The FED on Thursday announced two things:
1. QE3: they will be buying mortgage based securities to raise their price and reduce long term interest rates. Unlike the two previous round, there is no fixed amount of purchases set; the FED will do it for as long as it takes to get economy growing.
2. They also announced that they will not stop when the economy starts growing, but will continue for a "considerable time" to make sure that, when the monetary stimulus ends, the economy will continue to grow.
As far as I'm concerned for the Federal Reserve this is a day that will live in infamy because this is the day that the Fed went all in on QE. Instead of reviving the economy, I think it put the final nail in the coffin for the US dollar and with it the entire US economy.
ReplyDeleteBen Bernanke said the he will buy $40B worth of MBS monthly for an indefinite period of time. He also promised to extend "operation twist" through the end of the year. As far as I'm concerned this new policy should be called "operation screw" because if you own American dollars your screwed. If you own bonds your screwed. If you have a savings account your screwed. If your planning to retire on American dollars your screwed.
In addition, the Fed promised to keep interest rates low even after the economic recovery gain traction. In other words its the Fed admitting that they realize that the only reason the economy is going to accelerate or recover is because of the cheap money and that the Fed knows that it can't take the cheap money away because it will simultaneously take the recovery away. So it is an open ended commitment to keep interest rates at zero, however it is not going to be able to keep that commitment. The Fed is saying that it will keep interest rates low until the US gets the job growth it needs.The fact of the matter is that the reason the US is not getting job growth now is because rates are too low. Its because of all of the money that the fed has already printed that the economy is so screwed up that it can't create jobs and printing even more money is not going to solve the problem.
The catalyst for this announcement was the horrific job numbers, not only did the US create fewer then 100,000 jobs but almost as four times left the labor force. Labor force participation rate is lowest since 1981, and if you just focus on males its lowest its been since 1948. The Fed feels like its back is in a corner and it has to act. In fact in the press conference that Bernanke gave in response to a question, he basically said that the fed has one tool and that's purchasing financial assets to drive up asset prices and that the fed is going to use that tool even if it doesn't work the Fed is going to use that tool. In other words the Fed has a hammer and its going to bang everything it sees, even if its not appropriate. Maybe a hammer makes sense when your trying to put a nail into a board, it doesn't make sense if your walking through a china shop. But in other words he's got this hammer and he's going to swing at anything in sight and he thinks its going to create jobs. The only thing it is going to create is inflation.
Of course the Fed denies inflation even though the price of gold was surging over $30 an ounce in reaction to the Feds announcement. That said, silver up about $1.40, oil up $1.00 a barrel, The dollar index hitting new lows for the move.
In fact Bernanke started off his press conference by saying that the Fed printing money and buying bonds was not the same thing as the government spending money. Now what is the difference according to Ben Bernanke between spending money and buying bonds. Well Bernanke said that since the Fed is not buying goods that it doesn't count as spending. What do you mean? If you spend money on bonds your still spending. Just because your not buying an actual product , your buying a financial asset your still spending. Your spending money to buy a financial asset.
DeleteNow the Fed went on also to say it's not really spending because whatever financial asset it buys its going to turn around and sell it back into the market when it unwinds the policy. YEAH RIGHT!!! How is the Fed going to sell all of these bonds? The Fed is the only buyer. Without the Fed nobody in their right mind is going to buy, who's going to want to buy when the fed wants to sell? Who's going to step in front of that freight train? who's going to bid for mortgages when the fed is trying to unload that it owns? Nobody. In other words the Fed has checked in to the roach motel of monetary policy. It can check in but it cant check out. It can expand its balance sheet but never shrink it. So the Fed is spending money. It is spending it on financial assets and in fact the goal of the fed is to make those assets rise in price.
This is the craziest part about it and its almost like a fantasy or in a dream because its impossible for me to actually believe that this is actually happening. But this is the plan that Ben Bernanke has. Ben Bernanke's plan to revive the US economy and create jobs is to inflate another housing bubble. That's it that's what the Feds got, that's what it came up with. As if the last housing bubble worked out so well for the economy that the fed wants an encore.
Think about it, in the last housing bubble it was the government guaranteeing the mortgages but you still had the private sector owning a lot of the mortgages although with gov't guarantees. see now they are going one up, not only is the gov't guaranteeing the mortgages, the gov't is owning the mortgages. Basically the US new monetary policy for economic revival is for the federal reserve to print money and loan it to Americans at ultra low rates so they can go out and buy houses. And in the process push up housing prices so Americans go on a consumption binge and spend all sorts of borrowed money on imported products and somehow all of this is going to create employment and its not going to end in complete disaster just like the last time the Fed tried to create a housing bubble to stimulate the economy.
Now talk about insanity, talking about doing the same thing over again and expecting a different result.