Quantitative Easing

[kent nickell]

Quantitative easing as I understand it... Japan has apparently had a policy of quantitative easing for the last ten years that has been pretty stagnating but I'm not sure how well that can be compared to the US economy...

We appear to be aggressively going down the path of quantitative easing. This basically seems to involve increasing the money supply by printing more money to help ease us out of the credit crunch...

The US Treasury Dpt currently headed by Paulson is part of the US Govt. The Federal Reserve currently headed by Bernacke is supposed to be an independent entity free of government interference with the main goal of fighting inflation... (governments love to spend hence the need for independence for a body trying to fight inflation)

The Fed is now aggessively buying long-term Treasuries in an attempt to keep long term interest rates (which affect mortgages and corporate borrowing) low in line with the very low short term interest rates that banks use to lend money to each other.

As our government goes more and more into debt and therefore less stable and closer to insolvency or defaulting on this debt, people who purchase this debt want to be paid higher interest. We are currently going more into debt with the various bailouts and stimulus packages. The Fed by buying back these long term Treasuries is essentially artificially lowering these rates and in essence 'monetizing' this debt. Printing money to reduce debt is not overall a good plan. However, at this point it does appear to have the benefit of also fighting deflation by attempting to free up credit.

The balancing act will come when credit does start easing up. Then hopefully we won't have overmonetized the system leading to inflation or hyperinflation and will be able to pull back on printing money and having the Fed buy long-term Treasuries. Then the Fed can get back to managing inflation and we should see interest rates go back up to levels appropriate to cause reasonable people to want to buy our debt.....


Analysis : DBS Bank Research by Jens Lauschke, Jan 15, 2009
USA Interest Rate Outlook & Strategy: There is no bubble in Treasuries
Link: http://www.rgemonitor.com/redir.php?sid=2&tgid=10004&cid=316197

 

[kent nickell]

Re: Quantitative Easing

Deflation/Inflation/De-leveraging...This article has it all but it's hard to argue with the last paragraph... But 2011 is a long way off considering all the unprecedented information we are getting on a weekly basis.. A key planning factor would also seem to be flexibility... I liked what the author of 'Re-inventing Collapse' said when asked what his plan is.. He said 'My plan is to not rely on a single plan'

hattip Rickk

http://uk.reuters.com/article/gc04/idUKTRE50M5CZ20090123

Fears of deflation, inflation coexist uncomfortably

Fri Jan 23, 2009 7:02pm - Ottawa Citizen- excerpt

NEW YORK (Reuters) - "Global investors have been pummeled so hard by steep losses in financial markets that some have developed a split personality: one that agonizes about deflation even as the other frets over future inflation. The two threats appear contradictory, but may yet prove to be related. Most immediately, prices on everything from real estate and stocks to gasoline and consumer goods are plummeting, creating the very real danger of a deflationary spiral.

At the same time, there is a strong risk that the Federal Reserve's effort to rescue the economy by pumping cash into the financial system will lead to resurgent inflation down the line, especially if the central bank waits too long to withdraw the vast emergency lending programs deployed to fight the crisis.

"The choice over which fear to harbor depends on the investor's time horizon," says Milton Ezrati, chief economist at Lord Abbett. "The economy could ultimately face a significant inflationary threat unless the Fed can absorb this excess liquidity quickly as this crisis passes."

"U.S. consumers' current debt load is estimated to be approximately $2.6 trillion, which ensures that deleveraging to manageable levels may take until 2011 or beyond," said Ben Pace, chief investment officer at Deutsche Bank Private Wealth Management."

 

[kent nickell]

Re: Quantitative Easing

What is a Treasury Bubble Burst? Every investment has risks and benefits... Right now there is a lot of worry and flight to safety so there is a good market for US Treasuries even though the US is taking on a dangerous amount of debt. They are willing to make this investment at a low rate of return for the benefit of protection of the principal. Fears of deflation also help keep interest rates low. So people will buy US Treasuries at low interest rates as long as there is a dismal deflationary outlook to the economy (see the attached manufacturing ISM chart).

Eventually, as with many other things, this will turn out to be a bad investment (treasury bubble burst). Once things turn around and the economy starts picking up then interest rates will probably go up reflecting more inflationary trends and worries about national debt levels. If a treasury bond is now paying say 8% interest you don't want to be holding a lot of treasury bonds that are paying 2% interest (nobody is going to want to buy them from you). Say you do own a $1000 2% treasury in this environment. People will buy it from you but at a discount.. Maybe they will pay you $900 so that the real rate of return will be more equal to the current going rate. You have lost money on this burst bubble.

But that is what investing is all about. Why it is useful to be diversified. Money will flow into and out of various instruments. Who can call the bottom of a stock market or when deflationary trends will turn around? But it is possible to slowly buy into increasing rates of return. Of course things don't always happen slowly.....



http://www.ibtimes.com/articles/20080102/ism-manufacturing-jan-2.htm


Definition :
The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states. The survey queries purchasing managers about the general direction of production, orders, inventories, employment, vendor deliveries and prices. The questions are qualitative rather than quantitative; that is, they ask about the general direction, rather than the specific level, of business. Each question is transformed into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses. Five components are weighted to form the composite

The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and not subject to revision.

Why is it useful?
The ISM is the leading indicator to the manufacturing industry therefore it is highly deliberated, analyzed, and anticipated by various parties, for this indicator has provide its accuracy in providing an overviewed perspective on the manufacturing industry. As manufacturing is a key determining factor in the business cycle then is accordingly affected by this cyclic motion. In analyzing the ISM figure it comes in the 50 barrier a reading above fifty is considered a healthy growth level and implies growth that is a reading below that number is an indicator of slowing economy as the lower the number gets it might indicate the recession state the economy might lead to. The indicator is valuable as well for the complex diversities contained in this index such as production, employment, durable goods, and others for those are key aspects to determine the current conditions of the economy as well as to the early release of this index as it might as well put investors, analysts, and policy makers at ease.

A stronger reading on the ISM is a very strong push for the currency that is gained from the economical growth that is reflected in the reading, which is why this is one of the market mover indicators. In addition to that the stocks respond positively to this stronger reading on this index as well as stronger growth means vital economy means higher production therefore higher corporate earnings, that is this effect on the stock markets is in a timely manner as the realization of inflation pressure could be an indicator of upcoming change in monetary policies therefore might drop again. Generally speaking the effect in strong and positive in favour of the currency and stocks when the ISM reading is strong and above 50, as the opposite is as well applicable in both scenarios.

ysis : DBS Bank Research by Jens Lauschke, Jan 15, 2009
USA Interest Rate Outlook & Strategy: There is no bubble in Treasuries
Link: https://www.dbsvresearch.com/research/dbs/research.nsf/(vwAllDocs)/734A000E11D4EA164825753F002E318B/$FILE/ir_2009jan15_us.pdf