The Scary Math Behind The Mechanics Of QE3, And Why Bernanke's Hands May Be Tied

The Krugman's of the world may desire the bazooka, but Uncle Sam may not have enough ammo.  Instead of purchasing US Treasuries and mortgage-backed securities, maybe the Bernanke can create a market for beanie baby reverse repo's.


http://www.zerohedge.com/news/scary-math-behind-mechanics-qe3-and-why-bernankes-hands-may-be-tied

Gold, Jim Grant, Bernanke, Draghi & A Collapse In Confidence

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/8/27_Gold%2C_Jim_Grant%2C_Bernanke%2C_Draghi_%26_A_Collapse_In_Confidence.html

Stephen Roach: “The Fed is flailing..."

http://bloom.bg/Mm5Cwu

Fleckenstein - Fed Takes Half Step, Will Be Forced to Act Again

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/6/20_Fleckenstein_-_Fed_Takes_Half_Step%2C_Will_Be_Forced_to_Act_Again.html

Diminishing returns on monetary easing

With everybody closely watching the FOMC on whether they re-institute another round of QE and/or Operation Twist, I think it's instructive to examine the frequency of easing.  QE 1 was launched in March 2009 to stem the collapse on Wall Street.  QE 2 was launched in November 2010 (the Fed announced it in August 2010).  Operation Twist was initiated in October 2011.

edit:  As I type this, Operation Twist has been extended from June 30 to December 31, 2012. Short-term interest rates will also continue to be pinned to 0% until 2014.

Based on the timeline of monetary easing (i.e. money printing), the law of diminishing returns is in full effect--and that includes its effect on propping up asset markets.  The period between QE 1 and QE 2 was 20 months, and the period between QE 2 and Operation Twist 1 was 11 months.  The period between Operation Twist 1 and Operation Twist is 8 months.  It appears markets need more sugar, more frequently to maintain its highs.

Previous announcements of easing caused markets to rally sharply.  With the latest announcement, it appears markets have already priced it in.  Printing money out of thin air seems to be dampening the wealth effect--or at least is becoming less and less effective.

Of course, the counter argument is that the economy is stronger now and doesn't need more sugar--it just needs an extension of current monetary policies.  I believe this view is Polyannish, as the world economy is still teetering on the verge of another financial collapse.

The Fed also downplays the desired outcome of elevating markets, but that easing is more intended to cap interest rates to stimulate the economy.  Given rates are already at historical lows, this justification seems flimsy.  The Fed is pushing on a string.

My views are debatable, but what is intractable is the balance sheet of the US continues to balloon.  This does not bode well for the financial condition of the US, especially if inflation ends its apparent dormancy.  At that point, a rising interest rate environment would be a death knell for the US economy.

Fed Will Likely Weigh Rosengren’s Call For Stimulus

I'll say it once again in case there is any misunderstanding.  Multiple rounds of quantitative easing (QE) are guaranteed, despite multiple rounds of previous declarations on economic "green shoots."  The cheerleaders on Wall Street and in Washington got it wrong--again.

As the global economies continue to tank, desperate central bankers will continue to gin up the printing press.  There is no other solution on this path to fiscal hell.

The sovereign economies are stricken with a metastasizing tumor called debt.  Yet, central bankers continue to provide drips of antibiotic monetary stimulus, trying to treat the low-grade fever symptoms, when the only cure is a gutting of the growing cancerous tumor.

Yes, debt defaults are drastic solutions, but they are also necessary to treat the malignancy.  Will it occur by design? No, there is no political will to cut off the government teat of social welfare transfer payments.  Will it occur out of necessity?  Yes, as surely as the Roman empire collapsed under its own weight of bankruptcy.

http://www.bloomberg.com/news/2012-06-01/fed-will-likely-weigh-rosengren-s-call-for-stimulus.html

Bernanke says Fed would act if inflation falls

As predicted, when Operation Twist 2 fails (again), QE to infinity will be the mandate.

http://www.reuters.com/article/2011/09/29/us-usa-fed-bernanke-idUSTRE78R5QK20110929