Zero Chance For QE3 - The Fed's Job Is Done

[HOLLYWOOD]

Zero Chance For QE3 - The Fed's Job Is Done
September 11, 2012 | includes: DIA, SPY

http://seekingalpha.com/article/8598...e?source=kizur

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Stocks have moved dramatically on the "bad is good" theory of investing in recent weeks. That theory states that more bad news will motivate the Federal Reserve to go to QE3 and inflation will be the result, driving equities and other assets higher. The flaw in that thinking is that investors simply don't understand what QE actually does and why additional QE will not have any impact.

Bernanke will conclude with his boiler plate remark:

"Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in the labor market conditions in a context of price stability." Bernanke speech at Jackson Hole, August 31, 2012.

[youngbuck]

So you really think there won't be a QE3? The author's reasoning seems fairly sound, but I believe its validity hinges upon whether or not all the necessary information for him to make a fully informed decision is readily available to him, which I tend to doubt.

[LibertyRevolution]

The only way there will not be QE3 is if they implement a world currency.

[Zippyjuan]

The Feds frustration and what they will do this week
As we prepare for the announcement of additional stimulus, the Fed must be frustrated. Additional QE can accomplish nothing at this point. Here is why: All QE can do is inject additional cash into the banking system. It can't force the banks to lend it out nor can it force borrowers to borrow it.
The banking system is flooded to overflow with liquidity that is not being utilized. Further increases in that liquidity will not change a thing at this point. It would be like adding water to a glass that is already full to the brim. Adding water to the glass till it overflows will not make you drink if you are not thirsty.

Exactly what I have been saying.

I don't expect any QE3.

[AdamT]

QE3 is surely coming.

[hazek]

Exactly what I have been saying.

I don't expect any QE3.

The market has already priced in the larger part of QE3, do you really believe they're going to risk a significant crash by not doing QE3?

[Steven Douglas]

I think there will be QE3, but not to inject liquidity into the economy, so much as to strengthen special positions when the Fed finally opens the real flood gates - the real barriers to injection into the economy, and allows some or all of the shit to hit the fan. To wit:

Keynes tells us what we need to do to stimulate economic growth when we are in a recession or a depression:

" ... if Investment exceeds Saving, there will be inflation. If Saving exceeds Investment there will be recession."

The table above shows a modest expansion in M2 during the QE years from $7.995 trillion to $9.926 trillion - an increase of 24% over the period which works out to be an annualized rate of increase of 7.7%.

This isn't a mystery at all, once an omission is corrected from the following (emphasis mine in red):

The Federal Reserve has gotten a bum rap from politicians and the public. They have done their job, which is to set the stage for a recovery. The Fed didn't create the problem in the first place but they did step in and did what they could within the scope of their powers to set the stage for a recovery. The fact that banks, politicians and U.S. citizens didn't cooperate is simply not the Fed's fault.

So what has the Fed done? The Fed has reduced interest rates all along the yield curve with rate cuts and Twist operations. Additionally they have flooded the banking system with cash.

So, the Fed supposedly has "done their job", by "setting the stage for a recovery", while banks, politicians and U.S. citizens "didn't cooperate"? I beg to differ, as the Fed has set the stage for even that non-"cooperation".

The Fed has been steadily "injecting QE liquidity" into the banking system. But it did much more than that, because for the first time ever the Fed is also paying banks not to lend. That's where negative interest rates come from. The Fed is paying banks 0.25% interest, which is more than the banks paying people to keep money in a savings or money-market account.



The message was abundantly clear to banks, which also cooperated, as that chart above proves -- to the tune of about $1.6 Trillion in excess (hoarded) reserves, which the Fed is paying about $4 Billion a year in interest to banks to keep parked.

But what about the "U.S. Citizens" who supposedly aren't cooperating?

With 800-900 now the new "700" credit score, it's not exactly a question of average U.S. citizen cooperation -- as if that accurately described "the private sector". On average, most U.S. Citizens are finding it extremely difficult to secure loans. Large corporations, on the other hand, and especially those with AAA credit ratings, very much ARE able to get their hands on "cheap money". But they aren't spending it, and for very predictable reasons. They are increasing their debt for the purpose of hoarding cash now (while it's still very cheap), due to low interest rates (but ONLY for those who can actually secure those large, cheap loans):

Large Companies Hoarding Cash

Excluding the financial sector, companies on the Standard & Poor's 500-stock index are holding a cash pile of $1.15 trillion, according to S&P's research unit Capital IQ. The industries hoarding the most were technology ($264 billion), pharmaceuticals ($141 billion) and energy and consumer products (each holding more than $100 billion). Apple, Microsoft, Cisco, Pfizer and Google had the deepest cash cushions.

One reason the companies have this much cash on hand is that revenue for the top 1000 companies improved by 11.5% in 2010, after declining by 12.1% in 2009.

High profits are not the only reason for this buildup as borrowing is also a significant factor. For AAA-rated companies total debt has increased by more than 30% over the past five years. According to the research, companies may be borrowing to get cash on their balance sheets simply because the cost of borrowing is low.

So, low interest rates and availability of credit to AAA-rated behemoths shows that they are indeed "cooperating".

All that fat, recession-inducing (according to Keynes) M2 savings is now sitting in the belly of two sows - the banking and large corporate sector. The banks are just waiting for the signal from the Fed (no more free parking), so that they can blow all that juicy QE out of their asses and spray it into the economy. THAT is when inflation hits, because THAT is the point at which Investment overwhelms savings at a potentially rapid pace and at a potentially substantial margin. That is the point where all the past QE begins to have its effect in the form of massive price inflation.

The problem the Fed is facing is when, how, and in what increments to open the floodgates, as the banks pull their fractional reserve multiplier magic on all those reserves -- and when all the S&P 500 and other hoarders DUMP THEIR CASH RESERVES before they lose value, so that they can then begin servicing their fixed low-interest debts in RAPIDLY DEPRECIATING DOLLARS.

Those are the fundamentals we are facing - that is the "stage" that was set by the Fed.

[puppetmaster]

except they have to BUY shit assets from the banks.....so the banks get cash and we get the shit....

[ctiger2]

I wish Ben would just dump cash onto us from a helicopter like he promised. Start at my house and work your way outward.

[Bern]

There is a globally coordinated move amongst central banks happening right now. The ECB, BOC, BOJ and BOE are all gearing up their printing presses. The Fed will do their part too.