patrick.net

^ heh I was all ready to go ad-hom on that guy but then I see he's on the editorial board of Lapham's Quarterly.

~ never mind ~

It is very true that $1T in cold hard cash can be expanded to $100T via fractional reserve lending.

Though this leverage argument is a bit odd. $99T of that $100T isn't really cash but check money, or savings.

@Outside party

Thanks for the link.

Read his in-depth article on this topic at –
http://michael-hudson.com/2010/11/dollar-war-in-detail/

An interesting article. I think Patrick had it linked from the main news page a while back.

Oh yeah, thanks to the recent events abroad it looks like oil is catching up across the board with other commodities:

http://www.nytimes.com/2011/02/22/world/africa/22libya.html?_r=1&hp

and

http://markets.on.nytimes.com/research/markets/commodities/commodities.asp

I didn't read ALL the posts above, but I think y'all are overlooking one important mechanism of how QE/QE2 works, and what is the real intention of the programs.

Consider the following:

1. The Fed really is enacting QE/QE2 to help the banks, not to help the government or the taxpayers.

2. The Fed cannot legally "print" money for banks, only for the government.

3. The Fed needs a roundabout way to print money for the banks.

4. Hence, the Fed start out by buying (Treasury) bonds from the governement.

5. Then the fed swaps the Treasury Bonds with banks that have lower-grade crap bonds that they want to pledge

6. Since the world in general views (short-term) Treasury Bonds to be as good as greenback US Dollars, the Fed has succeeded in "printing money" for the banks, who in turn can use the cash to buy low and sell high whichever assets they please.

Capiche?

MarkInSF says

They’re trying to lower long term rates to boost long term lending and associated economic expansion.

This is the official, *stated* reason for QE/QE2. But it is not the real reason. The real reason is to ensure that banks can earn themselves out of their huge losses, at the expense of everyone else. It *sounds* good that they are "buying down mortgage rates" "for the benefit of the housing market" or whatever. But this is just a smokescreen for letting the banks buy low and earn big profits in Commodities, Stocks and whatever else is currently hot. Seriously, is it not patently obvious that all the QE/QE2 is pretty much going everywhere else than to the the housing market?

Helping "the economy" is not the real motivation, it is just the propaganda being used to "sell" QE/QE2 to the hapless people.

Call me cynical, but I think the above is 99% of the truth.

When I hit return in some wrong way, I get double posts of what I just wrote. What gives?

I've done that before. It probably is taking some time to post and so you hit 'submit comment' a second time, thinking it's the first. Easy user error to make.

justme says

5. Then the fed swaps the Treasury Bonds with banks that have lower-grade crap bonds that they want to pledge

6. Since the world in general views (short-term) Treasury Bonds to be as good as greenback US Dollars, the Fed has succeeded in “printing money” for the banks, who in turn can use the cash to buy low and sell high whichever assets they please.

Capiche?

No, I don't. There was nothing stopping anybody from buying low and selling high to try to make a profit before QE.

What are the "crap bonds" you're talking about anyway? About the only thing left on the Fed balance sheet is fannie/freddie debt and treasuries. Most of the other securities that were pledged as collateral during the crisis have been returned to the banks that borrowed. And in any event the banks that borrowed could not borrow the full value of the collateral, and had to pay above treasury rates for the privilege if they were borrowing cash that could be lent out for a profit. Hardly handing money to banks.

I'm guessing you're referring to a small Fed program where treasuries were lent out by the Fed for close to 0%? That's not the same as lending cash, because you can't turn around and lend a treasury to to somebody else for a profit, like you can with cash.

justme says

But this is just a smokescreen for letting the banks buy low and earn big profits in Commodities, Stocks and whatever else is currently hot. Seriously, is it not patently obvious that all the QE/QE2 is pretty much going everywhere else than to the the housing market?

Not obvious at all. How does QE allow banks to earn big profits in commodities, stocks, or anything else?

The Fed bought over a trillion dollars of GSE (freddie/fannie) debt, accounting for most of QE to date. That looks a lot like trying to support the housing market to me.

MarkInSF says

No, I don’t. There was nothing stopping anybody from buying low and selling high to try to make a profit before QE.

There was. Remember the dark day of 2008-09-15 when Lehman Brothers went under? Lots of people, including myself, could not get liquid in their money market funds. For the next year or so, regular investors that owned stocks or crappy MBS bonds (etc) had NO CASH to take advantage of the biggest buying opportunity in a generation.

Who was liquid? Only the banks that could pledge their crap bonds at the Fed "loan facilities" and get Treasuries in return. Those loan facilities constituted QE0. QE1 and Q2 are just more of the same.

MarkInSF says

Not obvious at all. How does QE allow banks to earn big profits in commodities, stocks, or anything else?

Again, because they have first mover advantage. They get cash from the Fed, buy in early, and then watch as the individual investors starts the panic buying. Good profits if you can get it.

justme says

MarkInSF says

Not obvious at all. How does QE allow banks to earn big profits in commodities, stocks, or anything else?

Again, because they have first mover advantage. They get cash from the Fed, buy in early, and then watch as the individual investors starts the panic buying. Good profits if you can get it.

If there is any first mover advantage, they don't need anything from the Fed. To get cash from the Fed they had to SELL something like a fannie mae bond. If they saw better opportunities in commodities or equities there was nothing stopping them from selling that fannie mae bond in the open market, and buying to take advantage of this vague first mover advantage you're talking about.

MarkInSF says

If there is any first mover advantage, they don’t need anything from the Fed. To get cash from the Fed they had to SELL something like a fannie mae bond. If they saw better opportunities in commodities or equities there was nothing stopping them from selling that fannie mae bond in the open market, and buying to take advantage of this vague first mover advantage you’re talking about.

if they had to sell their bonds (fannie mae or otherwise) on the open and free (no QE) market the value realized would have been dreadful, and big losses would be incurred.

That's the whole point of the Fed "buying down the rates", which really is "bidding up the price". High price = low interest rate. Who benefits from "bidding up the price"? Those who lots of have crappy bonds they want to sell, so that they can put the cash into something more lucrative.

I'm sure you are aware of the fundamental relationship between price and effective interest rate for bonds, but for those who may not be: When the newspaper says that the yield on Greek 10 year bonds went from
5% to 9% (arbitrary numbers for the sake of the example), this is just another way of saying that the market value of a previously $100 worth of a 5% bond went from $100 to $100*0.05/0.09=$55.55. So "buying down the rate" is very important and a giveaway to those who have bonds to unload.

This article contains many views about QE that I agree with:

http://www.oftwominds.com/blogfeb11/how-to-get-inflation-2-11.html?source=patrick.net

For example:

In a speech a few years later, Bernanke detailed the policy mechanism by which the circulation of dollars might be increased at will: If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets. "We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

This is what I described, except that Bernanke changed the scheme such that the taxpayer (Treasury) issued the debt and then buys the assets indirectly through the Fed. This indirection is better for the banks/wealthy because having the Treasury buy bonds directly would create a firestorm of protest, and rightly so.

Another one that I completely agree with:

The idea with ZIRP is to loan the banks essentially free money, which they can lend out at between 5% and 12% (or higher), generating "free" profits. The Fed's plan is to sluice these gigantic profits to banks so they can recapitalize their insolvent balance sheets without any direct handouts. But ZIRP is nothing but an indirect transfer of wealth from the private sector (now completely deprived of any interest income) to the banks.

justme says

But ZIRP is nothing but an indirect transfer of wealth from the private sector (now completely deprived of any interest income)

"interest income" is also a tax, from the less wealthy to the more wealthy.

if you want capital returns, earn them via enterprise.

10% ROI is child's play if you have a winning business idea and execution.

I like CHS but I think he's all wet about this:

"Borrowing money does not drive organic inflation: higher incomes and free cash drive organic inflation. If you want inflation"

The inflation of the previous decade was accomplished by household debt doubling between 2001 and 2007. 10% of disposable income during the bubble was coming from home equity borrowing, and that money was spent, and spent often.

Troy says

“Borrowing money does not drive organic inflation: higher incomes and free cash drive organic inflation. If you want inflation”

Are you sure you disagree with him? I think his definition of "organic inflation" is exactly inflation NOT caused by debt.

Dunno. Was the 1970s "organic" or "speculative" inflation? It was certainly debt-driven!

The entire economy since 1985 has been debt-driven too.

http://research.stlouisfed.org/fred2/series/CMDEBT

I read speculative inflation to be game-playing in futures and equities markets, and such game-playing trades are eventually closed with winners and losers.

I think nobody really understands the land market, frankly, that land valuation is something of a magical entity.

We don't need any inflation in land values. That just makes us all poorer.

Here's the best explanation of QE I've seen.
The money is flowing into Goldman Sachs.

http://www.youtube.com/watch?v=PTUY16CkS-k

> and that money was spent, and spent often.

You can say that again! I also think that this “easy money” kept people from watching our government.

@austrian_man

Thanks for the link. It is cute and funny in one sense but not in the sense of what is happening.

Anyway QE2 affects this perhaps:

http://finance.yahoo.com/news/Treasuries-Snap-Rally-as-US-bloomberg-2205120756.html

that article by "Outside Party" seems pretty interesting; the one about buying up all the world resources with dollars.

ChrisLA says

the one about buying up all the world resources with dollars

for every buyer there's a seller. As long as what's being sold isn't publicly-owned, the trade is a wash.

Troy says

ChrisLA says

the one about buying up all the world resources with dollars

for every buyer there’s a seller. As long as what’s being sold isn’t publicly-owned, the trade is a wash.

Kind of off-topic, but I think thats one of the Marxist arguments against "printed currency" is that central banks can print currency and take control of all the world resources.

ChrisLA says

is that central banks can print currency and take control of all the world resources.

again, who's the seller?

I've never read Marx, something I should remedy. However from a few searches it's clear that national banking was on his list of 10 demands people should make:

5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.

The central bank in the US is not under national control. The Federal Reserve operates very much independently, and under the direction of large member banks. The appearance of the chair before Congress is for appeasement purposes. It's quite clear from their refusal to even release records to Congress in a timely manner they are not under Federal control.

Therefore when Ron Paul says he wants to get the Federal Reserve firmly under control of Congress, he is advocating Marxism. Funny neh?

Vicente says

I’ve never read Marx, something I should remedy. However from a few searches it’s clear that national banking was on his list of 10 demands people should make:
5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.
The central bank in the US is not under national control. The Federal Reserve operates very much independently, and under the direction of large member banks. The appearance of the chair before Congress is for appeasement purposes. It’s quite clear from their refusal to even release records to Congress in a timely manner they are not under Federal control.
Therefore when Ron Paul says he wants to get the Federal Reserve firmly under control of Congress, he is advocating Marxism. Funny neh?

I don't think he recommends that Federal Reserve be under the control of Congress. I think that would be dangerous and will definitely lead to hyperinflation like Weimar Germany. The reason why the banking class will not inflate away the money from which it parasitically profits, is because after doing that - the banking class cannot exist.

I think what he recommends is to end the Fed and get back to the gold standard.

Ron Paul is all over the map. I read a couple of his "End the Fed" screeds and while I laud his Quixotic attempt.... replacing it with gold backed money regulated by who? By a national bank under Congress control? Right back to Marx.

I wish him luck trying to stuff the genie back in that bottle. I expect actual enactment would be followed by a decade or two of economic chaos that would make recent Great Recession look like a damp squib.

Seems like the GOP is trying to keep their "Crazy Uncle" busy with auditing the Fed. I doubt they would back him in actually carrying out any real punishment if misdeeds are found, much less abolition of the Federal Reserve.

Vicente says

Ron Paul is all over the map. I read a couple of his “End the Fed” screeds and while I laud his Quixotic attempt…. replacing it with gold backed money regulated by who?

Funny thing; up until 1971, when Nixon closed the gold window, the dollar was pegged to gold. As the reserve currency of the world, so were, in effect, the rest of the world's major currencies. Isn't it interesting that since that time, the major nations of the world have expanded their paper based debts into the stratosphere? If precious metals in the past worked, why couldn't it work now?

RayAmerica says

If precious metals in the past worked, why couldn’t it work now?

They didn't work then. That's why the world abandoned them as currency or currency backing.

ChrisLA says

A flaw of capitalist society, it leads to monopolies that have too much leverage to be broken.

You mean Corporatist Society Chris, because capitalism involves the potential for failure and bankruptcy. Corporatism, as we've seen plenty of over the last 2 years, does not.

tatupu70 says

They didn’t work then. That’s why the world abandoned them as currency or currency backing.

The world "abandoned" precious metals not because it didn't work, but so that the Central Banksters of the world could make $Trillions off of the unsuspecting people of the world. Also, the politicians love it because they can provide programs without having to raise taxes too much ... just make up the difference with the friendly Central Banksters that are willing and able to provide them all the money they need for a very hefty profit to them. The people continue to vote in the politicians that provide them with their entitlements and everyone is happy. That is, until the music stops and the band demands payment. Just about where the world is right now.

Lessons learned from QE2:

http://finance.yahoo.com/news/Market-Lessons-From-the-First-cnbc-3871798532.html

Jeremy says

You mean Corporatist Society Chris, because capitalism involves the potential for failure and bankruptcy. Corporatism, as we’ve seen plenty of over the last 2 years, does not.

A modern age Feudalism in a way.

This indicates the flow of money to some degree: