Former Federal Reserve Official Apologizes for Quantative Easing

CNBC:

“My argument is not that QE was not at all useful,” he said on CNBC’s “Fast Money.”

“I believe that at the time, it was just one more tool that the Fed introduced to try to help the economy,” he said. “My point, ultimately, is the idea that very quickly into QE, it started becoming obvious that it wasn’t working in the way that it was supposed to.”

The article quotes someone from Rutgers Business School, who wonders what the end game for QE is going to be. The stock market – particularly the banks buying stock – is addicted to the easy money of QE. When can the Fed withdraw the money without crashing the markets?

One other point from the article – the rise in the stock market mostly benefited the already wealthy, including the banks. That was the indirect transfer of wealth.

Other transfers were more direct. The Fed bought up hundreds of billions in the banks’ bad mortgages (as opposed to underwater mortgages from the little guy). The Fed loaned money to banks at a low rate and banks used the money to buy Treasuries that paid a higher rate of interest. Some of that may have been by design, to repair the damage done by years of bad lending, but the net result was moral hazard and a massive transfer of wealth to the wealthiest.

Dow Hits Record High in Dollars, 20 Year Low in Ounces of Gold

New York SunThe Fiat Dow:

As the Dow Jones Industrial Average edges close to 14,000 let us just remark on the value of the famous index in ounces of gold. It may be that 14,000 is nearly twice the 7,949 at which the industrial average stood on the day President Obama was sworn. But what are we to make of the fact that the value of the Dow is actually lower today, having slumped to 8.38 ounces of gold from the 8.7 ounces at which it was valued on January 20, 2009?

We are by no means the first to ponder this point. There is a whole Web site that charts the Dow in gold.

Federal Reserve’s Operation Twist Ends, Operation “The Money Printing Will Continue Until Morale Improves” Begins

Fed Links Rates to Joblessness, Expands Bond Purchases

The Federal Reserve said it will buy $45 billion a month of Treasury securities starting in January, expanding its asset-purchase program, and for the first time linked the outlook for its main interest rate to unemployment and inflation.

Interest rates will stay low “at least as long” as the jobless rate remains above 6.5 percent and if inflation “between one and two years ahead” is projected to be no more than 2.5 percent, the FOMC said in a statement. The committee roviews these thresholds as consistent with its earlier date- based guidance. It dropped its earlier pledge to hold interest rates near zero “at least through mid-2015.

The latest move will follow the expiration at the end of this year of Operation Twist, in which the central bank each month has swapped about $45 billion in short-term Treasuries for an equal amount of long-term debt. That program kept the total size of the balance sheet unchanged, while the new purchases will expand the Fed’s holdings.

Federal Reserve decides to raise the price of gold and silver

Yesterday the Federal Reserve announced a new round of quantitative easing, AKA money printing. The Fed plans to purchase $40 billion mortgage-backed securities (MBS) from banks and other lenders every month indefinitely.

The Fed is supposedly doing this to encourage lending and lower interest rates to boost jobs and the economy. In reality they’re probably doing it to save teetering banks. In my mind they’re doing it to boost precious metals. My 401K is loaded with gold and silver and a little oil and it shot up 2.83% yesterday.

Zero HedgeWhat Does A $4 Trillion Fed Balance Sheet Mean For Gold And Oil

Earlier we explained why Bernanke’s actions today mean that the Fed Balance Sheet will likely grow to over $4 trillion by the end of 2013. Critically this flood of liquidity will raise the nominal price of every asset (from whimsical pieces of stockholder paper to barbarous relics and black gold). Some of these assets, like stock prices and high-yield credit spreads do have point-in-time ‘value limits’ to their price – though at times it seems a dream that fundamentals would ever matter again; but some have less of a binding constraint – such as gold. Should the Fed proceed, as seems likely, and do its worst/best to blow its balance sheet wad then we estimate Gold will be priced at least $2250 per ounce by the end of 2013 (of course higher if the Fed sees no evidence of recovery). Meanwhile, deeper underground, the world’s mainstay source of energy, WTI Crude oil, could jump to record highs over $150 per barrel (which just happens to coincide with the ‘pegged’ value of oil in gold). It will be interesting indeed to see how the world’s socio-economic infrastructure hangs together should that occur – can’t happen? Different this time? Indeed it is now that Ben hit the big red ‘panic’ button.

For the sake of comparison, gold is $1767 today and oil is $100 for WTI.

The $40 billion monthly in new money printing is on top of the $45 billion monthly in new money printing for Operation Twist.

Putting it all together, the Fed’s balance sheet will increase from just over $2.8 trillion currently, to $4 trillion on December 25, 2013. A total increase of $1.17 trillion.

This is what the Fed’s balance sheet will looks like:

The Federal Reserve – the central bank of the United States – is tripling its debt in five years. That’s not going to end well for our currency. Real currencies – gold, silver, and oil – are going to appreciate in value. Stocks will probably do pretty well, too – stocks rose 1.83% yesterday. Stocks may not as well as those other things, but they’ll certainly do better than fixed assets like cash, T-bills, and bonds.

P.S. Gold mining stocks were beaten down to historically low levels earlier this year, so I dipped my toe in the water with TRX, GDX, and GDXJ. They outperformed the gold ETFs considerably yesterday.

Silver likewise did better than gold.

Silver’s way more volatile than gold, though. Last year it traded between $26 and $47 an ounce. It started 2012 at $26 and ended the day yesterday at $34. To keep from getting heartsick on the metals rollercoaster I’ve learned to put in stop orders to keep from losing profits when silver takes a header. I do that with other investments, too, but with silver you have to use stops and you have to raise them as the price rises.

LIBOR Interest Rates Manipulated

Federal Reserve Admits It Knew Of Barclays Libor “Problems” In 2007 And 2008

Gold May Have Been Manipulated Like LIBOR – St. Louis Fed Starts Tracking London Gold Prices

The Federal Reserve’s “Operation Twist” Explained

At NPR (audio).

Short version: The Fed is selling short-term Treasuries and buying long-term Treasuries (e.g. 10 and 30 year). That makes long-term interest rates slightly cheaper for mortgages, but makes short-term interest rates slightly higher for businesses. Expected effect: not much.

Key bit at the end (paraphrased): the Fed already used the heavy artillery. Then they used the rifles. Now they’re using bows and arrows. Pretty soon they’ll be using rocks.

Or, you know, they’ll go nuclear with the printing press.

I guess that’s what happens once you’re in a liquidity trap.

US Debt to GDP Passes 101%

Zero HedgeAs US Debt To GDP Passes 101%, The Global Debt Ponzi Enters Its Final Stages

Most people still think of China as buying our debt, but China is unloading U.S. debt.

The biggest buyer of U.S. debt is … the U.S. And not retirement funds and investment firms. The biggest buyer of U.S. debt is the U.S. Federal Reserve, AKA the people who print the little green pieces of paper in your wallet with dead presidents on them. They buy U.S. debt and pay for it with money they print out of thin air. What could possiblie go wrong?

Ben Bernanke

Chris Martensen: High oil prices are a cause of recessions; at these prices economy can’t heal

Chris Martensen –  Why Our Currency Will Fail:

Also note in the most recent data that oil prices happen to be at roughly the same level that triggered the first recession in 2008 (the purple dotted line).

If we needed one simple chart to help us understand why trillions of dollars of stimulus and handouts are not causing the economy to soar, this is the chart that explains the most. High oil prices and recessions are highly correlated, and it’s not too much of a stretch to postulate that economic recoveries and high oil prices are inversely correlated.

Note also that the above chart is not inflation-adjusted. If it were, it would show that there have been exactly zero recoveries when oil prices are near or over $100 per barrel.

For those counting on an economic recovery here to lift all boats and assist the bailout efforts, the burden of history is upon them to explain why this time we should ignore the price of oil.

Here’s why he thinks U.S. currency will fail: Read more of this post

The Fool in the Shower

‘Fool in the Shower’ to Give Fed a Good Scalding: Caroline Baum:

What the Fed is saying, in essence, is that as the economy improves, it’s appropriate to provide as much stimulus, or support, as it did in late 2008, when the economy was contracting and the financial system was imploding.

This is a dramatic shift. Given the long and variable lags with which monetary policy operates, past Fed officials at least paid lip service to the notion of acting preemptively: withdrawing excess stimulus — a fancy way of saying they will raise interest rates — as the economy improved.

Not so the current committee, which is tilted toward doves after the annual rotation of voting members. This group seems to think it should “continue to ease as long as there is economic slack,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “It’s a classic, elemental mistake,” he said, one described by the late Nobel economist Milton Friedman as the “fool in the shower.”

The fool turns on the water in the shower, steps in and finds that it’s still cold. So he turns the knob all the way to hot, only to get scalded when the water heats up with a predictable lag.

And it was low interest rates that helped fuel the housing bubble. Low interest rates got us into this mess and by golly they’ll got us out, sez the Fed.

30 Year Mortgage Rate Down to 3.88%

Interest rates on the 30-year fixed-rate mortgage hit another low this week, averaging 3.88% in Freddie Mac’s most recent survey of conforming mortgage rates, released on Thursday. The mortgage averaged 3.89% last week and 4.74% a year ago. Rates averaged 3.17% on the 15-year fixed-rate mortgage during the week ending Jan. 19, up slightly from 3.16% last week. The mortgage averaged 4.05% a year ago.

Fill in the Blank

Is the Fed Buying Puts on US Treasuries?

Seeking AlphaIs This What Hyperinflation Looks Like From the Inside?:

Some have speculated that the Federal Reserve is writing (selling) puts on Treasuries to keep rates low. As Frederick Sheehan notes, “the Fed-sponsored put option is the logical next step to dampen the yield curve.”

A put is an option contract that gives its owner the right to sell the put writer an underlying asset for a set price within a certain time. If one owns the underlying asset, buying puts on that asset is like buying insurance. One can also buy puts to make a downside bet on an asset. The put writer, on the other hand, is selling insurance or betting that the underlying asset will not fall below the set price within the time frame specified in the contract.

If the Federal Reserve is selling puts on Treasuries, and there’s reason to believe that it is because it did just that during the Y2K non-crisis, it is selling insurance on US debt. This is pretty much the same thing that AIG did. The only difference is that the Federal Reserve has a printing press and AIG did not. The Fed can’t default, but if rates go above its target strike prices, the Fed will have to print so much money that the currency will collapse.

U.S. Money Supply Gone Wild

“Inflation is always and everywhere a monetary phenomenon.”
Milton Friedman

If uncle Milty is right, we’re in trouble. From the St. Louis Federal Reserve via Zero Hedge:

UPDATE: In comments, Douglas notes that the chart above doesn’t show the x-axis at zero. Fair enough. Here’s another chart that does:

Printing worthless currency is illegal? Someone should tell Ben Bernanke.

Zero HedgeFBI Busts Mastermind Criminal For Issuing Silver Currency, Demanding Repeal Of Fed And IRS; Faces 15 Years In Prison.

Counterfeiting – Printing money willy-nilly and releasing it into the economy.

Quantitative easing – Same thing, when the Federal Reserve does it.

See the difference?

At least the Liberty Dollar guys had the decency to mint some silver in their phony-baloney wampum. Helicopter Ben Bernanke just puts one of those bobbing-head birds on his desk to peck the print key every few minutes.