Quantitative easing (QE) is a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system, generally through buying of the central government's own bonds to stabilize or raise their prices and thereby lower long-term interest rates.
This policy is usually invoked when the normal methods to control the money supply have failed, i.e., the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero. It has been termed the electronic equivalent of simply printing legal tender. (Source: Wikipedia)
Showing posts with label quantitative easing. Show all posts
Showing posts with label quantitative easing. Show all posts
Wednesday 17 November 2010
Friday 5 November 2010
Doubts grow over wisdom of Ben Bernanke 'super-put': Soaring bourses may have stolen the headlines, but equities are rising for an unhealthy reason.
Doubts grow over wisdom of Ben Bernanke 'super-put'
The early verdict is in on the US Federal Reserve's $600bn of fresh money through quantitative easing. Yields on 30-year Treasury bonds jumped 20 basis points to 4.07pc
http://www.telegraph.co.uk/finance/economics/8111153/Doubts-grow-over-wisdom-of-Ben-Bernanke-super-put.html
Note:
Pimco's Bill Gross says the great bull market in bonds is over, denigrating Fed policy as the greatest "ponzi scheme" in history.
Warren Buffett has chimed in too, warning that anybody buying bonds at this stage is "making a big mistake",
The early verdict is in on the US Federal Reserve's $600bn of fresh money through quantitative easing. Yields on 30-year Treasury bonds jumped 20 basis points to 4.07pc
Mr Bernanke is targeting maturities of 5 to 10 years with purchases of Treasuries. Photo: GETTY
It is the clearest warning shot to date that global investors will not tolerate Ben Bernanke's openly-declared policy of generating inflation for much longer.
Soaring bourses may have stolen the headlines, but equities are rising for an unhealthy reason: because they are a safer asset class than bonds at the start of an inflationary credit cycle.
Meanwhile, the price of US crude oil jumped $2.5 a barrel to $87. It is up 20pc since markets first concluded in early September that 'QE2' was a done deal.
This amounts to a tax on US consumers, transferring US income to Mid-East petro-powers. Copper has behaved in much the same way. So have sugar, soya, and cotton.
The dollar plunged yet again. That may have been the Fed's the unstated purpose. If so, Washington has angered the world's rising powers and prompted a reaction with far-reaching strategic consequences.
Li Deshui from Beijing's Economic Commission said a string of Asian states share China's "deep bitterness" over dollar debasement, and are examining ways of teaming up to insulate themselves from the tsunami of US liquidity. Thailand said its central bank is already in talks with neighbours to devise a joint protection policy.
Brazil's central bank chief Henrique Mereilles said the US move had created "excessive dollar liquidity which we are absorbing," forcing his country to restrict inflows. Mexico's finance minister warned of "more bubbles."
These countries cannot easily shield themselves from the inflationary effect of QE2 by raising interest rates since this leads to further "carry trade" inflows in search of yield. They are being forced to eye capital controls, with ominous implications for the interwoven global system.
In London and Frankfurt the verdict was just as harsh. "In our view, this is one of the greatest policy mistakes in the Fed's history," said Toby Nangle from Baring Asset Management.
"The Fed is gambling that the so-called 'portfolio balance channel effect' – pushing money out of government bonds and into other assets – will lift risk asset prices. The gamble is that this boosts profits and wages, rather than simply prices. We remain unconvinced. How will a liquidity solution correct a solvency problem?" he said.
"A policy error," said Ulrich Leuchtmann from Commerzbank. The wording of the Fed statement is "potentially dangerous" because it leaves the door open to a further flood of Treasury purchases if unemployment stays high. "It is a bottomless pit," he said.
Of course, it is precisely this open door that has so juiced risk trades, from Australian dollar futures, to silver contracts, and junk bonds. Goldman Sachs thinks QE2 will ultimately reach $2 trillion, with no exit until 2015. Such moral hazard is irresistible. It is the Bernanke 'super-put'.
Yet the reluctance of investors to leap back into the US Treasury market as they did after QE1 is revealing. The 30-year segment of the Treasury market is too small to matter, but symbolism does matter. Vigilantes sniff stealth default. "If long bond investors continue to throw their collective toys out of the cot, it risks upending the Fed's policy," said Michael Derk from FXPro.
Mr Bernanke is targeting maturities of 5 to 10 years with purchases of Treasuries. These bonds have behaved better: 10-year yields fell 14 points on Thursday to 2.48pc. However, Mark Ostwald from Monument Securities said foreign funds may take advantage of QE2 to dump their holdings on the Fed, rotating the money emerging markets rather than US assets.
Bond funds are already restive. Pimco's Bill Gross says the great bull market in bonds is over, denigrating Fed policy as the greatest "ponzi scheme" in history. Warren Buffett has chimed in too, warning that anybody buying bonds at this stage is "making a big mistake",
Fed chair Ben Bernanke uses the term 'credit easing' to describe his strategy because the goal is to lower borrowing costs. If he fails to achieve this over coming months - because investors balk - the policy will backfire.
No clear rationale for fresh QE can be found in orthodox monetarism. Data from the St Louis Federal Reserve show that M2 money supply stopped contracting in the early summer and has since been expanding at an accelerating rate, topping 9pc over the last four-week bloc.
The Fed has used the 'Taylor Rule' on output gaps as a theoretical justification for QE, but Stanford Professor John Taylor has more or less said his theories have been hijacked. "I don't think (QE) will do much good, and I also worry about the harm down the road," he said.
It has not been lost on markets that the Fed's purchases of $900bn of Treasuries by June (with reinvested funds from mortgage debt) covers the Treasury's deficit over the same period. The slipperly slope towards 'monetization' of public debt beckons.
Global investors mostly accepted that the motive for QE1 was emergency liquidity, and that stimulus would later be withdrawn. But there are growing suspicions that QE2 is Treasury funding in disguise.
If they start to act on this suspicion, they could push rates higher instead of lower, and overwhelm the Bernanke stimulus. That would precipitate an ugly chain of events for the US.
http://www.telegraph.co.uk/finance/economics/8111153/Doubts-grow-over-wisdom-of-Ben-Bernanke-super-put.html
Note:
Pimco's Bill Gross says the great bull market in bonds is over, denigrating Fed policy as the greatest "ponzi scheme" in history.
Warren Buffett has chimed in too, warning that anybody buying bonds at this stage is "making a big mistake",
High unemployment in Fed cross-hairs
The United States faces the prospect of high unemployment for some time as the Federal Reserve embarks on a risky and unproven course to bring back solid economic growth.
All eyes will be on the October labour market report on Friday, expected to show a dip in job creation and an unemployment rate stuck at 9.6 per cent for the third consecutive month.
The Federal Reserve announced on Wednesday it would inject an additional $US600 billion ($A598.12 billion) into the struggling economy, through the purchase of new Treasury debt from financial institutions at a rate of around $US75 billion ($A74.76 billion) a month.
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Fed chairman Ben Bernanke said the extraordinary action was necessary because the central bank has a duty to help promote increased employment and sustain price stability.
Though the current low level of inflation was "generally good" it poses the risk of morphing into deflation, a dangerous cycle of falling prices and wages, Bernanke said in an opinion article published Thursday in the Washington Post.
But it was the suffering job market that spurred the stimulus move, known as "quantitative easing."
Bernanke said that in the panel's review of economic conditions, "we could hardly be satisfied."
"Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 per cent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer," he said.
"The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills."
The Fed action came a day after Tuesday's nationwide congressional and local elections that handed big victories to Republicans, who have called for less government interference in the US economy.
Republicans won control of the House of Representatives and whittled the majority of President Barack Obama's Democrats in the Senate.
At the top of voters' complaints was persistently high unemployment more than a year after the recession officially ended, along with massive federal spending to rescue the economy from recession that has produced record deficits.
The government's weekly snapshot on unemployment trends reinforced the picture of a depressed labour market treading water.
Initial unemployment claims rose more than expected in the week ending October 30, up 4.6 per cent from the prior week, the Labor Department reported.
"Unfortunately, there is nothing in the data that suggests the employment sector is on the cusp of entering a prolonged hiring expansion.
"Instead, the stability suggests that employment growth is going to be slow and sluggish for the foreseeable future," said Jeffrey Rosen at Briefing Research.
Andrew Gledhill at Moody's Analytics noted that businesses remained anxious about economic conditions and were being cautious about payroll decisions, while layoffs were still climbing at a rate consistent with minimal job growth.
"The stalled labour market will not significantly break out of this trend until the second half of next year," Gledhill said.
"Even once widespread hiring resumes, it will take considerable job creation to restore employment to its pre-recession level; we forecast that won't occur until 2013."
AFP
http://www.smh.com.au/business/world-business/high-unemployment-in-fed-crosshairs-20101105-17g4d.html
The Fed turns on printing press: The Implications
The Fed turns on printing press
Sewell Chan, Washington
November 5, 2010
IN ITS latest move to help the economy, the Federal Reserve is about to restart its monetary printing press - or rather, the electronic equivalent.
The Fed announced that it intended to buy $US600 billion in long-term Treasury securities through June. It also signalled that it could make more purchases after that if unemployment remained too high and inflation too low.
The Fed is prohibited under law from directly lending to the Treasury Department, which issues government debt. So the Fed buys government securities on the open market from ''primary dealers'', a network of 18 institutions, including Goldman Sachs and Morgan Stanley, that constantly trade in such securities.
While monetary policy is set at the Fed's headquarters in Washington, it is carried out in Lower Manhattan, at the Federal Reserve Bank of New York, which buys and sells Treasury securities and other assets on the Fed's behalf.
In typical recessions, when the Fed pumps money into the economy, it buys assets, like government bonds, and creates an equivalent amount in liabilities - reserve deposits that commercial banks keep at the Fed. Those deposits, which now exceed $US1 trillion, along with currency in circulation, now $US961.4 billion, make up what economists call the monetary base - in essence, the raw material from which money is created and made available to consumers and businesses.
If banks were quickly start quickly using the reserves to make loans, the supply of money, now $US8.7 trillion by one estimate, could grow rapidly and lead to inflation even as the amount of reserves remained constant.
The supply of money includes not just currency, but also things like bank deposits, savings accounts and money market funds.
For now, that seems highly unlikely. Banks say there is not much demand for loans.
NEW YORK TIMES
Sewell Chan, Washington
November 5, 2010
IN ITS latest move to help the economy, the Federal Reserve is about to restart its monetary printing press - or rather, the electronic equivalent.
The Fed announced that it intended to buy $US600 billion in long-term Treasury securities through June. It also signalled that it could make more purchases after that if unemployment remained too high and inflation too low.
The Fed is prohibited under law from directly lending to the Treasury Department, which issues government debt. So the Fed buys government securities on the open market from ''primary dealers'', a network of 18 institutions, including Goldman Sachs and Morgan Stanley, that constantly trade in such securities.
While monetary policy is set at the Fed's headquarters in Washington, it is carried out in Lower Manhattan, at the Federal Reserve Bank of New York, which buys and sells Treasury securities and other assets on the Fed's behalf.
In typical recessions, when the Fed pumps money into the economy, it buys assets, like government bonds, and creates an equivalent amount in liabilities - reserve deposits that commercial banks keep at the Fed. Those deposits, which now exceed $US1 trillion, along with currency in circulation, now $US961.4 billion, make up what economists call the monetary base - in essence, the raw material from which money is created and made available to consumers and businesses.
If banks were quickly start quickly using the reserves to make loans, the supply of money, now $US8.7 trillion by one estimate, could grow rapidly and lead to inflation even as the amount of reserves remained constant.
The supply of money includes not just currency, but also things like bank deposits, savings accounts and money market funds.
For now, that seems highly unlikely. Banks say there is not much demand for loans.
NEW YORK TIMES
Thursday 4 November 2010
Fed's $600bn gamble risks throwing away America's biggest asset
Fed's $600bn gamble risks throwing away America's biggest asset
Apparently, there's been an election in the US. The BBC tells us that America's wholly unsurprising verdict on the past two years is frightfully important and signals the end of the Obama dream, whatever that may have been; it was never entirely clear.
http://www.telegraph.co.uk/finance/comment/jeremy-warner/8108660/Feds-600bn-gamble-risks-throwing-away-Americas-biggest-asset.html
Apparently, there's been an election in the US. The BBC tells us that America's wholly unsurprising verdict on the past two years is frightfully important and signals the end of the Obama dream, whatever that may have been; it was never entirely clear.
The Fed is taking a massive gamble with America's long term future by blindly pursuing further monetary stimulus Photo: EPA
Barely able to disguise his horror at the result, Mark Mardell, the Beeb's North America editor, solemnly pronounced that the hope Obama raised when elected president had turned out to be "too audacious for the times".
It didn't seem to occur to him that Obama's drubbing was not so much a case of haplessly falling victim to economic circumstance but was in fact largely down to incoherent legislative experiment, blind disregard for the deficit and chronic mishandling of the economy. Americans had reasonably expected better.
Obama's punishment will make little if any difference to the mess the US economy finds itself in and in any case is something of a sideshow against the latest high risk policy initiative the Federal Reserve is visiting on an already battered nation. The Hill can't act, but the Fed still stands ready and willing at the roulette wheel.
The fresh $600bn (£372bn) infusion of quantitative easing announced on Wednesdaymay or may not provide a lift for beleaguered domestic demand – both Goldman Sachs and HSBC have said much more is needed to escape a real or imagined liquidity trap – but one thing it certainly does do is further debauch the currency. Never before has dollar hegemony been so much under threat.
By flooding the world economy with yet more freshly minted dollars, America further undermines faith in the greenback as an internationally reliable store of value and is thereby squandering an economic and geo-political asset of huge importance to the nation's history.
The dollar's reserve currency status means that America can borrow at will in its own currency from the rest of the world, and at favourable rates to boot. This privilege is being recklessly thrown away. Every time the Fed prints more dollars to fight the domestic recession, it further devalues that debt. The lenders are understandably getting restless.
As is now becoming steadily more apparent, dollar hegemony was a major underlying cause of the crisis, for it allowed America to go on an unrestrained borrowing binge; the developing world is ever more minded to think its demise part of the solution.
The Fed is taking a massive gamble with America's long term future by blindly pursuing further monetary stimulus; it may take time, but the dollar's all powerful reign on the world stage is drawing to a close.
And they wonder why US business remains in a state of paralysed shock. Policy seems hell bent on destruction.
In Obama's defence, it is usually said that the economic legacy he inherited was so poisonous that it was never likely to be easily fixed, and there is no doubt much truth in this contention.
But rather than focusing like a lazer on the economic catastrophe unfolding before him, Obama instead embarked on a wildly ambitious, disruptive and divisive legislative programme that has succeeded only in heaping further uncertainty on already damaged economic confidence.
If ever more mountainous public debt were not deterrent enough to investment and trade, the clutter of futile reform emerging from the White House would have frightened even the most loyal of American investors into inaction.
Stripped of his political authority, Mr Obama can only look hopelessly on as the newly enthused "Reds" suck the lifeblood out of health and financial reform. Hard won at near fatal political and economic cost, much of the president's legislative programme may end up neutered to death.
A Republican House cannot overturn these bills, which have already been passed into law, but it can render them toothless by influencing the fine print and more importantly, refusing to fund them. "Defunding" Obama's legislation is readily justified in pursuit of the small state Republicans aspire to.
Unfortunately, the Republican opposition seems as bereft of a credible plan to put public debt back on a sustainable footing as the White House. The political stalemate makes it most unlikely one will be found any time soon. Any long term fix requires a combination of tax rises, pension and medicare reform. There's no cross party support for any of these things.
The political class has no strategy for rolling back debt in a growth friendly way, while the blunt instrument of ultra loose monetary policy has called into question the dollar's international standing and therefore the nation's ability to refinance itself.
Larry Summers – who departs as the President's economic adviser in January – puts it like this: "For how much longer", he asks, "can the world's top borrower carry on being the world's top power?" It's a good question.
http://www.telegraph.co.uk/finance/comment/jeremy-warner/8108660/Feds-600bn-gamble-risks-throwing-away-Americas-biggest-asset.html
The madness of doing more QE
Mervyn King must turn off the printing press
Quantitative easing will do little to secure the recovery, says Jeremy Warner.
http://www.telegraph.co.uk/finance/economics/8094536/Mervyn-King-must-turn-off-the-printing-press.html
Quantitative easing will do little to secure the recovery, says Jeremy Warner.
The Bank of England has been edging in the direction of more QE Photo: Christopher Pledger
With a bit of luck, this week’s relatively strong third-quarter growth figures might give the Bank of England pause for thought as it prepares to sanction another bout of quantitative easing (QE), popularly known as “printing new money”. As Hallowe’en approaches, opinion is turning against this much-deployed but little-understood form of monetary witchcraft, and with good reason.
The Bank’s Monetary Policy Committee has been edging in the direction of more QE for some months now; George Osborne, the Chancellor, has repeatedly suggested that it could provide a useful counterweight to the austerity of his fiscal consolidation plans.
In the United States, more QE is already pretty much a done deal. The Federal Reserve’s Open Markets Committee is next week expected to give the go-ahead to a further $500 billion of asset purchases. That might seem small beer against the $1.7 trillion already spent, but to describe an extra half-trillion of the stuff as “QE-lite”, as some Fed insiders do, still seems something of an understatement.
All in all, policy-makers are becoming worryingly dependent on further QE for salvation. The argument goes that with mountainous public debt excluding the possibility of further stimulus packages or tax cuts to boost the economy, why shouldn’t we just print more money instead?
To understand why this is a policy blunder in the making, it’s best to start with the case for the defence. There is plenty of evidence to suggest that the initial, crisis-provoked burst of QE worked as intended. It’s always impossible to prove the counterfactual – what might have happened if no QE had been applied – but it seems likely that the economic contraction would have been a great deal worse.
By boosting the money supply, QE helped keep interest rates in the real economy low, supporting consumption and allowing many companies to refinance themselves in the face of contracting credit. An otherwise catastrophic collapse in confidence, investment and trade was partially offset.
But you can have too much of a good thing – and as things stand, it’s quite hard to see why more of this monetary hocus-pocus would help things any further. On the other hand, the risks of it are all too obvious.
The case for going further rests on the idea that the private sector is not yet ready to step into the breach left by a shrinking state, and may actually be about to contract even more. In such circumstances, it would become necessary to keep pushing down on interest rates, to encourage both consumers and businesses to spend more.
It’s a funny old therapy that prescribes another dose of the same poison that brought the economy to its knees – too much consumption and not enough saving – but let’s leave this wider paradox aside for the moment. The more immediate problem is that it’s not at all clear that the slight reduction in interest rates that more QE might bring about would cause consumers to save less. Indeed, it could have the opposite effect: those with a surplus of savings might become more conservative still if they saw the outlook for income worsening at a time when their long-term security is being eroded by heightened inflation.
And where is the deflation risk that might justify more QE? It’s hard enough to see it even in the US, where – to my mind – a long-incubating problem of structural unemployment, hidden for years by the credit boom, is being misdiagnosed as one of deflation. It’s harder still in the UK. With inflation still stuck well above target, expectations of future inflation rising, nominal GDP growth back at almost 6 per cent, and the velocity of money – that is, the number of transactions for any given unit of cash – recovering fast, more QE becomes a very hard sell indeed.
Of course, the economy will require plenty of policy support to compensate for a planned fiscal squeeze that amounts to roughly 2 per cent of GDP a year for the next four years. But it is not at all obvious that more QE is the right way of providing it.
The Bank of England has repeatedly told us that recessionary pressures will cause inflation to abate – yet it has remained stubbornly above target. No one will believe the Bank if it cites a deflationary bogeyman that doesn’t yet exist as justification for turning on the printing presses again.
If all that new money actually were to reach the parts of the economy that needed it, I might have some sympathy. But QE has failed either to expand bank credit to small- and medium-sized enterprises or to lower its cost to them. It has, however, provided spectacular money-making opportunities for the City and inflated new bubbles in bond, commodities and emerging markets.
Goodness knows how central banks will unwind the vast positions they already hold in the debt markets, but the fear that they’ll end up taking the easy option and monetising what the Government owes – permanently adding it to the money supply, as happened in the 1970s – will only add to concerns about inflation.
There are plenty of ways to help the recovery, from raising infrastructure spending (which is perfectly compatible with deficit reduction) to boosting business confidence by enhancing the environment for investment and job creation. But please, no more QE.
http://www.telegraph.co.uk/finance/economics/8094536/Mervyn-King-must-turn-off-the-printing-press.html
Fed spends big to fight deflation
Quantitative easing barely registered on world markets but the message from the US Federal Reserve was heard throughout the world: it would use every measure possible to ward off deflation.
The move to support US asset prices through printing money served to slightly bolster already-high equity markets and pushed the Australian dollar to trade above parity with the US dollar for most of the morning.
George Tharenou, an economist with investment bank UBS, said the Fed’s announcement overnight of $US600 billion ($600 billion) in treasury purchases was combined with a commitment to continue buying troubled mortgage securities, bringing the total value of the package close to $US1.1 trillion.
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The second round of quantitative easing, or QEII, adds to $US1.7 billion in unconventional measures it launched after the collapse of Lehman Brothers in September 2008.
Mr Tharenou said the Fed was continuing action in an environment in which it could not cut already low official interest rates.
‘‘Whether or not the Fed can actually stop deflation is a matter of debate (but) I think the Fed is taking the best possible action it can,’’ Mr Tharenou said.
Andrew Pease, the chief investment strategist for fund manager Russell Investments, said the Federal Reserve had highlighted its commitment to restoring inflation and warding off deflation, with early signs being positive.
‘‘It’s a big package,’’ he said. ‘‘The question is what impact is it going to have. Is it going to be pushing on a string or is it going to do something? My guess is its going to reinforce positive price expectations.’’
Mr Pease said of deflation, which occurred in Japan after its own debt crisis in 1990: ‘‘People don’t spend, businesses can’t make profits ... there’s a whole lot of problems when an economy falls into deflation.’’
Mark Reade, a director of credit strategy for investment bank Citi, said the lack of market reaction was due to the package being broadly in line with expectations.
‘‘The Fed reiterated its commitment to keep rates low for an extended period of time,’’ he said. ‘‘That commitment is going to support asset prices.’’
He said the willingness to support prices also supported people's willingness to continue to invest in riskier assets - including equity markets and the Australian dollar.
On the news, the US dollar fell slightly below parity with the Australian dollar and remained there around midday.
However, Mr Pease warned the Australian dollar was ‘‘overvalued by just about any metric’’.
swashington@smh.com.au
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