If Bernanke Does Not Taper Soon, The Bond Market Will Force Him

[Kushinator]

And yes I know, the Fed controls the reserve level but the reserve level is relevent because of the FEDs paying banks interest on those reserves to manipulate the over night rate, which has a effect on short term interest rates.

Paying interest on excess reserves eliminates volatility in the overnight market.

Who's buying up all of our short term Bonds ? Got to keep all that new debt cheap.

The Fed, foreign countries, money market funds, banks, investment brokerages, etc....

And all that credit Bernakes creating as he knocks down the value of the dollar ? Its going into the asset markets and not the economy.

Silly rabbit, there is not relationship between increasing the amount of excess reserves in the banking system and a decline in the dollar.

So why continue ?

To ensure asset price volatility does not spook an entire generation out of investing.

 

[Kushinator]

First, Bull sh**. Bernanke mentioned stopping QE possibly later this year and he's basing that on positive economic indicators ?

That would be 2% inflation, real GDP growth more than 2%, and unemployment between 6.5% and 7%.

You know so bernanke can stop loading up the asset markets with easy money, OR continue on with what amounts as the largest tax increase on the American people as the economy stagnates.

LOL! What tax increase is that?

So far all QE has accomplished is to remove untold amounts of interest payments from the private sector and pay the Treasury off as bankers and Wall Street take advantage of easy money and low interest rates.

Are you actually suggesting that interest rates would be higher without current monetary policy initiatives? Your story is that in a market bound to decline (some say substantially) due to an end to easing policy, the economy would be experiencing the economic growth necessary sans QE?

And NO, your'e the ignorant one. The estimate of the " Treasury Borrowing Advisory Comittee " is a quadrupling of the " weighted average cost " of financing US debt over the next 10 years. And some speculate that number is Conservative.

Maybe the CBO is ignorant on the process of debt service too, huh ?

I find it amusing you value CBO projections when you believe you can use it to support your position.

The report that was commented on by zero hedge (according to them, gold is @ $3400/oz) and is really just a way to manipulate people who have limited understanding in financial economics. Yeah, i can accept the fact that the cost of financing is going to increase from 1.7% to 4.3% in 10 years. I also can accept the contingency of $855 billion in 2023. Can you accept the $20 trillion nominal GDP that is it's requisite?

The average, weighted average cost in the last 14 years (relatively low interest rates) is 3.3%. From 1988-1998, the WAC of debt financing was above 4%.

 

[Fenton]

While I am not a big fan of QE3, the argument that it has only helped the
wealthy is the type of class warfare nonsense that you refer to above. Buying MBS took mortgage rates down to very low levels. That not only helped the millions of Americans who bought homes, but also the people who were able to refinance. Lower long term rates have also helped the auto industry as so many cars are leased. Just look at what the hint of tapering has done to housing and auto stocks.

The FED buying massive amounts of Bonds and paying banks interest on the money they have to have on hand by law has lowered interest rates and sure some people have taken advantage of it but for the most part thats had zero positive effect on our economy.

The purchase of MBSs just takes the wieght off the banks so they can lend to people in the private sector.

But, they aren't lending, not in any substantial amount that would justify the damage they're doing.

Your justification for the Feds actions doesn't add up.

 

[Fenton]

That would be 2% inflation, real GDP
growth more than 2%, and unemployment between 6.5% and 7%.



LOL! What tax increase is that?



Are you actually suggesting that interest rates would be higher without current monetary policy initiatives? Your story is that in a market bound to decline (some say substantially) due to an end to easing policy, the economy would be experiencing the economic growth necessary sans QE?







I find it amusing you value CBO projections when you believe you can use it to support your position.

The report that was commented on by zero hedge (according to them, gold is @ $3400/oz) and is really just a way to manipulate people who have limited understanding in financial economics. Yeah, i can accept the fact that the cost of financing is going to increase from 1.7% to 4.3% in 10 years. I also can accept the contingency of $855 billion in 2023. Can you accept the $20 trillion nominal GDP that is it's requisite?

The average, weighted average cost in the last 14 years (relatively low interest rates) is 3.3%. From 1988-1998, the WAC of debt financing was above 4%.

Not much time Kush so I'll respond later but "the tax" I was speaking of is the amount of interest thats been pulled out of the private sector through QE so banks and asset markets can take advantage of low interest rates.

Its the direct diverting of money earned on interest payments on savings and bonds from your average American to the asset markets and whether Americans realize it or you realize it it's a "tax".

 

[washunut]

The FED buying massive amounts of Bonds and paying banks interest on the money they have to have on hand by law has lowered interest rates and sure some people have taken advantage of it but for the most part thats had zero positive effect on our economy.

The purchase of MBSs just takes the wieght off the banks so they can lend to people in the private sector.

But, they aren't lending, not in any substantial amount that would justify the damage they're doing.

Your justification for the Feds actions doesn't add up.

I am not a fan of QE3, as it seems to be more harm than good. However I did want to point out the good, as it is not a black and white issue. Lower mortgage payments are not really a zero sum game. The cost side goes to the banks or others who held the original mortgage. The people who have lower mortgage payments, are either able to pay more for a house which we see in home prices increasing or spend their additional discretionary income.

This benefit is short term, I would agree that the long term costs may be greater than the gains, but as you can see from postings on this site, people care more about the short term, and the Fed has become a political extension of the administration.

 

[WhyNotWhyNot]

While I am not a big fan of QE3, the argument that it has only helped the wealthy is the type of class warfare nonsense that you refer to above. Buying MBS took mortgage rates down to very low levels. That not only helped the millions of Americans who bought homes, but also the people who were able to refinance. Lower long term rates have also helped the auto industry as so many cars are leased. Just look at what the hint of tapering has done to housing and auto stocks.

I do recognize and accept the benefits of QE3. You cite a couple of them. My personal situation illustrates both your point and mine. We own our residence and we also own a house that we chose not to sell when we moved as the market crashed a few years ago. Both houses are mortgaged. We rented the old house with a little negative cash flow and waited for the real estate market to recover. We refinanced both houses with low rates made possible by QE3. The rental became a neutral cash flow so we have not raised its rent. Thus, as you would point out, the renter benefited from QE3 because his housing expense has not escalated. The QE3 benefit to the renter only translates to wealth increase if the renter’s income rises. The median middle class income is declining so the renter has probably not accumulated wealth as a result of his QE3 benefit. My expenditures for both my residence and the rental declined but my employment income, just like the renter’s, has been constant in recent years. Thus, my QE3 benefit translates to cash that I choose to save in retirement investment accounts – which generally hold stock based mutual funds. I became wealthier because QE3 enabled me to make money from my wealth (real estate ownership and retirement savings investments in stocks that grew in value due to QE3 stimulus). The renter did not become wealthier. Thus, QE3 has contributed to the growing “wealth gap” that is becoming contentious in America.

I am not a conspiracy theory guy. As you can see from my example, the “rich get richer while the poor get poorer” is a side effect / consequence of QE3. There is no financial policy (money supply, tax, or budget) that the Fed or the Congress can pursue that does not have side effects to the primary desired effect. The stimulus effect of rapid money supply expansion is transitory (stimulus means quick response and then exponential decay of the benefit) but the half-life of the side effects is long. Thus, at some point the side effects have greater importance than the primary effect. The Fed Board is a group of very smart people and they know this point in time has been reached. Consequently, they have determined that the time has come to end QE3 in a way that is controlled to minimize certain side effects that they anticipate (particularly interest rise and inflation). You can be sure that there will unintended side effects from the decision to taper also.

 

[washunut]

I do recognize and accept the benefits of QE3. You cite a couple of them. My personal situation illustrates both your point and mine. We own our residence and we also own a house that we chose not to sell when we moved as the market crashed a few years ago. Both houses are mortgaged. We rented the old house with a little negative cash flow and waited for the real estate market to recover. We refinanced both houses with low rates made possible by QE3. The rental became a neutral cash flow so we have not raised its rent. Thus, as you would point out, the renter benefited from QE3 because his housing expense has not escalated. The QE3 benefit to the renter only translates to wealth increase if the renter’s income rises. The median middle class income is declining so the renter has probably not accumulated wealth as a result of his QE3 benefit. My expenditures for both my residence and the rental declined but my employment income, just like the renter’s, has been constant in recent years. Thus, my QE3 benefit translates to cash that I choose to save in retirement investment accounts – which generally hold stock based mutual funds. I became wealthier because QE3 enabled me to make money from my wealth (real estate ownership and retirement savings investments in stocks that grew in value due to QE3 stimulus). The renter did not become wealthier. Thus, QE3 has contributed to the growing “wealth gap” that is becoming contentious in America.

I am not a conspiracy theory guy. As you can see from my example, the “rich get richer while the poor get poorer” is a side effect / consequence of QE3. There is no financial policy (money supply, tax, or budget) that the Fed or the Congress can pursue that does not have side effects to the primary desired effect. The stimulus effect of rapid money supply expansion is transitory (stimulus means quick response and then exponential decay of the benefit) but the half-life of the side effects is long. Thus, at some point the side effects have greater importance than the primary effect. The Fed Board is a group of very smart people and they know this point in time has been reached. Consequently, they have determined that the time has come to end QE3 in a way that is controlled to minimize certain side effects that they anticipate (particularly interest rise and inflation). You can be sure that there will unintended side effects from the decision to taper also.

Good example. I would argue though that there has been some financial benefit to the renter in your example that has raised his discretionary income. As you mention the ability to refinance, then allowed you not to raise the rent on the old house. Thus I guess you can call it addition by subtraction. By not raising the rent, you allowed that family to have more money to spend on things outside of rent. Also if he is in someway working in an industry related to autos or construction he may actually be working more hours than he/she would have if not for QE3.

So thank you for the example it was a good one. I agree that there were short term benefits, and time will tell in the longer term if the Fed can minimize or eliminate the potential negatives.

 

[WhyNotWhyNot]

I agree that there were short term benefits, and time will tell in the longer term if the Fed can minimize or eliminate the potential negatives.

I lifted my first post from a letter that I wrote a couple days ago. Here is another exerpt. I have skipped the discussions of points 1,2,3 because it would be to long to post. I am happy to post them later if anyone wants to follow those discussions.

"QE3 has expanded the money supply substantially faster than our “national wealth (value)” grew. It is a disguised way of printing more money that has no underlying financial value. Historically, this has always meant that the value of currency declines; our accumulated wealth (both positive savings and negative debt) is devalued; we experience personal purchasing power loss as incomes never increase as fast as essential living costs rise. Yet the Feds have routinely reported that inflation is very low and this has gone on long enough that we have become complacent. Reality is that “low inflation” is a result of four things: 1) the cost mix model that defines the inflation index, 2) low cost imported or automated manufactured goods displaced higher priced traditional products, 3) the US dollar is the world’s reserve currency so we get to share the devaluation effect around the world, and 4) economic misery held back demand……… Low demand does not seem to be changing. There simply is not much consumption enthusiasm as we struggle with the declining median income problem. So, we might expect that to counteract some of the inflationary pressure. But, us old guys remember the “stagflation” of the 1980’s. When the inflexible cost content of a product dominates the sales price of the product, then the only way that a company can survive is to raise unit prices as purchased quantities decline. If this trend is industry wide, then all producers raise prices and we get higher prices in spite of declining demand. As long as labor demand is low and unemployment is high, there will be no real pressure to increase worker income. An example I love is our local water utility. Last year we experienced a draught and we were required to reduce water consumption. The utility didn’t sell enough water to pay for operating the system so there was a rate increase. This year there is a surplus of water but the rate increase is permanent. That is what I believe is already happening in our grocery stores and gas stations. We have real stagflation, it is getting worse, and it will become evident to everybody in less than a year no matter how the policy makers go about spinning the story. I expect a moderate version of the late 1970’s and early 1980’s."

Comments please.

 

[washunut]

I lifted my first post from a letter that I wrote a couple days ago. Here is another exerpt. I have skipped the discussions of points 1,2,3 because it would be to long to post. I am happy to post them later if anyone wants to follow those discussions.

"QE3 has expanded the money supply substantially faster than our “national wealth (value)” grew. It is a disguised way of printing more money that has no underlying financial value. Historically, this has always meant that the value of currency declines; our accumulated wealth (both positive savings and negative debt) is devalued; we experience personal purchasing power loss as incomes never increase as fast as essential living costs rise. Yet the Feds have routinely reported that inflation is very low and this has gone on long enough that we have become complacent. Reality is that “low inflation” is a result of four things: 1) the cost mix model that defines the inflation index, 2) low cost imported or automated manufactured goods displaced higher priced traditional products, 3) the US dollar is the world’s reserve currency so we get to share the devaluation effect around the world, and 4) economic misery held back demand……… Low demand does not seem to be changing. There simply is not much consumption enthusiasm as we struggle with the declining median income problem. So, we might expect that to counteract some of the inflationary pressure. But, us old guys remember the “stagflation” of the 1980’s. When the inflexible cost content of a product dominates the sales price of the product, then the only way that a company can survive is to raise unit prices as purchased quantities decline. If this trend is industry wide, then all producers raise prices and we get higher prices in spite of declining demand. As long as labor demand is low and unemployment is high, there will be no real pressure to increase worker income. An example I love is our local water utility. Last year we experienced a draught and we were required to reduce water consumption. The utility didn’t sell enough water to pay for operating the system so there was a rate increase. This year there is a surplus of water but the rate increase is permanent. That is what I believe is already happening in our grocery stores and gas stations. We have real stagflation, it is getting worse, and it will become evident to everybody in less than a year no matter how the policy makers go about spinning the story. I expect a moderate version of the late 1970’s and early 1980’s."

Comments please.

Very nice job. All the four buckets you break out were on target. As an example, I just got finished paying for four years of college at a private university. So my cost of living for the last few years on the first 60K of spending was growing about 7% per year. In 2014, inflation for higher education does not impact me at all.

How this all plays out is anyone's guess. My own is that interest rates rise, and there will be trillions of lost wealth in bonds.

 

[Kushinator]

Its the direct diverting of money earned on interest payments on savings and bonds from your average American to the asset markets and whether Americans realize it or you realize it it's a "tax".

Redefining the meaning of a tax? Come on....

I guess Rush would be proud.

 

[Fenton]

Redefining the meaning of a tax? Come on....


I guess Rush would be proud.

I don't listen to Rush or Hannity or have much spare time to watch Fox.

I would qualify it as a indirect tax but its massive amounts of money being directed out of the economy and straight into the asset markets and for what ?

So we can keep Obama's new debt cheap ?

 

[Kushinator]

I don't listen to Rush or Hannity or have much spare time to watch Fox.

Well that's good.

I would qualify it as a indirect tax but its massive amounts of money being directed out of the economy and straight into the asset markets and for what ?

No. An indirect tax would be something like a VAT, or sales tax. I have already brought up this concept in another thread (which you were too busy to respond). In an economy that is panicking on the idea of a slowdown in unconventional monetary policy, you expect anyone to believe that interest rates would be at normal levels sans QE? :lamo

The 10 year Treasury is highly correlated to nominal GDP growth. Nominal GDP growth minus inflation equals real GDP growth; without various QE policy initiatives, we would likely be flirting in and out of deflation with real GDP growth less than 1% on average.

So we can keep Obama's new debt cheap ?

You obviously do not understand how interest rates work.

In the future, please respond to my points individually. Otherwise it is a task to figure out which point you were responding to when you group them all together.

 

[washunut]

Well that's good.



No. An indirect tax would be something like a VAT, or sales tax. I have already brought up this concept in another thread (which you were too busy to respond). In an economy that is panicking on the idea of a slowdown in unconventional monetary policy, you expect anyone to believe that interest rates would be at normal levels sans QE? :lamo

The 10 year Treasury is highly correlated to nominal GDP growth. Nominal GDP growth minus inflation equals real GDP growth; without various QE policy initiatives, we would likely be flirting in and out of deflation with real GDP growth less than 1% on average.



You obviously do not understand how interest rates work.

In the future, please respond to my points individually. Otherwise it is a task to figure out which point you were responding to when you group them all together.

I could be mistaken but thought that the 10 year Treasury ties to GDP plus inflation for an average rate of about 5%.

 

[Kushinator]

I could be mistaken but thought that the 10 year Treasury ties to GDP plus inflation for an average rate of about 5%.

No. While there has been a divergence (which was the intention of QE(s)), the recent rise in rates can be thought of as mean reversion.

 

[washunut]

No. While there has been a divergence (which was the intention of QE(s)), the recent rise in rates can be thought of as mean reversion.

Looks to me like the chart is showing GDP plus inflation. Maybe we are saying the same thing.

 

[Jack Hays]

Very nice job. All the four buckets you break out were on target. As an example, I just got finished paying for four years of college at a private university. So my cost of living for the last few years on the first 60K of spending was growing about 7% per year. In 2014, inflation for higher education does not impact me at all.

How this all plays out is anyone's guess. My own is that interest rates rise, and there will be trillions of lost wealth in bonds.

Interesting thread. This article is only tangentially related, but I thought it worth bringing in.

[h=4]Economy[/h] [h=3] Putting sound bites before substance a tiresome trend[/h] President Obama should be pushing the Hubbard refinancing plan rather than touting bogus bipartisanship.
Allan Sloan, The Washington Post AUG 23

 

[Kushinator]

Looks to me like the chart is showing GDP plus inflation. Maybe we are saying the same thing.

Yes, lol. Nominal GDP.