Home » Monetary policy » A Sign of Things to Come?

A Sign of Things to Come?

by John Rubino on August 11, 2010 · 11 comments

This isn’t how it normally goes.

For the past couple of decades — that is, during the parabolic phase of the global credit bubble — the financial markets have responded to US Fed announcements of easier money like kids whose daddy has promised them a trip to Disneyland. The euphoria doesn’t always last, but the initial reaction is usually a credulous round of applause and reflexive buying of risk assets. Go back through the 2008-2009 bear market and you’ll see that even when the world seemed to be falling apart, a Bernanke speech or a discount rate cut was good for a quick pop in stock prices.

Which makes the past couple of days remarkable. The Fed promises more quantitative easing — this time via increased buying of US Treasuries — and instead of popping, the markets finish the day lower and open the following day down hard.

Could investors have finally figured out that they’re being played by the world’s monetary authorities, and that our growing mountain of debt makes a painless fix impossible? Maybe, but I’ll go out on a limb and say no. The problem with this latest stimulus program is that it isn’t seen as big enough to offset the slowdown that makes it necessary. The market is just waiting for the main course.

The scam that is fiat currency will continue as long as those currencies are in demand. While the US, Europe, and Japan can still borrow money, they’ll continue to do so, and continue to announce ever-larger stimulus programs aimed at counteracting the mass liquidation of private debt.

So there’s more coming. Much more. As the blog Pragmatic Capitalist explains, the “helicopter money” phase of hasn’t even started.

There is perhaps, no greater misunderstanding in the investment world today than the topic of quantitative easing. After all, it sounds so fancy, strange and complex. But in reality, it is quite a simple operation. JJ Lando, a bond trader at Goldman Sachs, has eloquently described QE:

“In QE, aside from its usual record keeping activities, the Fed converts overnight reserves into treasuries, forcing the private sector out of its savings and into cash. This is just a large-scale version of the coupon-passes it needed to do all along. Again, they force people out of treasuries and into cash and reserves.”

Some investors prefer to call it “money printing” or “stimulative monetary policy”. Both are misleading and the latter is particularly misleading in the current market environment. First of all, the Fed doesn’t actually “print” anything when it initiates its QE policy. The Fed simply electronically swaps an asset with the private sector. In most cases it swaps deposits with an interest bearing asset. They’re not “printing money” or dropping money from helicopters as many economists and pundits would have you believe. It is merely an asset swap.

…No, no – Mr. Bernanke hasn’t failed. He just hasn’t tried hard enough….

Next year’s stimulus plan will feature a panicked federal government buying assets outright, for above-market prices, with newly created dollars. That’s when we find out just how gullible the financial markets really are.

  • Smitty

    When this party if finally over, Robert Prechter is going to look like a Polyanna…………it’s going to be UGLY!!!!!!!

  • Steve Jackson

    Would Rubino kindly do us all a favor? What “assets” does the Federal Reserve have to “swap”? Here on Main Street, we still call it – printing money out of thin air.

  • JT

    Japan managed to fight off a systemic crash/collapse of their economy for twenty years and that has been accomplished without controlling the world’s reserve currency. For two decades they’ve had high unemployment, stagnant wages, a slowly deflating housing market, and a flat stock market. The US can expect to fend off the crash all of the fear mongers are calling for but don’t expect much more than a “lost decade” performance over here for years to come. It seems fairly safe to say we’ll be muddling through for many years as we work through the mountain of debt that began with Reagan and expanded exponentially until the final “pop” in 2007.

  • Kahn

    One MAJOR difference between Japan, and the US.
    Japanese citizens THEN in their Prime, had a savings rate of 20%.
    Until the last two years, the US rate of public savings was around Zero.
    So, for two years, we have Panicked, and now that rate is around 5-6%.
    Also, the Japanese are a Xenophobic society.The US is as diverse as the galaxy, which will not bode well for us, as things continue to get rougher.
    As we know they will………there is no easy way out of this,and cutting off welfare, and feebies, will not sit well with third and fourth Gen wefare families.
    Bernake is to put it mildly, out of bullets.
    Soon, the other Soverigns, will start cashing out…..of the USD, and Treasuries, and Bonds.
    When that happens, look out.

  • David Nix

    Yeah, I saw the blurb in the news about the Fed buying unsold T-Bills. Chris Martenson deliberately stays away from religion, but the Hand of God is at work. Sometime before 2015 the money system will be broken and replaced.

    Every 50 years is a Grand Jubilee, requiring the forgiveness of debts and land mortgages. The requirements of the Old Testament did not go away. Jesus said He fulfilled the Law, not abolished it. The Grand Jubilee fell on the day the Stock Market fell 777.7 points. If you go back in history you will clearly see the Jubilee requirements being enforced by God on an unwilling people. 1958 was civil rights, 1908 was the money system again, 1858 was chattel slavery, 1808 was about religious and personal freedom (Napoleon attempting world conquest). It seems to take 7 years each time for things to get sorted out. Since I am old, I probably won’t have to go through this again in my lifetime.

    Obama is president 44. That number signifies “judgment of the world” 45 signifies ‘preservation.’ Whoever succeeds him will fix things.

    The world is not going to end, but it apparently will be a rough ride. 2011 is the 400th anniversary of the Bible in the English language. 400 is the number of years of the captivity of Israel in Eqypt. Obama evens looks like the Pharoah so this should be fun if you have that sort of sense of humor.

  • Bruce C.

    My only stock market investments are in inverse ETFs so I’m pleased to see that some sanity is back, temporary though it may be.

    J.R. doubts that investors have finally realized that a painless resolution of the national debt is not possible, and reckons their disappointment is because the “stimulus” proposed was not big enough. He may be right, but I have a slightly different take. Maybe investors think that its the wrong kind of stimulus. They may have figured out that the FED’s proposed stimulus plan (the buying of longer-term Treasuries with proceeds from its mortgage bonds) does nothing to address the real economic problems: consumers’ resistance to borrow, looming tax heights, ever-increasing regulations and business costs, lack of demand, lack of jobs, decreasing incomes, increasing demands for entitlements, the falling dollar and price increases for commodities.

    I’m probably giving them too much credit too. We shall see if the market continues to sell off or if another myopic view takes hold (corporations have “tons of cash”, dividends are up!, global demand now trumps domestic demand, stocks are “dirt cheap”, when things seem the gloomiest it’s the best time to buy, business always finds a way to make a buck no matter what Washington does, etc.)

    P.S. JJ Lando’s explanation of QE is probably the most convoluted and LEAST eloquent I’ve ever read. Who wrote that article?

    Anyway, Steve Jackson, your right to be confused. Lando’s FED “asset” is actually a debenture/debt (i.e., Treasury bond or a Federal Reserve Note) – the opposite, unless your a banker in which you think of interest payments as income/”an asset”. Furthermore, QE CAN result in “money printing” in the event that people en masse demand physical dollars by taking their money out of the banks. Physical currency would have to be printed to supply it. That would trump any kind of electronic digital games.

  • emma

    If gold goes up then the economy goes down. OH OH!!!

    I dont think there is an economic recovery coming. have a look at the guy who predicted the 2008 crash. He has been spot on with all this and it is very scary!!!! video => http://www.youtube.com/watch?v=gn6kS4l2yFM

  • http://e-watchman.com Robert King

    “next year’s stimulus plan…” There is no guarantee that there will even be a next year.

  • Brad Thrasher

    If it creates a job, it’s stimulus. Anything else is a gimmick.

    That’s all you need to know about stimulus and QE.

  • Lewis Forro

    There is nothing eloquent or understandable about Goldman-Sachs’ Mr. JJ Landro’s description of quantitative easing. His explanation is just more nonsensical double talk that you always see being bandied about on financial websites. I know governments can “print money” out of thin air. The ancient Roman emperors sort of did it by debasing their silver coins 1500 years ago. Weimar Germany did it big time in the 1920s. Zimbabwe has been doing it for years. Various Latin American governments (most notably Argentina, I guess) have done it over the years. I honestly would like to know the actual mechanics of how governments do this but the geeks and gnomes who work at Goldman-Sachs and Mr. Rubino aren’t able to explain it in plain English for me. If anybody out there knows of a lucid, straightforward article on this topic that is written for the layman, please email me the link to it to my email address below, I would appreciate it.

    Lewis Forro

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