation of getting a contract.

    It does not matter how low interest rates are. When business anticipate the results of an election, or a Government that changes policy, thy will hold off on investment and job creation.

    I always believed the commodity boom would continue as China secretly stockpiled. I think they are holding off while QE cash is bidding up commodities. What the market panic and offload, while China buys ups.

    Hitler did the same thing during Reich 1.0’s economic recovery. It worked quite well.

    China does copy things that do work.

    • “Obama should have done this 4 years ago. When he did not I knew he would fail”

      …he didn’t fail. He is one of satans’ minions, or if you are one of those who worship lucifer.. no matter they are the same…he has done exactly what every other U.S. president, from the beginning has done, according to satans plan. There is no amount of gold or silver that will save planet earth, OR those who have turned their backs on HIM.. God knows what His enemies have planned, and He is one step ahead of ‘them’. If you look beyond the imminent monetary crash, you would be able to ‘see’ the future. But I waste my breath.

      • God is too busy with the building of the Universe. Did he not say let “there be light”?

        Stars are being born every second. He created and left us alone to our devices. We have 5 Billion years to figure out how to escape to another Solar system with a habitable planet.

        Lets make him proud of his creation.


        • @ Rojek:

          God is too busy with the building of the Universe. Did he not say let “there be light”?

          What does that have to do with anything???????

          You obviously don’t know HIS power. He’s NEVER too busy to keep tabs on HIS mortal enemies.. ya just nevah know when your time is up… He is the only ONE who controls life.

          If you haven’t noticed lately, HE is in absolute control of destroying this evil place, along with all those disobedient ‘lovers of evil’ who were thrown down here to disobey HIM some more..He made sure they didn’t ‘escape’ the confines of HIS perimeters by placing the Ionsphere around the outer atmosphere of this planet.. NO ONE has gone out of this sphere.. or the band would have been torn and the earth/inhabitants would have fried from the suns radiation. Don’t you fret about ‘billions of years, Rojek.. the only place that happens is in Heaven. This is HELL, and never forget that… oh yes.. you already know that. I know God intimately, and it’s obvious you like to mock truth.. Gods anger burns against mockers/scorners, on the same level as liars/murderers, rapists and sodomites. He knows their every move. No, GOD can handle it all, just because you can’t understand the Omnipresence of Him, doesn’t mean a dogs wag to Him. He could care less about your opinion…. about anything. God is GOD, Creator of everything,….. and without His permission, there is nothing. Not even a remembrance. Certainly nothing this world loves so much. It will ALL be in ashes. Forever.

    • Buddy: Economists, degreed as such or not, ought to be able to generalize where experience shows that we “get the most bang (long-range economic growth) for the buck”. But I can shed some light on the here (U.S.) and now.

      Generally, government cannot CREATE growth, but, as you illustrate, it can sure as hell STOP destroying jobs and obstructing new ones by unnecessary deficits/debt, regulation and taxing — not to mention Obama’s deliberately blocking domestic fossil energy development, giving donors “crony capitalism” grants and unsecured loans, empowering union-boss excesses, supporting Wall Street’s manipulations, etc. etc.

      In 2008 few knew of Obama’s college lectures lauding his mentor and public policy role model, U.S. Communist Saul Alinsky’s, “Everything we (Communists, radicals) do, we do for POWER!” He still follows it — governing for POWER, not helping people, not compassion, not civil rights, not racial or gender equality, not strengthening families. Maybe Obama believes that Marx’s “dictatorship of* the masses” will “wither away” as future generations outgrow the poison of capitalism; but his actions as president reveal that he assuredly believes in the dictatorship!

      * Whereas Marx may have meant “of” to mean “by”, Lenin, Stalin, Mao, et al made it unmistakably “of” as in “masters are in control of slaves”. Obama’s narcissism and closed mind assure that he sides with the Communist dictators, at least as long as he gets to be the dictator.

      • May I add to Obama’s governing criteria: Like the Democratic Party ever since it was “taken over by gangsters” under Hillary and Bill, the rule is, “Whatever we can get away with!”

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  11. “the financial system already has a huge and historically unprecedented liquidity cushion”

    NO, The principle problem with the payment of interest on reserves is that @.25%, excess reserve balances (1) absorb existing savings from within the commercial banking system (freezing the flow of loan-funds & the transactions velocity of money) & (2) attract voluntary savings from the non-banks & shadow banks (exerting a contractionary (negative rate-of-change) on the supply of, & turnover in, loan-funds.

    While a policy rate change may not decrease the volume of excess reserves, it will stimulate the banks to invest in securities (if there are no creditworthy consumers & businesses seeking new loans). In the same way the extension of loans by the commercial banks causes an increase in the total deposits in the system, the purchase of investments by the banks proceeds pari passu (with equal pace) with the creation of credit. As long as the sellers of the securities are not commercial or Reserve banks, & no bonds are called or mature, new bank deposits will be created (as the CBs exchange them for earning assets).

    Cutting the Keynesian inspired policy rate injects new liquidity (the “velocity of collateral”) into the short-term money market (reducing haircuts, decreasing maturity mis-matches, adds funding sources, increases the quality of collateral offered & reduces collateral requirements, minimizes counterparties’ credit default risks, raises asset values & lowers forced sales, i.e., generally thaws the financial markets).

    Cutting the policy rate encourages the flow of loan-funds through the non-banks (reversing dis-intermediation). And equally important, lending by the non-banks is not inflationary, ceteris paribus (i.e., between borrowers & savers). Contrariwise, (1) lending by the commercial banks is inflationary & (2) if voluntary savings aren’t spent/invested, then contractionary forces will develop.

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