Sunday, December 30, 2012
Thursday, December 27, 2012
Wednesday, December 26, 2012
Jim Sinclair - words of wisdom...
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Tuesday, December 25, 2012
Monday, December 24, 2012
Dr John on Fed Policy
"The Federal Reserve under Bernanke is like a bad doctor facing a patient with a broken femur. Being both unable and unwilling to restructure the broken bone, he announces that he will keep shoving aspirin down the patient’s throat until the bone heals. Despite virtually no relationship between the injury and the treatment, that femur might eventually heal enough on its own to allow the patient to hobble out of bed. But by then, the patient will need to be treated for liver failure. What’s even more bizarre is that everybody quietly knows this, but as he shoves another handful of aspirin down the patient’s throat, nobody proposes restructuring the broken bone, and they instead stand around helplessly saying “well, ya gotta do somethin’ don’t ya?”"
http://www.hussmanfunds.com/wmc/wmc121224.htm
Saturday, December 22, 2012
Friday, December 21, 2012
Thursday, December 20, 2012
Kyle Bass @AC2012 - The Entanglement
It is an hour long, but, it is Kyle Bass - a must listen...
http://www.youtube.com/watch?v=JUc8-GUC1hY&feature=youtu.be
http://www.youtube.com/watch?v=JUc8-GUC1hY&feature=youtu.be
Tuesday, December 18, 2012
Sunday, December 16, 2012
Eric Scott Hunsader @nanexlic
I have waited 2 years for this: http://www.scribd.com/doc/116761218/CS-HFT-DETECTION … It confirms that someone at SEC is flat out lying to protect #HFT
CS HFT DETECTION
Saturday, December 15, 2012
Friday, December 14, 2012
Thursday, December 13, 2012
Wednesday, December 12, 2012
A bad idea, a good idea?
Rouleur Says:
December 11th, 2012 at 8:18 pm
December 11th, 2012 at 8:18 pm
…when in corporate brainstorming sessions, I frequently hear…”there is no such thing as a bad idea”…errrr…yes, there is…most ideas are bad ideas…why do you think a good idea is a good idea?…it is rare event …now, turning this back to the question at hand…if no ideas are bad ideas, then why should they die, anything is ok, it perpetuates the BS forever?
Tuesday, December 11, 2012
Monday, December 10, 2012
Sunday, December 9, 2012
Saturday, December 8, 2012
Friday, December 7, 2012
Thursday, December 6, 2012
Wednesday, December 5, 2012
Tuesday, December 4, 2012
Neil deGrasse Tyson
Does the Universe have a purpose?
"To assert that the universe has a purpose implies the universe has intent. And intent implies a desired outcome. But who would do the desiring? And what would a desired outcome be? That carbon-based life is inevitable? Or that sentient primates are life’s neurological pinnacle? Are answers to these questions even possible without expressing a profound bias of human sentiment? Of course humans were not around to ask these questions for 99.9999% of cosmic history. So if the purpose of the universe was to create humans then the cosmos was embarrassingly inefficient about it."
"To assert that the universe has a purpose implies the universe has intent. And intent implies a desired outcome. But who would do the desiring? And what would a desired outcome be? That carbon-based life is inevitable? Or that sentient primates are life’s neurological pinnacle? Are answers to these questions even possible without expressing a profound bias of human sentiment? Of course humans were not around to ask these questions for 99.9999% of cosmic history. So if the purpose of the universe was to create humans then the cosmos was embarrassingly inefficient about it."
Monday, December 3, 2012
Sunday, December 2, 2012
Friday, November 30, 2012
Thursday, November 29, 2012
Dr Francois Bellocq connection with Hinault and LeMond
Bellocq was a doctor with a reputation
Bellocq had earned his reputation in the 1970s, when he was team doctor for Peugeot. Those were the days when Maurice de Muer was the unluckiest directeur sportif in Christendom: Jean-Pierre de Mondenard claims that, out of seventy positives between 1970 and 1978, De Muer's riders accounted for twenty-four. ("I can't have eyes in the back of my head to watch my riders twenty-four hours a day," De Muer claimed, in defence.)
In 1976, a Peugeot rider, Rachel Dard, got involved in aconvoluted attempt to cheat a dope control that ultimately saw him racing a train from Dax to Paris in order to destroy evidence of his wrong-doing. When l'Equipe got hold of the story, Dard confessed, and produced a prescription Bellocq had written him for doping products. The biggest problem here was that, at the time, Bellocq wasn't a qualified doctor and shouldn't have been writing prescriptions. The French fed dropped Bellocq from its medical committee.
Bellocq stayed on with Peugeot but went independent in 1979. His client list included the great and the good of cycling, along with a few also rans: Bernard Hinault, Greg LeMond, Robert Millar, Gilbert Duclos-Lassalle, Jean-François Bernard, Ronan Pensec and Pascal Simon were just some of the riders who beat a path to the French doctor's door. In 1987 he was working with Roger Legeay at Z-Peugeot, and he again worked for Legeay, at GAN, shortly before his death in 1993.
Bellocq's speciality was hormone rebalancing therapy. In 1991, he published a book, Sport et Dopage - Le Grande Hypocrisie, which explained his thinking: "I believe that the limits of sports medicine amount to stopping an athlete from digging into his body's resources, and replenishing a body from which professional sport demands so much." That replenishing is where the problem arises.
Over the course of a stage race, a rider's testosterone levels will naturally fall. As will their levels of other hormones, such as cortisone or EPO. Bellocq advocated rebalancing those levels. Whatever the body naturally used and couldn't replace quick enough, well it was permissible to top that up to its natural levels.
In Sport et Dopage, Bellocq explained how he applied his beliefs to Tour riders during his time at Peugeot: "During the three-week Tour de France we proposed a treatment based on small quantities of suprarenal hormones after twelve days of competition. In our opinion the use of corticoids helps delay fatigue in professional riders. It's up to us to help these riders, who in effect are putting their health at risk." (It's probably just a coincidence that, in the 1988 Tour, the Grenoble to Villard de Lans time trial came after twelve days of competition.)
The problems with Bellocq's argument begin when you start to question how you draw the line between topping up to a natural level and over-filling the tank. What, in other words, is the difference between hormone rebalancing and doping? Bellocq, in Sport et Dopage, reached for a response to that question, arguing that the difference was the same as "the difference between the love of a good wine and alcoholism." (What is it with these doctors and their drink analogies? Michele Ferrari compared EPO to orange juice.)
Another failure in Bellocq's argument was that he didn't always know the full consequences of the drugs he administered. Consider the case of Bernard Thévenet, a Peugeot rider in the seventies and one of Bellocq's clients. Nanard won the Tour twice - in 1975 and 1977 - and both victories were shrouded in rumours of doping. Thévenet's testing positive at least three times between 1976 and 1977 didn't help dispel those rumours.
But it's after the 1977 Tour that Thévenet's story becomes relevant: he was hospitalised in 1978, diagnosed as having problems with his adrenal glands. While in hospital, he confessed to a journalist friend that he had doped. He later admitted the same to Pierre Chany at France-Vélo,highlighting the physical cost of his doping: "I've been doped with cortisone for three seasons. The result is visible now: I'm barely able to sit on a bike."
Generally though Bellocq's clients seem to agree with their doctor's theories. Consider, for instance, Bernard Hinault who - interviewed in 1988 for Tonus, a medical magazine - had this to say: "There should be systematic check-ups every month. That way the products that are forbidden now would be allowed, albeit in reasonable quantities. There are some hormones that could be used, no problem, as long as their use was in conjunction with a monthly medical check-up. I agree with Dr François Bellocq, who was my doctor, when it comes to these kinds of treatments."
Philippe Brunel interviewed le blaireau for l'Equipe in 1999 and asked if he favoured hormone rebalancing: "Yes, perhaps, with one condition, that it be strictly controlled. Hormones are given to bed-ridden elderly to regulate mineral levels so that they do not degrade too much, so why not? It's necessary to study the issue, to approach it with caution."
That interview also shows how the logic of hormone rebalancing seems to lead inexorably to blood doping. Here's Hinault on that subject: "[Francesco] Moser made use of auto-transfusion. So he was playing with his own blood. He did no more no less that the Finnish athletes, Lasse Viren and the others. It suffices to take some of one's own blood during the spring when it is rich, hyper-oxygenated, and to re-inject it when one is fatigued. Is that really doping? Maybe not, except if the blood is placed into a machine to re-oxygenate it to the maximum."
Wednesday, November 28, 2012
Jon Lovitz on Barack Obama
He pays 35% federal income tax, 11% state income tax, 7% FICA tax, plus property taxes and city taxes in California.
That's 60% of his income going to taxes. And he's not complaining about paying it. What he is complaining about is Obama saying that the rich aren't paying their fair share.
Sunday, November 25, 2012
Friday, November 23, 2012
Thursday, November 22, 2012
Wednesday, November 21, 2012
Friday, November 16, 2012
Tuesday, November 13, 2012
Head and Shoulder Topping Pattern?
...from Arms Advisory via TBP
http://www.ritholtz.com/blog/2012/11/probably-not-over/#more-85905
Sunday, November 11, 2012
Saturday, November 10, 2012
Friday, November 9, 2012
Report Raises Questions About Central Bank Gold Holdings
Published : November 07th, 2012
818 words - Reading time : 2 - 3 minutes
For years I have cautioned that changes in the ownership of gold held in the vaults of key central banks around the globe may not have been accurately reported. A report issued last month in Germany has once again brought these issues to the fore. In today's environment of rampant money creation and questioning of central bank activities, such uncertainty is bound to spark the curiosity of an increasing number of investors.
Since the depths of the 2008 financial crisis, central banks around the world have increased their gold holdings. As of January of this year, the International Monetary Fund estimated that official reserves had hit a six year high. Most of this growth has come from emerging and developing nations who are estimated to have swollen their gold reserves 25% by weight since 2008. Just a few years ago, India purchased 200 tonnes on offer by the IMF.
This increase may surprise those who have been led to believe that central banks do not traditionally accumulate gold during recessions. The fact that they are doing so could carry an important message for private investors.
The United States, which has gold holdings of some 8,133.5 tonnes as of 2010 (currently valued at some $420 billion), is still by far the largest holder of gold. Perhaps with deep memories of the social scars of its Weimar Republic, Germany is the world's second largest, with some 3,396 tonnes. Oddly, Germany keeps its horde largely abroad with an estimated 66 percent at the New York Federal Reserve and 21 percent at the Bank of England. The gold was moved out of Germany during the Cold War in the 1950s due to concerns of a potential Russian invasion of West Germany.
In late October, Ambrose Evans-Pritchard reported in the UK's Daily Telegraphthat the German Court of Auditors told legislators in a redacted report that the German gold held abroad had 'never been verified physically' and ordered theBundesbank to secure access to the storage sites. The report included the surprise revelation that Germany had slashed the amount of gold held at the Bank of England by two thirds back in 2000 and 2001. At that time, active gold selling by the UK government had apparently made the Germans nervous. Further, Evans-Pritchard reported that the Court called for the repatriation of 150 tonnes of German gold over the next three years to test its weight and quality. The report added fuel to the political movement within Germany to bring back all of its gold reserves. From my perspective, the report also sheds light on three fascinating issues.
First, Germany has increased its gold holdings significantly between 2000 and 2009, more than doubling the percentage of its foreign exchange reserves held in gold. According to 2010 figures of the World Gold Council, Germany's gold reserve now constitutes nearly 74 percent of its foreign exchange reserves. This increase came despite rising storage costs and the massively reduced threat of Russian invasion. What caused Germany to accumulate so much gold? This question should not be lost on investors.
Second, the report details a level of central bank cooperation and trust that staggers the imagination. Allied governments appear to have "trusted" one another with the stewardship of hundreds of billions of dollars worth of unallocated, and in some cases uninventoried, gold bars. This policy borders on financial negligence.
Third, some central banks, such as the Fed, publish the total amount of gold held in their inventories. However, they provide no details as to its ownership. It is well known that some countries keep considerable portions of their bullion reserves with the U.S. Fed and with the Bank of England. But the details are lacking.
From 1999 to 2009 central banks drafted and executed three Central Bank Gold Agreements that have the stated intention of coordinating the sale of gold on a global basis. Many private investors see these agreements as simply an attempt to "demonetize" gold by creating strategic price volatility, and thereby investment uncertainty. The massive trading required to achieve these desired price movements must have resulted in relative changes to central bank holdings. But as banks do not reveal the owners of their gold deposits, the data is unavailable to prove this.
In the coming years, we expect general interest in gold as a store of value to increase while confidence in fiat currencies declines. If this trend is energized by increasing uneasiness over the safety, security, and ownership of the gold held by the world's central banks, much greater volatility could result. If the general breakdown of trust in fiat money is increased suddenly by a sovereign debt crisis like we have seen in Southern Europe, the next action could be a move by central banks to lay more formal claims to their deposits held abroad. Such an eventuality could finally drag the shadowy central bank gold market into the light of day.
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Thursday, November 8, 2012
Wednesday, November 7, 2012
Martin Armstrong - Collapse
Now the West is in the final throes of the collapse in Marxism that began in 1989. The pain emerges during the 23-26 year (2012-1015) followed by the eruption phase 31 years later (2020), the revolutionary phase begins 36-37 years into the event, whereas the total collapse and capitulation of the political economic system typically arrives 42-43 years from the start of the event – 1989 to 2032
Tuesday, November 6, 2012
Monday, November 5, 2012
Sunday, November 4, 2012
Nothing to see here, just move along...
Our friend the German financial journalist Lars Schall calls attention to remarks delivered Thursday by a member of the executive board of the German Bundesbank, Andreas Dombret, at a reception held at the Bundesbank's office in New York in the presence of the president of the Federal Reserve Bank of New York, William Dudley. Dombret's remarks, appended here, confirm that, as GATA often has reported, Germany's gold reserves are held in large part at the New York Fed to facilitate their presumably secret trading, since, as Dombret notes, "Frankfurt is not a gold-trading center."
Dombret's remarks seem meant to pretend that the clamor and controversy over the foreign vaulting and secrecy around the German gold reserves will end quickly, preserving the trust between the Bundesbank and the Federal Reserve.
Excerpts from Remarks by Andreas Dombret
Member of the Executive Board
Deutsche Bundesbank
Reception of the Bundesbank Representative Office, New York
Thursday, November 1, 2012
Member of the Executive Board
Deutsche Bundesbank
Reception of the Bundesbank Representative Office, New York
Thursday, November 1, 2012
... Please let me also comment on the bizarre public discussion we are currently facing in Germany on the safety of our gold deposits outside Germany -- a discussion which is driven by irrational fears.
In this context, I wish to warn against voluntarily adding fuel to the general sense of uncertainty among the German public in times like these by conducting a "phantom debate" on the safety of our gold reserves.
The arguments raised are not really convincing. And I am glad that this is common sense for most Germans. Following the statement by the president of the Federal Court of Auditors in Germany, the discussion is now likely to come to an end -- and it should do so before it causes harm to the excellent relationship between the Bundesbank and the U.S. Fed.
Let's get back to facts and figures: I would like to remind you that our gold reserves are part of the German currency reserves. These were accumulated over time thanks, in part, to Germany's economic boom in the 1950s and 1960s. Germany's growing economic strength, especially its strong external position, resulted in rather large trade account surpluses, most of them acquired in U.S. dollars. At that time, the International Monetary System, known as the Bretton Woods system, was dominated by the U.S. currency. As long as this system was in force, which was up until 1971, the U.S. Fed was obliged to exchange its currency for gold.
Any current account surplus thus resulted in an increase in Germany's gold reserves. This gold was stored in U.S. vaults for obvious reasons. This was not only the case for the gold held by the Bundesbank -- it was, in fact, common practice. By the way: It was the only practical thing to do, since running a trade account deficit meant a decrease in gold stocks.
Thus, we are now looking back at 60 years not only of fruitful cooperation in many fields and international fora, but also of storing gold and trading via the New York Fed. As a matter of fact, it is sensible for us to do so in New York, as Frankfurt is not a gold-trading venue.
Throughout these 60 years we have never encountered the slightest problem, let alone had any doubts concerning the credibility of the Fed. And for this, Bill [Dudley, president of the Federal Reserve Bank of New York], I would like to thank you personally. I am also grateful for your uncomplicated cooperation in so many matters. The Bundesbank will remain the Fed's trusted partner in future, and we will continue to take advantage of the Fed's services by storing some of our currency reserves as gold in New York.
At the same time, you can be assured that we are confident that our gold is in safe hands with you. The days in which Hollywood Germans such as Gerd Frobe, better known as Goldfinger, and East German terrorist Simon Gruber masterminded gold heists in U.S. vaults are long gone. Nobody can seriously imagine scenarios like these, which are reminiscent of a James Bond movie with Goldfinger playing the role of a U.S. Fed accounting clerk.
While gold is important, we have to combat a crisis of confidence in the euro area. This is the task we need to concentrate on. And we will do so.
Saturday, November 3, 2012
Friday, November 2, 2012
Thursday, November 1, 2012
David Rosenberg
When markets drive the economy, cash flow is king
There was a time, not that long ago, when it was the economy that drove asset prices such as equity and real estate valuations. Today, the causation is viewed, even in policy circles, as running in the opposite direction. It is asset prices that now drive the economy.
There was a time, again not that long ago, when the Federal Reserve cut the overnight rate when it wanted to stimulate the economy and stir investor animal spirits. But policy rates have been zero for nearly four years. The Fed has resorted to unconventional measures for more than three years and the latest move towardsopen-ended quantitative easing is the boldest step yet.
The Fed also believes this will work from a growth-revival standpoint. But the facts speak for themselves: the US equity market has rallied 116 per cent from its trough, the Case-Shiller 20-city index suggests that home prices have rebounded 4 per cent from the bottom. And even with that, the pace of economic activity has remained weak ... and is getting weaker.The Fed has completely altered the relationship between stocks and bonds by nurturing an environment of ever deeper negative real interest rates. Therein lies the rub. The economy and earnings are weak, and getting weaker, but the interest rate used to discount the future profits stream keeps getting more and more negative and that, in turn, raises earning expectations. The fact that the S&P dividend yield is triple the yield in the belly of the Treasury curve has also added to the allure of equities, or at least those that have compelling dividend yield, growth and coverage characteristics.
Until 2009, there was absolutely no correlation between the Fed’s balance sheet and the equity market. Now the correlation is at least as deep as it is with corporate earnings and the stock market. I am not convinced all this “wealth effect” is going to be the answer for an economy beset by myriad factors, from labour market stress to re-regulation, from the European recession to a muddled fiscal policy outlook. But there is no question that the Fed can influence asset prices, at least for a while, and that it intends to continue with this policy of perpetual intervention until the unemployment rate gets much lower.
One last point. Ben Bernanke, the Fed chairman, has also said he wants corporate bond yields to come down. While they are at modern-era lows, their “spread” off Treasuries for triple B paper remains attractive.
For the risks involved, especially given corporate balance sheet strength and default rates that have stayed minimal despite the stalled pace of economic activity, this is a part of the capital structure that still looks good.
And remember – this is another part of the market that Mr Bernanke wants to see rally in his quest to promote risk-taking and sanction a further reduction in the overall cost of capital. Again, I’m not sure how far this goes to underpin economic growth but it should help underpin investment returns in this sector.
Perhaps Mr Bernanke et al are deliberately pushing investors into risky assets but the overriding issue is the acceptable level of risk to take on, given the likeliest outcome for the total return potential for any given asset class or security. Being in credit strategies has been a better alternative than cash this year.
As conservative as I have been over the equity market, I have never advocated cash as an asset class. Cash may be the ultimate in capital preservation but it earns you nothing. In a zero return environment – notwithstanding all the financial, economic and geopolitical uncertainties – cash is not king. What is king, however, is cash flow.
Within the equity sector, this means a focus on dividend growth, dividend yield and dividend coverage. This includes Canadian banks and some pipeline exposure. It also includes large-cap US technology, where growth in dividends is second to none.
Another area of the market I like for similar reasons is the precious metals complex, as the supply of paper currency continues to outpace the production of gold, silver and the like and central banks pledge to maintain negative real interest rates. Broadly speaking, gold bullion has significantly outperformed gold mining shares over the past decade.
Recently, though, gold mining equities have finally begun to outperform gold bullion given their attractive valuations, widening profit margins and the fact that management teams are running their gold mining businesses with a much greater focus on cash flow generation. In addition, they are now offering something that is the most compelling feature of the stock market at the current time: a dividend.
David Rosenberg is chief economist and strategist at Gluskin Sheff
Wednesday, October 31, 2012
Monday, October 29, 2012
Bargain-Addicted Investors Ignore Perils of Low Rates
By A. Gary Shilling Oct 28, 2012 5:30 PM CT
The U.K. and the euro zone are in a recession, the U.S. economy is teetering, and a hard landing is unfolding in China. Softness in these three paramount economies is dragging down the rest of the world. So why do most investors seem totally unconcerned over the unfolding global contraction?
The U.K. and the euro zone are in a recession, the U.S. economy is teetering, and a hard landing is unfolding in China. Softness in these three paramount economies is dragging down the rest of the world. So why do most investors seem totally unconcerned over the unfolding global contraction?
This is what I call the Grand Disconnect between weak and weakening economies worldwide, on one hand, and optimistic investors, on the other, who are hooked on massive monetary and fiscal stimulus programs.
“Conditions are so bad that it’s good for my equity portfolio,” the thinking seems to be.
Economies and financial markets have become so dependent on monetary and fiscal bailouts -- and investors so enamored of them -- that all seem to have forgotten the dire circumstances that continue to make these rescues necessary. Many market participants yearn for conditions that are so troubled that central banks and governments, be it in China, the U.S. or Europe, will be spurred to greater easing, with positive implications for stocks.
This almost total reliance on monetary and fiscal stimulus, with little regard for fundamental economic performance -- except to hope that growth will be weak enough to spur more government action -- is a new phenomenon. Until quite recently, there was strong faith in government action, but it was coupled with the belief that such measures would quickly re-establish robust economic growth.
Restoring Growth
I have often been asked what monetary or fiscal actions would rapidly restore economic growth, as if a magic bullet would bring back the salad days of the 1980s and 1990s. My reply was that no such cure existed. The immense monetary and fiscal stimulus in the U.S., including the $1 trillion-plus annual federal-government deficits, the $2.3 trillion in quantitative easing and about $1.5 trillion of excess bank reserves held by the Federal Reserve, probably made the economy and financial markets better off. Nevertheless, slow and now faltering global economic growth indicate that these huge efforts were more than offset by gigantic deleveraging in the private sector. The only thing that would restore normal global growth, I argued, was time -- the five to seven years it will take for deleveraging to be completed.
The search for a magic bullet seems to have been abandoned. The emphasis is now almost solely on the opiate of government stimulus, increasing quantities of which will probably be needed to keep investment addicts satisfied. The recent announcements of quantitative easing by the Fed and the European Central Bank have had a diminishing impact on the Standard and Poor’s 500 Index. And recent market actions suggest that QE3 may be a classic case of buy the rumor, sell the news.
What more can be done? The Fed’s commitment to purchase $40 billion in mortgage-backed securities a month is open-ended, and is scheduled to last until the unemployment rate, now at 7.8 percent, drops to the Fed target range of about 5 percent to 6 percent and there is robust job creation. That will probably take a number of years. Meanwhile, excess bank reserves will continue to increase.
So why did Fed Chairman Ben Bernanke push through the third round of quantitative easing? Sure, the Fed has a dual mandate to promote full employment as well as price stability, but QE3 on top of Operation Twist, QE2 and QE1 and all the Wall Street rescue measures the Fed took in 2008 have pushed the central bank deep into the realm of fiscal policy, compromising its fiercely defended independence. Also, the open-ended and unprecedented nature of QE3 might suggest that Bernanke has lost control.
Security Purchases
Furthermore, the effectiveness of previous rounds of quantitative easing is questionable. Even though the Fed has bought $2.3 trillion of long-term securities, economic growth is marginal at best and unemployment remains very high. Of course, we will never know what would have happened had the Fed not acted. History isn’t a controlled experiment where you can change one baffle in the maze, run the rats through again and see if they take a different path.
Two weeks before the Sept. 13 announcement of QE3, Bernanke delivered a speech in Jackson Hole, Wyoming, defending the Fed’s aggressive policy. He stated that asset purchases until then had reduced the yield on 10-year Treasury notes by 0.8 percent to 1.2 percent and said, “These effects are economically meaningful.” He also noted the increase in stock prices during those quantitative easings. And Bernanke said a Fed study found that QE1 and QE2 had raised output by 3 percent and boosted private payrolls by 2 million “while mitigating deflationary risks.”
Maybe so. What we know for certain is that the Fed’s asset purchases have had a limited effect on the normal financing process. Yes, when the Fed buys Treasuries or mortgage-backed securities, the seller has the proceeds to spend or invest elsewhere. Meanwhile, these funds are deposited in a bank, increasing bank reserves at the Fed. In normal times, these funds are lent and relent by banks in the fractional reserve system, and the net result is that every dollar of reserves turns into about $70 of M2 money supply.
Currently, however, banks are reluctant to lend except to the most creditworthy borrowers, and those people aren’t much interested in borrowing, despite negative real interest rates. As a result, since August 2008, before quantitative easing began, bank reserves have increased by$1.5 trillion and M2 has grown by $2.3 trillion. That’s a 1.5 multiplier, far below the normal 70-fold level. Another way of looking at this is to note the accumulation of excess reserves -- the difference between total and required bank reserves at the Fed -- which now amount to about $1.5 trillion.
Credibility Risk
Another issue that might have given Bernanke pause in pursuing QE3 is the strain it puts on the Fed’s credibility. In his Jackson Hole speech, he said a “potential cost of additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed’s ability to exit smoothly from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability.”
This is a serious risk. Bernanke has stated that the Fed could easily get rid of excess reserves by agreeing, in a 15- minute policy committee phone call, to sell securities from its vast $2.8 trillion portfolio. But let’s imagine the economy five to seven years down the road when deleveraging is completed and real growth moves from about 2 percent a year to its long-run trend of 3 percent to 3.5 percent.
Even then, it would take several years to use excess capacity and labor, as measured by the Commerce Department’s output gap, which is calculated from the difference between current real gross-domestic-product growth and an estimate of the growth potential of the economy.
In any event, when Wall Street gets the slightest hint that the Fed is thinking about removing the excess liquidity, interest rates will surge and the danger of a relapse into a recession will seem very real. Political pressure on the Fed might be intense, and it might be accused of taking away the punch bowl before the party gets started.
Nevertheless, the Fed is much more worried about deflation than inflation. In Jackson Hole, Bernanke said central-bank security purchases were “mitigating deflationary risks.” In deflation, even zero nominal interest rates are positive in real terms, as we have seen repeatedly inJapan.
In deflationary times, to create negative real rates such as those we have now, the central bank can’t reduce the federal funds rate below zero -- although recently, yields for short- term Treasuries, as well as German and Danish government securities, have turned negative. Investors were so eager to hold these securities that they were willing to pay for the privilege. Still, in times of economic weakness, the Fed wants negative real rates to encourage borrowers to borrow. In inflation-adjusted terms, lenders are paying borrowers to take their money.
Zero Rates
Furthermore, in deflationary conditions, the federal funds rate is likely to remain close to zero, where it is at present. But the Fed would like the rate to be high enough so that the central bank can cut it significantly in times of economic weakness as a way to stimulate the economy.
Finally, the Fed fears that deflation, if it becomes chronic as I continue to forecast, will spawn deflationary expectations. Declining prices will encourage buyers to wait for still-lower prices. Their restraint creates excess inventories and unutilized capacity, which push prices lower. That confirms expectations and persuades prospective purchasers to wait for still-lower prices. The result is a self-feeding, downward spiral of prices and economic activity. This, however, hasn’t happened in Japan, which, in the past two decades, has more often experienced deflation than inflation.
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