QE2 Explained...

[davidsmith0123]

I think he should have chosen someone with more mental horse-power.
*****************
Fast Gunn, Ben Bernanke may be many things, but he is not lacking in mental candle power or, if you must, horse-power.

[Fast Gunn]

Personally, I think we spend way too much on defense and keep increasing it instead of doing what we should and trim it back.

All those monstrous battleships and squadrons of warplanes are expensive as hell and become more expensive each year.

People actually do need health-care, but we don't need to keep increasing spending on the latest and exotic weapons of war, but the generals treat it like a sacred cow that we mustn't touch.

The way the tattered world economy is right now, world leaders should agree to place an immediate moratorium on defense spending and redirect all that money to rebuilding the economy.

We already have more weapons than we need, but our infrastructure is crumbling and we have too many people unemployed.

[oden]

Congress is the mechanism to raise funds, the Federal Reserve stabilizes currency. In my opinion they(the Federal Reserve) are stepping out of bounds and pursuing policy goals instead of their charter. They should be apolitical.

[I B Hankering]

Whereas a little inflation is healthy for the economy, what the Fed is trying to do is dangerous. The Weimar Republic, in post WWI Germany, similarly printed money to pay its debts. In doing so, they destroyed their economy with hyperinflation. “From Mid-1922 to November 1923 hyperinflation raged. Unemployment did disappear, but, the real wages of workers dropped badly. By mid-1923, workers were being paid as often as three times a day. Their wives would meet them, take the money and rush to the shops to exchange it for goods before it devalued further. By this time, however, more often than not, the shops were empty. Storekeepers could not obtain goods or could not do business fast enough to protect their cash receipts. Likewise, farmers soon refused to bring produce into the city in return for worthless paper. Food riots broke out. Parties of workers marched into the countryside to dig up vegetables and to loot the farms. Businesses started to close down and unemployment suddenly soared. Their economy was in free fall.” The Communist and the Nazi movements thrived in the ensuing chaos; ultimately, Hitler gained power, and, well, you know the rest of the story—or at least I hope you know. IMO anybody opposing QE2 is actually being rational and not “anti-American”.

[woodyboyd]

I think everyone needs to see it. They have a little bit wrong with inflation and deflation. When you look at inflation and deflation thanks to Milton Friedman, everyone thinks inflation is always a monetary event, i.e. the government's fault.

That is not the case. Inflation/Deflation has to do with supply and demand of a good or service in relation to the supply and demand of money.

M3 is the best measure of money supply, and the lay public and most of Wall Street would swear the Fed is printing money out the wazoo, but the data shows otherwise, http://www.shadowstats.com/alternate...-supply-charts

Bernanke and the Fed can print all the money that they want, but the real problem is that they cannot control where it goes. Bernanke said that you could control deflation by dropping money from helicopters, but only Congress can actually do that. So Bernanke has to (or thinks he has to) handle the falling money supply, which is a HUGE problem, all on his own. Truthfully, dropping money from helicopters is better than what is going on now, which is basically giving Goldman Sachs taxpayer money.

You'd think that with copper and soy hitting all time highs again that they must be in short supply, but if so, you would be wrong. Copper capacity is now at the highest level we have seen in the last six years at least. See chart at the bottom of this link: http://www.icsg.org/images/stories/p...ls_2010_10.pdf

And the same goes for soybeans, http://www.iptv.org/mtom/story.cfm/lead/1379, "FCStone estimates the U.S. soybean crop at 3.45 billion bushels, with yields averaging 44.9 bushels per acre. That’s just above USDA’s October record forecast of 44.4 bushels per acre."

So with these and most other commodities, supply is way up, demand is still lower than in 2008, but prices are through the roof. The reason for the rising prices then is simply perception that money supply is expanding, and it is not. When commodity prices rise in a climate with less money, demand is going to fall, and even a small drop in demand for a commodity can lead to a parabolic move down in price.

So what we have in essence is the blowing of another bubble by the fed and like the dot com and housing bubbles, this one is not going to end well.

[cucharabill]

Here's another explanation:

http://www.youtube.com/watch?v=ohKQP_wSO9k

Pretty straightforward.

[WTF]

Originally Posted by woodyboyd

So what we have in essence is the blowing of another bubble by the fed and like the dot com and housing bubbles, this one is not going to end well.

Except for Goldman Sachs!

[I B Hankering]

Originally Posted by cucharabill

http://www.youtube.com/watch?v=ohKQP_wSO9k

Pretty straightforward.

That’s a good link; it goes well with this one:

How banks are making money in the recession
http://www.youtube.com/watch?v=cxfMxpB9-Ds&feature=related

Originally Posted by woodyboyd

So with these and most other commodities, supply is way up, demand is still lower than in 2008, but prices are through the roof. The reason for the rising prices then is simply perception that money supply is expanding, and it is not. When commodity prices rise in a climate with less money, demand is going to fall, and even a small drop in demand for a commodity can lead to a parabolic move down in price.

So what we have in essence is the blowing of another bubble by the fed and like the dot com and housing bubbles, this one is not going to end well.

Is it just perception, or is the market anticipating profits? It’s my understanding, that because the Fed is signaling its intent, investors are speculating in the commodities market; thus, driving up prices. In turn, this inflation is not accounted for in government reports that track inflation, since food and fuel costs are not considered.

Since we are discussing rising food costs, here’s another interesting news story

Al Gore Mea Culpa: Support for Corn-Based Ethanol Was a Mistake

http://www.politicsdaily.com/2010/11/23/al-gore-mea-culpa-support-for-corn-based-ethanol-was-a-mistake/?icid=main%7Chtmlws-main-n%7Cdl1%7Csec4_lnk2%7C186075

[Fast Gunn]

Soybeans?

Corn for ethanol?

How did this discussion regarding what the Fed is doing about the economy wander into vegetables?

I don't think Ben Bernanke knows what he's doing, but he sure seems to be getting advice from Goldman Sachs on what to do!

[Texas Contrarian]

The Fed's November 24, 2010 VISA Card Statement

[Fast Gunn]

Now, that is funny!

The flammable model of Ron Paul sounds like a steal at only $900!

. . . There must be a fire sale going on!

[I B Hankering]

Originally Posted by Fast Gunn

Soybeans?

Corn for ethanol?

How did this discussion regarding what the Fed is doing about the economy wander into vegetables?

I don't think Ben Bernanke knows what he's doing, but he sure seems to be getting advice from Goldman Sachs on what to do!

The focus of this topic is to discuss the pros and cons of QE2. Many critics of QE2 suggest that QE2 will cause (is causing) inflation. Critics also associate the recent rise in commodity prices with inflation caused by QE2.

Woodyboyd correctly states that inflation occurs when there are too many dollars chasing too few opportunities. By example, woodyboyd shows, by way of the article he cites, that the increased price for soybeans is not attributable to a production shortfall, i.e., insufficient product to meet demand needs. This then begs the question, “If there is no shortage of product, what then is causing the increase in price?” Could it be QE2 and/or opportunism related to QE2?

Arguably, my input was tangential but nevertheless, IMO, relevant. The article I cite, discusses how yet another misguided-government program—Al Gore’s politically inspired pet project—is in fact hurting most American consumers more than it will ever help them. The article explains how corn based ethanol production is driving up food costs, i.e., corn, beef, dairy, poultry, etc., for everybody. In this sense, it’s yet another an inflationary policy not so unlike QE2. Thanks to Uncle Sam, a select few benefit financially, while the rest of us pay.

[Texas Contrarian]

Originally Posted by I B Hankering

Many critics of QE2 suggest that QE2 will cause (is causing) inflation...

Yes, and this is where I think people need to draw a distinction between inflation (at least the price level as measured by the CPI) and bubble-blowing. For instance, the Fed's extremely expansionary monetary policy from 2001-04 did not result in a sharp general rise in the price level, but it sure blew up a helluva housing bubble.

In my opinion, the route from QE2 to general price inflation may be somewhere between curcuitous and nonexistant, especially in an environment of continuing deleveraging with all the deflationary pressures that implies. But the route to bubble formation is not so indirect!

It might seem mysterious and conterintuitive that we could have experienced a falling money supply (M3). After all, hasn't the Fed pumped out tons of money with almost two years of ZIRP and over $1.5 trillion (with another $600 billion to come soon) added to its balance sheet for all these asset purchases?

Yes, but money is two-dimensional: Quantity and velocity. On the surface, it may seem that supply has been pumped out on a virtually unprecedented scale, but it is not acting like it usually does -- that is, the multiplier effect of fractional reserve banking, among other things, is not working in the usual way. That means that the "velocity" of a very big pile of money is abnormally low. It's sort of a breakdown of the old "quantity theory of money", and that can happen especially in the short run when velocity is low and unstable. Who knows where it will end up over a longer term? That's why I think QE is a little like grabbing a tiger by the tail.

I think the goals of QE are severalfold:

The Fed, by buying up long-term paper, hopes to support a very sick and non-recovering housing market by keeping fixed-rate mortgage interest rates as low as possible. (They're generally priced off spreads over T-note yields.)

The Fed hopes to frustrate investors sick of earning extremely low yields and push them into risk assets such as equities, which would help to reverse some of the negative wealth effect of declining 401k and other personally-owned funds, thereby increasing consumer confidence. We've already seen one obvious problem with this idea -- people are likely to instead take risks on precious metals and commodities, not only driving up consumers' costs of food and fuel, but diverting capital from more productive purposes.

The Fed seeks to support American exporters and reduce our negative trade balances by effecting a de facto dollar devaluation to gain exchange advantage (although both the Fed and Treasury deny this). It has caused severe backlash on the part of several countries, particularly China and Germany.

And one thing that has not been widely reported is that policymakers seem to be in a full-on panic over whether there's a looming collapse in demand for U.S. Treasury issuance. All you would have to see is one undersubscribed Treasury auction in order to generate panic on a par with that of the financial crisis of 2008. The IMF recently estimated that the world's wealthier nations will come to the credit markets for about $11 trillion of new issuance in 2011. Where will the demand come from? Are we just going to become virtually committed to monetizing trillions of dollars more debt?

And when and how will an exit strategy be implemented? I don't believe for a minute that we can just hang out there year after year with an expanding, multi-trillion dollar Federal Reserve balance sheet. It would destabilize the monetary system as never before.

I'm afraid this isn't going to end well.

[Guest050715-1]

Originally Posted by Fast Gunn

Personally, I think we spend way too much on defense and keep increasing it instead of doing what we should and trim it back.

All those monstrous battleships and squadrons of warplanes are expensive as hell and become more expensive each year.

People actually do need health-care, but we don't need to keep increasing spending on the latest and exotic weapons of war, but the generals treat it like a sacred cow that we mustn't touch.

The way the tattered world economy is right now, world leaders should agree to place an immediate moratorium on defense spending and redirect all that money to rebuilding the economy.

We already have more weapons than we need, but our infrastructure is crumbling and we have too many people unemployed.

That is because defense spending is a sacred cow for generals. Just like Obamacare seems to be yours. Everyone has their pets. That is why I’ll bet nothing gets cut actually. You’d think they’d start with pork, but I’ll bet you every bill presented to the President is laden with lard.

I’m not an economist and don’t play one on TV like Ben is, but I’m pretty sure printing money isn’t the way to go. I have a money tree out back, so I’m good.

[Fast Gunn]

You have a lot of interesting ideas, CM, but I just wish you could find a way to end your thesis on a more positive note.

Remember that the world made it through the Great Depression. That was a much more serious threat than this recession and thankfully the recession has officially ended.

The Federal Reserve learned some very painful lessons on what not to do from our painful past.

I will grant that the world is going through some serious financial convulsions at the moment, but I believe we will get it right in the end.

But after reading your apocalyptic post I am going to need a stiff drink!