As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our 'intellectual superiors' and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 - the biggest ever bonus season (forget record bonuses in 2010... in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).
If someone asks you what happened in 2009, the answer is simple - two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed's equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.
In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. This makes sense: the abovementioned crunches stopped the flow of credit from January until well into April, and generally firms were unwilling to demonstrate to the market how clothless they are by hitting the capital markets until well into Q2 if not Q3. What happened was a move so drastic by the Fed, that into November, the worst of the worst High Yield names were freely upsizing dividend recap deals (see CCU) - the very same greed and stupidity that brought us here. Luckily, so far securitization and CDOs have not made a dramatic entrance. They likely will, at which point it will be time to buy a one-way ticket for either our southern or northern neighbor, both of which, in the supremest of ironies, transact in a currency that will survive long after the dollar is dead and buried.
Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.
And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.
Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.
As we pointed, the number one reason why 2010 is set to be a truly "interesting" year is a result of the upcoming explosion in US Treasury issuance. Fiscal 2010 gross coupon issuance is expected to hit $2.55 trillion, a $700 billion increase from 2009, which in turn was $1.1 trillion increase from 2008. For those of you needing a primer on the exponential function, click here. But wait, there is a light in the tunnel: in 2011, gross issuance is expected to decline... to $1.9 trillion.
And while things are hair-raising in "gross" country (not Bill...at least not yet), they are not much better in netville either. Net of maturities, 2010 coupon issuance will be about $1.8 trillion, a 45% increase from the $1.3 trillion in FY 2009 (and the paltry $255 billion in 2008).
Now everyone knows that the average maturity of the UST curve has become a big problem for Tim Geithner: nearly 40% of all marketable debt matures within a year (a percentage that has kept on growing). In fact, the Treasury provided guidance in its November 2009 refunding, in which it stated that it intends "to focus on increasing the average maturity" of its debt after relying heavily on Bill issuance in H2. Once again, we wish Tim the best of luck.
Why our generous best intentions to the US Treasury? Because unless the US consumer decides to forgo the purchase of the 4th sequential Kindle and buy some Treasuries (and not just any: 30 Year Bonds or bust), the presumption that the Bond printer will have the option of finding vast foreign appetite for its spewage is a very myopic one. We already know that China is a major question mark, and will aggressively be looking at pumping capital into its own economy instead of that of Uncle Sam's - at some point the return on investment in its own middle class will surpass that of funding the rapidly disappearing US middle class. That tipping point could be as soon as 2010.
As for Japan - the country has plunged into its nth consecutive deflationary period. Whether or not the finance minister announces yet another affair with the Quantitative Easing whore on any given day, depends merely on what side of the bed he wakes up on. The country will have its hands full monetizing its own sovereign issuance, let alone ours.
Lastly, the UK - well, with the country set to have zero bankers left in a few months, we don't think the traditionally third largest purchaser of US debt will be doing much purchasing any time soon.
None of this is merely speculation: October TIC data confirmed these preliminary observations. It will only become more pronounced in upcoming months.
How about that great globalization dynamo: emerging markets? Alas, they have their hands full with issuing their own record amounts of both sovereign and corporate debt as well: in 2009 gross EM debt issuance reached an astounding $217 billion, $29 billion higher than the previous record in 2007. Gross EM issuance was particularly high in the last quarter at $73 billion, with October breaking the record for the largest ever monthly gross issuance of emerging market global bonds at $38 billion (January is traditionally the busiest month of the year.) With $81 billion, 2009 was notably a record year for sovereign bonds, while gross issuance of corporate bonds amounted to $136 billion, the second highest level after that of 2007 with $155 billion.
Bottom line: everyone has major problems at home, and is more focused on the supply than the demand side of the equation.
What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:
Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint (we are surprised the Fed's $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the "reverse" button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.
If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors. Then again, as Eric Sprott has been pointing out for quite some time, it could very well be that the US economy has become merely one huge Ponzi, and as such, its expansion or reduction on the margin is uncontrollable. We very well may have passed into the stage where blind growth is the only alternative to a complete collapse. We hope that is not the case.
Merry Christmas and Happy Holidays to all readers.
http://www.zerohedge.com/article/brace-impact-2010-private-demand-us-fixed-income-has-increase-elevenfold-or-else
Showing posts with label quantitative easing. Show all posts
Showing posts with label quantitative easing. Show all posts
10 November 2009
Financial mess isn't even the end of the beginning.. Halligan
This blogger prefers Liam Halligan to Ambrose Evans-Pritchard, any day....
So terrible was Gordon Brown's economic stewardship during his decade as Chancellor from 1997, and so huge has been his "fiscal stimulus" since, that the UK now has the biggest structural deficit of any major country.
Britain faces a 2009/10 fiscal shortfall equal to 13pc of GDP – the biggest in our peacetime history – with little sign of improvement. The Government will borrow some £200bn on taxpayers' behalf every year until 2012/13 at least – eight times above "normal" levels. In just four years, an extra £32,000 will be added to the existing sovereign debt burden of every British household.
In an admirably frank report last week, the International Monetary Fund singled out the UK as "uniquely vulnerable" to spiralling debt service costs as we deal with the mess left by Brown's fiscal incontinence. In 2007, Britain spent 4.2pc of its tax revenues on debt interest. By 2014, we'll spend almost 10pc of receipts on servicing government loans, before we even start paying them back, as our national debt sky-rockets from 40pc to more than 100pc of GDP.
Just the increase in annual debt service will equal what the Government currently spends on public transport. Thank you, Mr Brown, for your contribution to our country.
Yet Brown didn't do this alone. Most of our political classes have been complicit in this historic policy error. The UK's mainstream parties, having finally admitted our fiscal situation is desperate, have only recently stopped competing on the basis of who can spend more. Public discourse is now starting, very slowly, to recognise that we actually need to spend and borrow much less. But the politicians still claim, sotto voce, that a debt burden equal to 100pc of GDP "isn't all that bad".
The UK's debt stock is accumulating rapidly, though, at a time when tax revenues, used to service that debt, are going through the floor. Government receipts were down 9pc in September, compared with the same month last year. So we're at risk of plunging into a "debt trap" – having to borrow to pay the debt service on existing debt, causing the total debt stock to spiral out of control.
A sharp economic downturn is always bad for tax receipts. But with the City in meltdown and the UK now a net oil importer, two big sources of government cash have been hammered, indeed making Britain's public finance "uniquely vulnerable". And that's before interest rates start rising, cranking up debt service costs even more.
Faced with such realities, rather than telling the public straight that we face the peacetime equivalent of "blood, sweat and tears", and that sacrifices must be made, our so-called leaders keep the Keynesian rhetoric going. Behind the scenes, though, even Brown and Co have grasped that yet another "fiscal stimulus" would see a sovereign debt downgrade, in turn provoking a creditors' strike – under which the UK would be rendered "insolvent", unable to roll-over its debts.
So that leaves "quantitative easing" – or QE – the even more extreme policy where the Bank of England creates electronic money from nothing, apparently in a bid to stimulate the economy.
The Bank has already created £175bn of such "funny money" since March – some 99.7pc of which, in a bizarre example of circular financing, has been spent on government securities. So our central bank prints money and gives it to the Government, which in turn gives it to the banks. This is the economics of Zimbabwe and the Weimar Republic.
This QE money is supposed to boost bank lending. But banks have instead stuffed much of it into shares on their own account, creating yet another asset bubble. Banks say they're lending more – and they are in the sense that they're "lending" to their own off-balance sheet vehicles, in a desperate attempt to shore-up disastrous sub-prime positions and avoid the write-downs and bank restructuring desperately needed to purge the system.
Lending to the non-financial sector, meanwhile, remains in negative territory despite QE – with thousands of viable UK firms, employing millions of people, facing closure due to a lack of working capital.
Last week, the Bank announced that QE would carry-on – with another £25bn being "injected" into the economy. But heavy hints were dropped that this is the end.
The Bank had to hint this. The UK's international creditors are getting nervous. Despite the on-going "deflation" propaganda, there is growing concern that Britain's money-printing will cause not only inflation to spike, but a sterling crisis too. Both would be very bad news for anyone holding sterling-denominated government securities that aren't indexed-linked – as is the case with the vast majority of UK gilts that are sold.
This latest dose of QE isn't the end of this age of deeply-damaging policy-making by the British political elite. It isn't even the beginning of the end of this ghastly episode in our history, in which our leaders throw all caution to the wind, ignoring centuries of accumulated wisdom and make a bad situation even worse.
I fear we have reached, merely, the end of the beginning of an extremely difficult period in our history, when living standards plunge, our public finances deteriorate further and enterprise stagnates. And as a UK citizen and taxpayer, I write that with a very heavy heart.
http://www.telegraph.co.uk/finance/comment/liamhalligan/6521350/This-financial-mess-isnt-even-the-end-of-the-beginning-for-UK-wealth.html
So terrible was Gordon Brown's economic stewardship during his decade as Chancellor from 1997, and so huge has been his "fiscal stimulus" since, that the UK now has the biggest structural deficit of any major country.
Britain faces a 2009/10 fiscal shortfall equal to 13pc of GDP – the biggest in our peacetime history – with little sign of improvement. The Government will borrow some £200bn on taxpayers' behalf every year until 2012/13 at least – eight times above "normal" levels. In just four years, an extra £32,000 will be added to the existing sovereign debt burden of every British household.
In an admirably frank report last week, the International Monetary Fund singled out the UK as "uniquely vulnerable" to spiralling debt service costs as we deal with the mess left by Brown's fiscal incontinence. In 2007, Britain spent 4.2pc of its tax revenues on debt interest. By 2014, we'll spend almost 10pc of receipts on servicing government loans, before we even start paying them back, as our national debt sky-rockets from 40pc to more than 100pc of GDP.
Just the increase in annual debt service will equal what the Government currently spends on public transport. Thank you, Mr Brown, for your contribution to our country.
Yet Brown didn't do this alone. Most of our political classes have been complicit in this historic policy error. The UK's mainstream parties, having finally admitted our fiscal situation is desperate, have only recently stopped competing on the basis of who can spend more. Public discourse is now starting, very slowly, to recognise that we actually need to spend and borrow much less. But the politicians still claim, sotto voce, that a debt burden equal to 100pc of GDP "isn't all that bad".
The UK's debt stock is accumulating rapidly, though, at a time when tax revenues, used to service that debt, are going through the floor. Government receipts were down 9pc in September, compared with the same month last year. So we're at risk of plunging into a "debt trap" – having to borrow to pay the debt service on existing debt, causing the total debt stock to spiral out of control.
A sharp economic downturn is always bad for tax receipts. But with the City in meltdown and the UK now a net oil importer, two big sources of government cash have been hammered, indeed making Britain's public finance "uniquely vulnerable". And that's before interest rates start rising, cranking up debt service costs even more.
Faced with such realities, rather than telling the public straight that we face the peacetime equivalent of "blood, sweat and tears", and that sacrifices must be made, our so-called leaders keep the Keynesian rhetoric going. Behind the scenes, though, even Brown and Co have grasped that yet another "fiscal stimulus" would see a sovereign debt downgrade, in turn provoking a creditors' strike – under which the UK would be rendered "insolvent", unable to roll-over its debts.
So that leaves "quantitative easing" – or QE – the even more extreme policy where the Bank of England creates electronic money from nothing, apparently in a bid to stimulate the economy.
The Bank has already created £175bn of such "funny money" since March – some 99.7pc of which, in a bizarre example of circular financing, has been spent on government securities. So our central bank prints money and gives it to the Government, which in turn gives it to the banks. This is the economics of Zimbabwe and the Weimar Republic.
This QE money is supposed to boost bank lending. But banks have instead stuffed much of it into shares on their own account, creating yet another asset bubble. Banks say they're lending more – and they are in the sense that they're "lending" to their own off-balance sheet vehicles, in a desperate attempt to shore-up disastrous sub-prime positions and avoid the write-downs and bank restructuring desperately needed to purge the system.
Lending to the non-financial sector, meanwhile, remains in negative territory despite QE – with thousands of viable UK firms, employing millions of people, facing closure due to a lack of working capital.
Last week, the Bank announced that QE would carry-on – with another £25bn being "injected" into the economy. But heavy hints were dropped that this is the end.
The Bank had to hint this. The UK's international creditors are getting nervous. Despite the on-going "deflation" propaganda, there is growing concern that Britain's money-printing will cause not only inflation to spike, but a sterling crisis too. Both would be very bad news for anyone holding sterling-denominated government securities that aren't indexed-linked – as is the case with the vast majority of UK gilts that are sold.
This latest dose of QE isn't the end of this age of deeply-damaging policy-making by the British political elite. It isn't even the beginning of the end of this ghastly episode in our history, in which our leaders throw all caution to the wind, ignoring centuries of accumulated wisdom and make a bad situation even worse.
I fear we have reached, merely, the end of the beginning of an extremely difficult period in our history, when living standards plunge, our public finances deteriorate further and enterprise stagnates. And as a UK citizen and taxpayer, I write that with a very heavy heart.
http://www.telegraph.co.uk/finance/comment/liamhalligan/6521350/This-financial-mess-isnt-even-the-end-of-the-beginning-for-UK-wealth.html
27 August 2009
The Dollar, denial and money printing ~ News Review
Aug. 21 (Bloomberg) -- The dollar’s role as a good store of value is “questionable” and the currency has a high degree of risk, said Nobel Prize-winning economist Joseph Stiglitz.
“There is a need for a global reserve system,” Stiglitz, a Columbia University economics professor, said at a conference in Bangkok today. Support from countries like China should ensure orderly discussions on a new reserve system, he added.
http://www.bloomberg.com/apps/news?pid=20601103&sid=aH9O..zWjeHs
Denial is a psychotropic, mind-altering drug that by comparison makes crack cocaine look like health food, and addiction to it shuts down the brain. America’s denial about its out-of-control spending, non-repayable debt, financial sector fraud and deceit, decadent political institutions, epic dereliction of leadership duty, fiscal and monetary immorality, and disastrously dishonest system of cronyism is leading the nation into an economic nuclear winter of desolation and chaos.
http://www.24hgold.com/english/contributor.aspx?contributor=Stewart%20Dougherty&article=2289016786G10020
On average, people in the cities surveyed worked 1,902 hours per year, but in Lyon and Paris they worked 1,582 and 1,594 hours respectively. In Cairo, they worked 2,373 hours, while in Seoul they worked 2,312 hours.
The richest workers are in New York and Zurich, where they would have to work nine hours to buy an iPod nano, while workers in Mumbai needed to work 20 nine-hour days – nearly one month's salary – to buy the gadget.
Copenhagen, Zurich, Geneva and New York were the cities where employees had the highest gross wages.
In terms of the most expensive cities, London fell from the top of the list to the 21st place because of the pound's devaluation, the survey showed.
Oslo is the world's most expensive city now, followed by Zurich, Copenhagen, Geneva and Tokyo, while New York was on the list at number 6.
'76 percent of the Europeans estimate that the crisis will not be over by 2012' (GlobalEurometre June 2009)
A potted history of Fed chairpersons by Quinn.........
http://www.financialsense.com/editorials/quinn/2009/0825.html
US money printing goes full tilt....Summary
The Federal Reserve and the federal government are attempting to "plug the gap" caused by a slowdown of private credit/debt creation.
Non-US demand for the dollar must remain high, or the dollar will fall.
Demand for US assets is in negative territory for 2009
The TIC report and Federal Reserve Custody Account are reviewed and compared
The Federal Reserve has effectively been monetizing US government debt by cleverly enabling foreign central banks to swap their Agency debt for Treasury debt.
The shell game that the Fed is currently playing obscures the fact that money is being printed out of thin air and used to buy US government debt.
http://www.chrismartenson.com/blog/shell-game-how-federal-reserve-monetizing-debt/25806
http://www.zerohedge.com/article/fed-enabling-foreign-central-banks-swap-out-their-agency-debt-treasuries
“There is a need for a global reserve system,” Stiglitz, a Columbia University economics professor, said at a conference in Bangkok today. Support from countries like China should ensure orderly discussions on a new reserve system, he added.
http://www.bloomberg.com/apps/news?pid=20601103&sid=aH9O..zWjeHs
Denial is a psychotropic, mind-altering drug that by comparison makes crack cocaine look like health food, and addiction to it shuts down the brain. America’s denial about its out-of-control spending, non-repayable debt, financial sector fraud and deceit, decadent political institutions, epic dereliction of leadership duty, fiscal and monetary immorality, and disastrously dishonest system of cronyism is leading the nation into an economic nuclear winter of desolation and chaos.
http://www.24hgold.com/english/contributor.aspx?contributor=Stewart%20Dougherty&article=2289016786G10020
On average, people in the cities surveyed worked 1,902 hours per year, but in Lyon and Paris they worked 1,582 and 1,594 hours respectively. In Cairo, they worked 2,373 hours, while in Seoul they worked 2,312 hours.
The richest workers are in New York and Zurich, where they would have to work nine hours to buy an iPod nano, while workers in Mumbai needed to work 20 nine-hour days – nearly one month's salary – to buy the gadget.
Copenhagen, Zurich, Geneva and New York were the cities where employees had the highest gross wages.
In terms of the most expensive cities, London fell from the top of the list to the 21st place because of the pound's devaluation, the survey showed.
Oslo is the world's most expensive city now, followed by Zurich, Copenhagen, Geneva and Tokyo, while New York was on the list at number 6.
'76 percent of the Europeans estimate that the crisis will not be over by 2012' (GlobalEurometre June 2009)
A potted history of Fed chairpersons by Quinn.........
http://www.financialsense.com/editorials/quinn/2009/0825.html
US money printing goes full tilt....Summary
The Federal Reserve and the federal government are attempting to "plug the gap" caused by a slowdown of private credit/debt creation.
Non-US demand for the dollar must remain high, or the dollar will fall.
Demand for US assets is in negative territory for 2009
The TIC report and Federal Reserve Custody Account are reviewed and compared
The Federal Reserve has effectively been monetizing US government debt by cleverly enabling foreign central banks to swap their Agency debt for Treasury debt.
The shell game that the Fed is currently playing obscures the fact that money is being printed out of thin air and used to buy US government debt.
http://www.chrismartenson.com/blog/shell-game-how-federal-reserve-monetizing-debt/25806
http://www.zerohedge.com/article/fed-enabling-foreign-central-banks-swap-out-their-agency-debt-treasuries
11 April 2009
The perils of printing money ~ none, it worked for Zimbabwe
Many major central banks around the world have now spent all their bullets in lowering official interest rates, yet their economies still founder.
Quantitative easing (QE) is now being seen as a last hope for governments in the US, Japan, Britain and Europe to prevent the onset of possible depression following the global economic crisis.
In a nutshell, QE involves central banks printing money to purchase a range of assets from the market. Typically these are government and mortgage bonds. The US and others are, on the one hand, financing their fiscal deficits by issuing bonds to the market, yet on the other hand are supersizing their balance sheets by buying back these and other securities with electronically created money.
If this sounds crazy then you understand the situation. QE advocates say that money supply in the economy is increased which should allow easier borrowing to purchase assets like property. This in turn is designed to halt deflation and raise prices.
But what happens when the party is over? Governments can't print money and buy bonds forever.
The resulting situation is one of a bond market bubble where yields are artificially low and governments are the only major buyers. Investors will stay out of the market, in fear of losses on these bonds when the QE buying program ends. Long-term rates then rise rapidly just as economic recovery is emerging.
This practice is almost as crazy as the whole multi-layer of leverage created in the first place when the US Federal Reserve held rates at just 1 per cent for far too long and produced the great property bubble of the early 2000s. Perversely, it will once again be government policy that spawns this mess.
Credit goes to governments for supporting the global financial markets and guaranteeing bank deposits. Safeguarding the integrity of the financial system is paramount to a free and law-abiding society. Credit also for establishing programs to relieve banks of toxic assets so that they may get back to good old-fashioned money lending. Future re-regulation of the banking system will prevent many of the unfortunate aspects of runaway capitalism from returning.
That said, the practice of widespread QE implementation is fraught with folly and may get us into a situation just as dire as the one we are currently in.
Clearly central banks consider the downside of QE (surging inflation and rapidly rising borrowing costs) a far more fixable problem than what we are currently in, using traditional monetary policy measures.
So why go from one disaster to another or bust to boom and back again when we have the opportunity to get things sorted in this current downturn? Clearly the world needed to deleverage and many bad industries and enterprises had to consolidate by either merging, rationalising or bankruptcy. It is likely we have already suffered the majority of the pain. The US car makers will emerge much greener and more globally competitive. Many weak banks have already fallen or been consumed by the large. The huge discount in many stocks will open the door for investors to prudently rebuild their portfolios.
There has already been massive government fiscal stimulus, record low rates and huge equity injections into the private sector … maybe, just maybe it is time to step back a little and see what happens from the sidelines without authorities thinking they need to continue to coach from the middle of the pitch with untested and possibly dangerous policies.
Closer to home, the Reserve Bank has wisely lowered its benchmark rate to 3 per cent to support the economy yet still has ammunition to do more. It believes a combination of historically low rates and fiscal stimulus will be enough to see Australia through the storm. Luckily for us, an extremely solid economic foundation built up over the past 15 years should mean that QE never gets into the minutes of RBA policy.
Then there is the folly of blanket hand-outs. Surely they should be saved. The Rudd Government is wrong to be giving huge incentives for the public to go out and leverage themselves again in this economic environment. Did excessive leverage not cause the problem in the first place?
Neale Muston, the former managing director of fixed income at Morgan Stanley Australia, now runs a global markets trading business in Sydney.
Source: The Sydney Morning Herald
http://business.brisbanetimes.com.au/business/the-perils-of-printing-money-20090410-a2v4.html
Quantitative easing (QE) is now being seen as a last hope for governments in the US, Japan, Britain and Europe to prevent the onset of possible depression following the global economic crisis.
In a nutshell, QE involves central banks printing money to purchase a range of assets from the market. Typically these are government and mortgage bonds. The US and others are, on the one hand, financing their fiscal deficits by issuing bonds to the market, yet on the other hand are supersizing their balance sheets by buying back these and other securities with electronically created money.
If this sounds crazy then you understand the situation. QE advocates say that money supply in the economy is increased which should allow easier borrowing to purchase assets like property. This in turn is designed to halt deflation and raise prices.
But what happens when the party is over? Governments can't print money and buy bonds forever.
The resulting situation is one of a bond market bubble where yields are artificially low and governments are the only major buyers. Investors will stay out of the market, in fear of losses on these bonds when the QE buying program ends. Long-term rates then rise rapidly just as economic recovery is emerging.
This practice is almost as crazy as the whole multi-layer of leverage created in the first place when the US Federal Reserve held rates at just 1 per cent for far too long and produced the great property bubble of the early 2000s. Perversely, it will once again be government policy that spawns this mess.
Credit goes to governments for supporting the global financial markets and guaranteeing bank deposits. Safeguarding the integrity of the financial system is paramount to a free and law-abiding society. Credit also for establishing programs to relieve banks of toxic assets so that they may get back to good old-fashioned money lending. Future re-regulation of the banking system will prevent many of the unfortunate aspects of runaway capitalism from returning.
That said, the practice of widespread QE implementation is fraught with folly and may get us into a situation just as dire as the one we are currently in.
Clearly central banks consider the downside of QE (surging inflation and rapidly rising borrowing costs) a far more fixable problem than what we are currently in, using traditional monetary policy measures.
So why go from one disaster to another or bust to boom and back again when we have the opportunity to get things sorted in this current downturn? Clearly the world needed to deleverage and many bad industries and enterprises had to consolidate by either merging, rationalising or bankruptcy. It is likely we have already suffered the majority of the pain. The US car makers will emerge much greener and more globally competitive. Many weak banks have already fallen or been consumed by the large. The huge discount in many stocks will open the door for investors to prudently rebuild their portfolios.
There has already been massive government fiscal stimulus, record low rates and huge equity injections into the private sector … maybe, just maybe it is time to step back a little and see what happens from the sidelines without authorities thinking they need to continue to coach from the middle of the pitch with untested and possibly dangerous policies.
Closer to home, the Reserve Bank has wisely lowered its benchmark rate to 3 per cent to support the economy yet still has ammunition to do more. It believes a combination of historically low rates and fiscal stimulus will be enough to see Australia through the storm. Luckily for us, an extremely solid economic foundation built up over the past 15 years should mean that QE never gets into the minutes of RBA policy.
Then there is the folly of blanket hand-outs. Surely they should be saved. The Rudd Government is wrong to be giving huge incentives for the public to go out and leverage themselves again in this economic environment. Did excessive leverage not cause the problem in the first place?
Neale Muston, the former managing director of fixed income at Morgan Stanley Australia, now runs a global markets trading business in Sydney.
Source: The Sydney Morning Herald
http://business.brisbanetimes.com.au/business/the-perils-of-printing-money-20090410-a2v4.html
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