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Why QE and FOMC Tools Do Matter


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#21 salsabob

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Posted 09 September 2012 - 09:08 PM

Isn't the Fed providing the $ to the Gov't who then does the dropping from the helicopter?


Great question! But the answer is....NOT SO!

Because the lion's share of federal budget is spent NOT on building infrastructure, Not on buying hi-tech military hardware, NOT on research of futuristic products & processes, NOT on developing new pharmaceuticals....etc....That is why the Trillion dollar deficits are not reviving the economy.

Lion's share of federal budget is spent on writing checks to people. Those checks are small and are spent mainly on consumption of necessities. It is NOT a capital forming process NOR productivity enhancement process, which result in wealth creation. Only real wealth creators are manufacturing, agriculture, mining and applied research. Retail consumption is not a wealth creator if stuff is mostly imported from other countries.


That's pretty silly. Once the capital forming process is done and the productivity enhancements are put to bed, just where does that increased production get sold to? Martians?

The last thing a good successful businessman wants to do is spend his hard earned cash in increase production or, for that matter, hire someone - a business is not a social service. It's not until his order book (or a business plan that forecasts his order book) screams at him to increase production that he'll take the leap. People who don't get this either haven't run a successful business or soon won't. ;)

The primary problem, by far, with the economy is households are de-leveraging unprecedented debt levels. That means they are not spending at a level to sustain economic growth. Businesses are not stupid, they are not going to use their hard earned cash to increase production at a time when demand is insufficient. And, let's not forget, we are a net importing nation so there is, on net, absolutely no help there.

There is only one sector of the economy in a position to spend, on net, i.e. deficit spend. And will need to do so until households' balance sheets are healthy again. If not, then we continue to get what we've been getting in 2012 or worse; possible a lot worse.

It's weird that everyone gets that the end of year "fiscal cliff" (i.e. reduced federal deficit spending) will put us into a severe economic contraction, but hardly anyone has the brains to make the connection of, hmm, what would increased federal deficit spending do - why, by golly, it might cause an economic expansion.

But that's okay, I still can continue to do very well by taking money from those folks that can't see anything but hyperinflation just around the corner. It's like taking candy from babies -- and more or less for the same underlying reason. ;)

Edited by salsabob, 09 September 2012 - 09:11 PM.

John Galt shrugged, outsourced to Red China and opened a hedge fund for unregulated securitized credit derivatives.

If the world didn't suck, wouldn't we all just fly off?

#22 pdx5

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Posted 10 September 2012 - 12:39 AM

That's pretty silly. Once the capital forming process is done and the productivity enhancements are put to bed, just where does that increased production get sold to? Martians?



You really need to travel the world to see first hand the growth in Asia. I have traveled to several countries in Asia during the last 3 years. Look at the table below showing GDP growth in year 2011. They are growing much faster than US & Europe. I am just astounded at the new infrastructure & industry created in Asian countries in the last decade. China is the 2nd biggest and India is now the 9th largest economy in the world. There are plenty of growing markets demanding goods and services.

Rank Country % GDP growth in 2011

1 Qatar 18.7
3 Turkmenistan 9.9
4 Iraq 9.6
5 China 9.5 <---------------------2nd largest economy in world
6 Papua New Guinea 9
7 Argentina 8.8
8 Mongolia 8.5
9 Turkey 8.5
10 Sri Lanka 8.3
11 Laos 8.3
11 Eritrea 8.2
12 Bhutan 8.1
13 India 7.8 <---------------------------9th largest economy in world
15 Panama 7.4
18 Afghanistan 7.1
19 Equatorial Guinea 7.1
20 Uzbekistan 7.1
21 Kyrgyzstan 7
22 Moldova 7
23 Rwanda 7
24 Liberia 6.9
25 Nigeria 6.9
26 Cambodia 6.7
27 Zambia 6.7
29 Chile 6.5
30 Democratic Republic of the Congo 6.5
31 Estonia 6.5
32 Kazakhstan 6.5
33 Maldives 6.5
34 Saudi Arabia 6.5
35 Indonesia 6.4
36 Paraguay 6.4
37 Uganda 6.4
38 Bangladesh 6.3
39 Botswana 6.2
40 Peru 6.2
41 Haiti 6.1
42 Tanzania 6.1
43 Hong Kong, China 6
44 Lithuania 6
45 Tajikistan 6
46 Uruguay 6
47 Zimbabwe 6
48 Ecuador 5.8
49 Vietnam 5.8
50 Kuwait 5.7
51 Solomon Islands 5.7
52 Cape Verde 5.6
53 Gabon 5.6
54 Burma 5.5
55 The Gambia 5.5
56 Georgia 5.5
57 Niger 5.5
58 Guyana 5.3
59 Kenya 5.3
60 Kosovo 5.3
61 Mali 5.3
62 Singapore 5.3
63 Lesotho 5.2
64 Malaysia 5.2
65 Taiwan 5.2
66 Mauritania 5.1
67 Sierra Leone 5.1
68 Belarus 5
69 Bolivia 5
70 Republic of the Congo 5
71 Sao Tome and Principe 5
72 Seychelles 5
73 Suriname 5
74 Burkina Faso 4.9
75 Colombia 4.9
76 Djibouti 4.8
77 Guinea-Bissau 4.8
78 Israel 4.8
79 Philippines 4.7
80 Ukraine 4.7
81 Armenia 4.6
82 Malawi 4.6
83 Morocco 4.6
84 Dominican Republic 4.5
85 Oman 4.4
86 Sweden 4.4
87 Russia 4.3
88 Burundi 4.2
89 Mauritius 4.2
90 Central African Republic 4.1
91 Costa Rica 4
92 Guinea 4
93 Latvia 4
94 Nicaragua 4
95 Senegal 4
96 Mexico 3.9
97 South Korea 3.9
98 Benin 3.8
99 Cameroon 3.8
100 Poland 3.8
101 Togo 3.8
102 Vanuatu 3.8
103 Angola 3.7
— World average 3.7
104 Luxembourg 3.6
105 Namibia 3.6
106 Honduras 3.5
107 Nepal 3.5
108 South Africa 3.4
109 Austria 3.3
110 Slovakia 3.3
111 United Arab Emirates 3.3
112 Kiribati 3
113 Macedonia 3
114 Algeria 2.9
115 Brazil 2.8
116 Brunei 2.8
117 Guatemala 2.8
118 Venezuela 2.8
119 Finland 2.7
120 Germany 2.7
121 Albania 2.5
122 Belize 2.5
123 Chad 2.5
124 Iran 2.5
125 Jordan 2.5
126 Malta 2.5
127 Iceland 2.4
128 Pakistan 2.4
129 Serbia 2.3
130 Bosnia and Herzegovina 2.2
131 Bulgaria 2.2
132 Canada 2.2
133 Comoros 2.2
134 Switzerland 2.1
135 Antigua and Barbuda 2
136 The Bahamas 2
137 Belgium 2
138 El Salvador 2
139 New Zealand 2
140 Saint Lucia 2
141 Samoa 2
142 Australia 1.8
143 Barbados 1.8
144 Czech Republic 1.8
145 Hungary 1.8
146 Montenegro 1.8
147 France 1.7
148 Norway 1.7
149 European Union 1.6
150 Netherlands 1.6
151 Bahrain 1.5
152 Denmark 1.5
153 Fiji 1.5
154 Jamaica 1.5
155 Lebanon 1.5
156 Romania 1.5
157 Saint Kitts and Nevis 1.5
158 Thailand 1.5
159 Tonga 1.4
160 Egypt 1.2
161 Ireland 1.1
162 Slovenia 1.1
163 Trinidad and Tobago 1.1
164 United Kingdom 1.1
165 Madagascar 1
166 Tuvalu 1
167 Dominica 0.9
168 Croatia 0.8
169 San Marino 0.8
170 Spain 0.7
171 Italy 0.6
172 Azerbaijan 0.2
173 Cyprus 0
174 Tunisia 0
175 Sudan -0.2
176 Saint Vincent and the Grenadines -0.4
177 Japan -0.5
178 Andorra -1.8
179 Syria -2
180 Swaziland -2.1
181 Portugal -2.2
182 Yemen -2.5
183 United States -3
184 Cote d'Ivoire -5.8
185 Greece -6
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#23 ...

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Posted 10 September 2012 - 03:51 AM

There is only one sector of the economy in a position to spend, on net, i.e. deficit spend [government.] And will need to do so until households' balance sheets are healthy again.


Totally discredited Keynesian rubbish.

Carter tried it, it failed.
Japan has tried it repeatedly for 20 years, it has failed repeatedly.
Bush-43 tried it in '01, '07 and '08, it failed each time.
The current administration tried it in '09 to the tune of almost $1 trillion, and it failed.

Why? Simple.

Tax a dollar out of the private economy and give it to the government to spend and all that happens is that the same dollar is spent, perhaps a little more rapidly, but much more inefficiently. That's a net detriment.

Borrow a dollar out of the private economy? Same deal. Also a net detriment.

Borrow a dollar from foreigners? It's no longer available (to the foreigners who bought the U.S. debt) to buy U.S. goods or services or invest in other, actually productive U.S. assets. Net detriment.

Print a dollar and all that happens is inflation at some point. Big net detriment. There's a reason gold went from 250 to 1900 in 9 years.

Interestingly, in our latest adventure into Keynesian "stimulus" the feds sent hundreds of billions to the states. What did the states do? They (as a whole) simply borrowed less themselves, almost dollar-for-dollar. They're not stupid, and almost all of them must balance their budgets.

And tinkering around the edges with one-time tax cuts or tax rebates or tax credits never works. They get saved or applied to debt reduction. People aren't stupid either. They know nothing is really changed by one-shot deals.

There is no free lunch.

All of the dozens of times deficit-spending "stimulus" has been tried, you get a temporary little blip in spending (often for only one quarter) and then the effect disappears and it becomes a drag on growth.

Businesses and people in general figure out (or at least have a vague sense) that at some point deficits will have to be paid for, which could mean higher tax rates -- which means incentives, or at least the perception of those future incentives to work, produce and invest have been reduced, not increased.

Not to mention (perhaps more importantly) the large and general increase in uncertainty about future policy. Which are a couple of the main reasons large corporation cash hoards are at record levels and small business has pulled in its horns. The worst part of that is that new and small businesses account for almost all net new hiring. The older the corporation (in general) the less their employment expands, in fact they are usually a drag on net hiring.

The pernicious effect is at the margin. Just because policy is currently counterproductive doesn't mean that everyone works less or takes less risk. But, it does mean that 1 or 2% say "screw it, why bother?" and retire, and another 10 or 20% become skeptical and retrench, shelving expansion and hiring plans, and the decision-making of the rest is also affected to varying degrees.

And there went any possibility of robust growth, right out the window.

Bush-43 only got taxes right in '03 with marginal-rate cuts which changed incentives -- and they worked. Just as Coolidge, Kennedy-LBJ and Reagan each set off booms in the '20s, '60s and '80s with marginal-rate tax cuts, respectively.

The "fiscal cliff" (not necessarily in its current form with major defense cuts) is exactly what we need. A temporary down-blip in useless, non-productive spending, followed by the realization that this government could possibly get back on a spending path that might be fiscally sustainable.

That alone could actually set off significantly higher growth. Marginal-rate tax cuts would be even better and would set off the usual boom. With the attendant increases in tax revenues and resulting deficit reduction. Assuming that expenditures are kept under control. Say, via entitlement reform. Which has to happen or our "entitlements" will crash and burn of their own weight and we're all screwed.

Who knows, maybe those are the possibilities that the market is now discounting, never mind all of this QE crapola.

#24 salsabob

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Posted 10 September 2012 - 08:28 AM

That's pretty silly. Once the capital forming process is done and the productivity enhancements are put to bed, just where does that increased production get sold to? Martians?



You really need to travel the world to see first hand the growth in Asia. I have traveled to several countries in Asia during the last 3 years. Look at the table below showing GDP growth in year 2011. They are growing much faster than US & Europe. I am just astounded at the new infrastructure & industry created in Asian countries in the last decade. China is the 2nd biggest and India is now the 9th largest economy in the world. There are plenty of growing markets demanding goods and services.

Rank Country % GDP growth in 2011

1 Qatar 18.7
3 Turkmenistan 9.9
4 Iraq 9.6
5 China 9.5 <---------------------2nd largest economy in world

....


Let's put aside such normalizing considerations as GDP per capita or even just GDP as the base for measuring growth. [Did you know that an infant Blue Whale doubles its lenght in 6 months? Imagine if it continued to grow that fast its whole life - why there be no room in the Pacific for it to turn around.]

Given your travels, one would think you would understand the degree in these various countries of their centralized planning, one party rule, and the how they have stimulated their economies by govt decree. When you travel, one needs to look beyond how many widgets are comng off the line. Take a look at their financing (in China, it all can be quickly traced back to the central govt) and the source of demand in their order book (in China, that would be exports as decreed by the central govt that does not allow its currency to float as well as post- global meltdown stimulus that on a GDP basis makes what the US did look rather puny).

I would like to see more govt deficit spending (a combination of more tax cuts and actual spending) in the US; such spending is essentially costless (no tax increases and no attributable demand-pull inflation). However, I am not too fond of one party rule and centralized govt planning on the scale of the countries often presented by folks like yourself as being exemplary for us. But I'm not too worried about that; I don't think either Stalin or Mao are own the ticket this election. ;)
John Galt shrugged, outsourced to Red China and opened a hedge fund for unregulated securitized credit derivatives.

If the world didn't suck, wouldn't we all just fly off?

#25 arbman

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Posted 10 September 2012 - 08:35 AM

After that weak jobs report, MONEY PRINTING IS COMING. :D

Posted Image

http://www.businessi...-traders-2012-9



Am I long? No. Am I planning to short this pig? Yes. :lol:

#26 salsabob

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Posted 10 September 2012 - 08:48 AM

There is only one sector of the economy in a position to spend, on net, i.e. deficit spend [government.] And will need to do so until households' balance sheets are healthy again.


Totally discredited Keynesian rubbish.

Carter tried it, it failed.
Japan has tried it repeatedly for 20 years, it has failed repeatedly.
Bush-43 tried it in '01, '07 and '08, it failed each time.
The current administration tried it in '09 to the tune of almost $1 trillion, and it failed.


Failed? What do you mean when you say "failed?"

This is like after you sank your yacht (because you were too drunk to avoid the reef), you now sceam failure because the Coast Guard cutter that rescued you doesn't have fuzzy toilet seats to sit on. You're still drunk. And, I'm still taking your money. :banana:

Why? Simple.

Tax a dollar out of the private economy and give it to the government to spend and all that happens is that the same dollar is spent, perhaps a little more rapidly, but much more inefficiently. That's a net detriment.

Borrow a dollar out of the private economy? Same deal. Also a net detriment.


It is simple, but not in the brainwashed way that you believe.

Where did you get your dollar? I'm sure you earned it, but you did not make it. If you did, then I would have to call the FBI. ;)

Just how do you think dollars appear in the economy for us to earn?

Sure the banks make money out of thin air, but that is double entry accounting - you've got to pay the bank back and zero out those dollars they made for you. BUT, you also have to pay them interest. Where is that going to come from?

Here's a clue - fix your gaze on one of those moronic "debt clocks." When you can see that's not debt but equity, you have arrived.

It's not really intellectually difficult to grasp the reality, but after decades of brainwashing, it is very difficult to open your eyes; to take the Red Pill. I could say more, a lot more, but it is usually hopeless and nearly always a thankless task. I've grown bored with that effort over many years. I now just make a lot of money from those who relish their blindness.
John Galt shrugged, outsourced to Red China and opened a hedge fund for unregulated securitized credit derivatives.

If the world didn't suck, wouldn't we all just fly off?

#27 salsabob

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Posted 10 September 2012 - 09:04 AM

After that weak jobs report, MONEY PRINTING IS COMING. :D

Posted Image

http://www.businessi...-traders-2012-9


Am I long? No. Am I planning to short this pig? Yes. :lol:


I'm sure you realize that is Ben Bernanke throwing those dollars. What you may not get is that those dollars use to be interest payments into the economy. And what people never get, although it is in every FED statement, is that he's throwing those dollars to Tim Geithner as "profit" and then big Tim turns around and sends those dollars back to the ether from which they came. It's all done by computer key strokes on an electronic spreadsheet [and psssss, :ninja: removing dollars from the economy is deflationary, but don't tell anyone.]

Get this, and you will be on your way to enlightenment.

Just never ever forget, however, that 99.9% of people don't understand this.... and they will move the markets accordingly (... at least for a while). And that is what Ben and Tim are counting on. ;)

Edited by salsabob, 10 September 2012 - 09:05 AM.

John Galt shrugged, outsourced to Red China and opened a hedge fund for unregulated securitized credit derivatives.

If the world didn't suck, wouldn't we all just fly off?

#28 andiron

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Posted 10 September 2012 - 09:39 AM

keynesian solution works when debt situation for the country is not precarious....but if major economies of the world go on a rampage of debt financed growth, as we are witness to in the last 30 yrs or so, the GRAND BUST is all but inevitable...we have seen the collapse of the cost of borrowing in developed countries leading to even more borrowing leading to the record advanced economies Debt/GDP at this time...(if we include private debt, the situation is even more dire)...The easy money was plowed in Global RE among other assets and here we have the primary evidence of Global Hyperinflated Asset (GHAs).. many houses have galloped 10 times their value since early 90s in many countries .... Rampant building construction also, for a time being, made GDP look ever so better and thus debt/GDP manageable but its inevitable crash is essential for a stable equilibrium...... Technically, it could be that we are at the cusp of something big ....A realization by market participants that QE is just a temporary psychological boost...The stock of money needed to finance global economy, if increased, would go mainly to assets (in whatever way it does, even though excess reserves nullify, or perhaps, dilute the intent of QE) that are perceived attractive as financial assets and NOT in endeavors that have long term benefits (say new and efficient technologies) ...Now increasing financial asset prices will boost consumer spending - restaurant visits, tourism, mall shopping etc- and hence the GDP (assuming import cost is a smaller fraction, and it is) but if it is to the detriment of future well being or not remains to be answered....

Edited by andiron, 10 September 2012 - 09:43 AM.


#29 andiron

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Posted 10 September 2012 - 10:48 AM

also more on this on FT

....
a sampling...

And a rising number of voices, often those not so close to policy making circles but privately including some within the club, suggest central bankers could become more radical still. Central banks are being urged to buy assets other than government bonds, breaking a taboo that they should not accept credit risk on to their balance sheet.

While none of this is palatable, it is better than the really radical ideas that may gain traction if economic malaise lingers, such as the infamous “helicopter drop”. A central bank could simply credit the bank accounts of the citizens in a country, directly boosting incomes for a period and encouraging them to spend.

A variant of this proposal is to finance the spending of government temporarily, allowing it to cut taxes for a period. This monetary financing of government is outlawed in Europe for the good reason that when it has previously been tried direct money-printing has ended in hyperinflation. An economy cannot provide sufficient goods and services to match all the newly minted cash at prevailing prices, and inflation takes hold.

...........

http://www.ft.com/in...l#axzz2655SAVvl

Edited by andiron, 10 September 2012 - 10:48 AM.


#30 sluzbenik1

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Posted 10 September 2012 - 10:55 AM

Interesting discussion... I tend to think the US is, as Andiron says, at the limit of deficit spending, but simply cutting taxes won't work either, because there's still no guarantee that this will do anything other than increase corporate coffers. The US already has the lowest corporate and individual tax rates anywhere in the developed world. And we have badly unaddressed social needs, mainly education and health care and to an increasing extent, purely basic infrastructure. These are areas where the free market doesn't work so hot, and where government could step in, creating stability and more confidence in the future. Unfortunately, in post-industrial economies government spending provides a superstructure for all other economic activities, less so in the US than Europe. For the first time in a long time Americans are retrenching, though consumer spending remains strong. But it can't remain so forever in the face of health care costs (which are actually going to increase for the uninsured who have to buy insurance, further depressing consumer spending while making insurance companies even wealthier) and education. The student loan crisis will be the next one in 5-7 years...There is no way 20-somethings are going to be able to pay off their loans. Their baby boomer parents can no longer afford to bail them out, so we've got a big problem...If we do not get inflation, it will be a bigger problem, as it will not be inflated away, especially if salaries remain relatively stagant. So I agree with salsabob, and I'm just saying specifically where debt transfer needs to take place. On the other hand, I fail to see how inflation will not be the end result. How the Fed manages inflation expectation in the next 5 years is key to sustained recovery. I fear it will be relatively easy to start an inflation snowball at some point. Inflation is fine, but it has to be managed...if wage growth and consumer spending is devoted to necessities like health care and student loan payments rather than buying stuff, a very-hard-to-stop period of stagflation will result.