Category Archives: Quantitative Easing

Federal Reserve blames Congress and President for problems

Marketwatch reports in a story titled Fed says Congress needs better growth plan: Central bankers urge tax, regulatory reforms, pro-trade policy:

Top Federal Reserve officials on Monday said the central bank has done everything it can to help a weak U.S. economy. The rest is up to Congress and the White House.

The Fed is correct here. Not only have they “done their part,” they’ve actually done too much. Our current economic problem is not something the Fed can fix. There’s no shortage of money. There’s no credit freeze. There’s nothing the Fed can do. (So why don’t they stop their quantitative easing?)

The economic problems come from the fiscal side. High taxes and unpredictable government interference has scared away capital and risk taking. The report continues:

In separate speeches, three senior Fed executives said Washington needs to fashion better tax and regulatory policies that encourage businesses to invest in the U.S. and create jobs.

“It is absolutely imperative that the Congress and the president attack the long-run budget problems the nation faces,” St. Louis Federal Reserve President James Bullard said in a speech to Wall Street financial analysts in New York.

“The Federal Reserve cannot and should not do it alone,” he said. “Other policymakers must bear their burden and do their part to encourage more-robust economic growth and establish the conditions for stronger employment.”

In a speech Monday in San Antonio, [Dallas Federal Reserve President Richard] Fisher warned that the Fed’s credibility could be lost if global investors perceive that the U.S. is trying to inflate its way out of debt.

All three said U.S. lawmakers have to figure out ways to boost the nation’s competitiveness and develop better long-term growth policies. They urged Washington to streamline regulations, simplify the U.S. tax code and pursue more free-trade deals to open foreign markets to American goods.

Fisher said fewer businesses want to invest in the U.S. because they can get a better return on their investment in other countries.

“The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed,” Fisher said.

The question remains though: Who is most incompetent? The Federal Reserve? Congress? The President? They are all so totally incompetent that there is only one way out of this mess: the government, that is all three of the above, has to get out of the way. Stop interfering in the economy. Reduce taxes. Reduce spending and return a large portion of the economy back to the free-enterprise system. The economy will not thrive until they do so.

China vs. United States on monetary policy.

China continues its verbal assault on the United States’ quantitative easing plan:

China announced new measures Tuesday to curb inflows of foreign speculative capital, as senior government officials stepped up criticism of excessively loose monetary policies abroad, such as those of the Federal Reserve.

Tuesday’s announcements were accompanied by fresh criticism from Beijing officials of loose monetary policies abroad and consequent risks in emerging markets.

Chinese Finance Minister Xie Xuren blamed excessively loose monetary policies by issuers of major currencies as compounding fiscal and debt risks.

The comments, made during a meeting with a delegation of British trade representatives, including U.K. Chancellor of the Exchequer George Osborne, appeared to be thinly veiled criticism of the Federal Reserve’s latest quantitative easing moves.

Similarly, Chinese Vice Premier Wang Qishan said Tuesday that volatility in global markets was negative for market confidence and that he saw excessively liquidity globally.

Many believe China is an evil communist country that enslaves its people and destroys its environment. While some or all that may be true, China appears to be the good guy when it comes to monetary policy. How is it possible that Communist China understands that creating paper money out of thin air does nothing but create economic distortions while the United States is blind to that reality?

Maybe, instead of having Chinese study economics and business in American universities, we should send some of our student to China to learn economics because they seem to have a better grasp of it.

China warns QE2 could create emerging market bubble

China is giving the United States an economics lesson:

Beijing leveled new criticism at the latest round of quantitative easing unveiled by the Federal Reserve, warning the policy could swamp emerging economies with destabilizing inflows of speculative capital.

“For the U.S. to undertake a second round of quantitative easing at this time we feel is not recognizing the responsibility it should take as a reserve currency issuer, and not taking into account the effect of this excessive liquidity on emerging-market economies,” Vice Finance Minister Zhu Guangyao told reporters at a press conference in Beijing.

Zhu said the first round of quantitative easing by the Fed was justified to help stabilize markets “at the height of the financial crisis.”

However, the second round — dubbed “QE2” in financial circles — comes at a time when economic recovery is beginning to kick in, he said.

“Financial markets are not lacking capital; rather they are lacking confidence in the global economy. Financial institutions have large amounts of cash,” he said.

You know how low you’ve sunk when China, technically the People’s Republic of China ruled by the Communist Party of China, makes more economic sense than the Federal Reserve.

Worldwide backlash against quantitative easing.

Apparently, I’m not the only one concerned about the Fed’s quantitative easing.

Yesterday, I wrote a piece: Quantitative easing. What is it good for? Absolutely nothing!

Today, we get similar sentiments from around the world:

Could this move turn out to be a modern-day Smoot-Hawley? For those of you who are too young to remember, the Smoot–Hawley Tariff Act was passed in 1930, raising tariffs, and being a major contributor to the Great Depression.

Irish bond premiums higher than Greece’s before its bailout. Sovereign debt crisis continues.

Lost in all the news of the election and quantitative easing, the sovereign debt crisis is getting worse. Marketwatch reports:

Investors are dumping bonds in Ireland and Greece in a reprise of the sovereign debt crisis that shook global markets six months ago, as political infighting threatens to stymie budget reforms in the most debt-strapped countries.

On Tuesday, Irish credit costs surged to a record high and bond prices tumbled, after the reported resignation of Jim McDaid, a member of parliament for Ireland’s Fianna Fail party, added to worries the government would fail to muster the votes for planned spending cuts and tax hikes totalling 15 billion euros ($21 billion.)

Credit-default spreads for Irish sovereign debt jumped 22 basis points to 5.20 percentage points, and hit 5.30 percentage points, a record high, said Markit. The gain means it costs about $520,000 a year to buy five years of default insurance for $10 million in Irish government debt.

The surge in Irish credit fears was echoed in higher costs to buy protection on debt of other so-called “PIIGS” countries. Greek CDS widened 15 basis points to 8.45 percentage points, while Portuguese CDS gained 8 basis points to 4.02 percentage points. One basis point is 1/100 of a percentage point.

Ireland’s 10-year bonds tumbled, sending yields up 19 basis points to 7.17% and further widening the gap with benchmark German bonds, which yielded 2.47%.

Yields on 10-year Greek government bonds surged 10 basis points to 10.67%. Selloffs in Greek and Portuguese debt were in full force last week when their governments’ own budget initiatives came into doubt.

Bloomberg takes a more dismal outlook of the situation:

Irish Finance Minister Brian Lenihan may have just one month to stave off an international bailout.

The extra yield that investors demand to hold Irish 10-year bonds over German bunds surged to a record today as Lenihan tries to put together a 2011 budget by Dec. 7 that convinces investors he can get the country’s finances in order.

The premium on Irish bonds has doubled since August and is now wider than the spread on Greek debt four days before it sought a European Union-led bailout in April. That’s putting pressure on Lenihan to cut the deficit and overcome both an economic slump and the rising cost of bailing out the country’s banks.

This is huge, but nobody is talking about it. “The premium on Irish bonds has doubled since August and is now wider than the spread on Greek debt four days before it sought a European Union-led bailout in April.” Ireland can fall apart at any minute but the market and media is totally ignoring it. Forewarned is forearmed.

Quantitative easing. What is it good for? Absolutely nothing!

The Federal Reserve “unveiled plans to purchase $600 billion of Treasurys by the end of June 2011 to revive the economy.

Maybe one of my readers can explain to me how the Federal Reserve buying Treasury bonds will “revive the economy.” I just don’t get it. The Federal Reserve will be doing nothing more than printing Dollar bills and exchanging those Treasuries. Nothing of value will be created. No new goods will appear on the market. No jobs will be created. Simply put, Treasury bonds owned by individuals or corporations will be replaced by Dollar bills.

Owners of Treasury bonds own them because they want to save/invest their money. Buying the bonds from these people won’t convince them that they need to spend what they had been saving. They will simply invest their money elsewhere: in stocks, corporate bonds, overseas, gold, or in cash. No real wealth will be created through this so-called quantitative easing and it will not encourage any wealth-creating activities. It is simply moving money from one pocket (Federal Reserve cash) to another (Treasuries bonds) from the government’s perspective and the converse from Treasuries to cash from the people’s perspective.

The argument is that buying Treasuries will help keep interest rates low. But who benefits from this? Investors/savers will earn less on their deposits/bonds, but creditors (corporations, mortgages) will pay less interest. But those two will largely offset each other. No net benefit.

In the end, there is one entity that has so much debt that it will be the largest beneficiary: the United States government. Instead of paying interest on bonds, the government is choosing to print money instead. On $600 billion of intermediate-term debt yielding between 0.33 (2-year yield) and 2.57 (10-year yield) percent, the government would “save” about $600 million a month. That’s it? With a deficit running at about $125 billion a month, that’s just 0.5% if the deficit. Again, what for?

The Federal Reserve is simply manipulating the economy for no real purpose. Oh yes, it has the purpose of enabling the government to spend with reckless abandon and run large deficits because it now has a ready market for its debt. But to do so, it must print all those Dollars, and that is driving down the value of the Dollar which is very evident by the huge rally in gold since the “Great Recession” began.

The government is destroying OUR long-term prosperity for ITS short-term gain. A good deal for the Federal Reserve and the Treasury Department, but not for you and me.

Second Fed official opposes Quantitative Easing.

In a follow-up to my previous blog post Fed planning trillion dollar Quantitative Easing. Fed official admits it won’t work, another Fed official announced his opposition to the planned trillion Dollar quantitative easing:

Dallas Fed President Richard Fisher, who will get a vote on the policy setting Federal Open Market Committee next year, on Friday made his case against a new round of bond purchases, saying it is not clear the benefits of further quantitative easing outweigh the costs. Fisher, according to a copy of prepared remarks he’s due to deliver in Vancouver, made the case that removing or reducing the tax and regulatory uncertainties is the best way to promote business spending and have firms “release the liquidity they are hoarding and invest it robustly in hiring and training a workforce that will propel the American economy to new levels of prosperity, rendering moot the argument for QE2,” he said. “I consider this to be a far more desirable outcome than being saddled with a bloated Fed balance sheet.”

The key words are IT IS NOT CLEAR THE BENEFITS OF FURTHER QUANTITATIVE EASING OUTWEIGH THE COSTS.

Doesn’t this seem to the motto of our current government? Purchase mortgages, expand the Fed’s balance sheet, and print more money even if there is no evidence that this helps the economy. Enact a trillion Dollar stimulus bill, pass a TARP bill, extend unemployment benefits to two-years and drop the requirement to look for work, and raise taxes on the rich even though logic and history prove that this things also do nothing for the economy.