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Wednesday, November 03, 2010

Six Hundred Billion!!!

"...then let those who are in Judea flee to the mountains. Let no one on the housetop go down to take anything out of the house. Let no one in the field go back to get their cloak. How dreadful it will be in those days for pregnant women and nursing mothers! Pray that your flight will not take place in winter or on the Sabbath."
This is gonna HURT.

There is virtually no place for the money to go except into commodities, and the effects will tend to cut employment rather than stimulate it. In the "test" - the run-up to the election as the Fed has discussed it - the price effect in stores has been noticeably negative on discretionary goods. That means a channel tightening, and that means profits go down, wages are constrained, hiring is constrained, and some employers cut further.

If they had done this next summer, we might have been strong enough to withstand the shock. This policy, if executed, is likely to induce a new contraction.

Unemployment could easily go over 12%.

Well, Snarky Mark can probably find some clever way to discuss this, but I have a cold, and now I have a bad headache and a desire to cry on top. I'm going to bed. The next election will be positively Jacksonian.

The worst part of this is heating oil and gas. It will have a very immediate effect.

Comments:
I still think this is all about protecting the banks. I was expecting them to expand asset sales to Agency MBS as the backdoor to take the the banks' bad debt.

That it is $600B of Treasuries either shows the banks are still really REALLY fubar'ed, but they couldn't get buy-in for Agency purchases, or the Fed is completely warped on Keynesianism.

Tough saying which. That they were so clueless coming into the sub-prime massacre speaks to the latter I think.
 
People always ask "inflationary or deflationary?" and then useless debate ensues.

Instead, one should ask "increased purchasing power or decreased purchasing power?"

I'm firmly on the "decreased purchasing power" side for the average American. But I don't know if the same can be said for the investor class.
 
"The worst part of this is heating oil and gas. It will have a very immediate effect."

Absolutely. Idiots. Thank you sir, may I have another?
 
M_O_M,

I'm having second thoughts about this analysis given the tepid response of equities and metals to the announcement today.

Is this QE going to come out at a great enough rate to have the effect you describe? That's $600B dribbled out over the next 8 or 9 months, which will probably go straight into commodities, like you say. I understand how energy would be a problem, but it seems more likely that the flows would be concentrated in the precious metals complex, given the way that market looks. If the asset inflation is concentrated in PM's, will this QE actually be a big enough to raise the price of consumer staples appreciably?
 
My first thought involves pension fund returns vs. pension fund return assumptions in a negative real interest rate environment.

I'm *sure* there's nothing to see there though. They've no doubt ratcheted down their assumptions as much as I have. Yes sir.

Pension funds are no doubt trimming expenses and refusing to make discretionary purchases just like I am. No doubt about it.

Snarky enough?
 
Neil,

It would seem that the QE damage was mostly already done heading into the announcement. I'd call it mixed.

On the one hand, crude oil and heating oil is up today.

On the other hand, 30-Year TIPS are and natural gas are down.

The CRB was mostly unchanged.
 
Higher oil prices just in time for Christmas.
So much for the Christmas season or buying
the house 20 miles from work, or flying home
for the holidays. A weaker dollar kills us with
higher energy prices and with unemployment
at current levels, forget about wage increases.
This isn't sound economic policy, this is a bank
bailout, a declaration of war on the working class.

Sporkfed
 
Sporkfed,

This isn't sound economic policy, this is a bank bailout, a declaration of war on the working class.

QE "Anticipation" (Musical Tribute)

I quoted the Hippocratic Oath in the hopes that Dr. Bernanke had simply forgotten the "I will keep them from harm and injustice" part.
 
Okay, I'm running a fever now. I am truly miserable.

Neil, the whole nat gas thing is a bit complicated. Maybe when my eyes unblur.

But now I need to share with Mark and Tim my favorite army joke, because I think we just landed in an army hospital run by Dr. Bernanke:

A general is touring an ambulatory medical ward. He asks the first patient "So why are you here, son?"

"Hemorrhoids, sir!"

"Er, well, how are they treating you, son?"

"Five minutes each morning with a wire brush, sir! And I can't wait to get back to my unit!"

The general nods gravely at his enthusiasm and moves on to the next private.

"So what has brought you here, Private?"

"VD, sir!"

A bit embarrassed, the general stammers a bit and asks "What kind of treatment are you receiving, and what is your prognosis?"

"Ten minutes each morning with a wire brush, sir! I'm due to get back to the front in two days, sir!"

Appeased, the general moves on to the third soldier.

"You're looking well, Private! What's put you in here and how are you being treated?"

"Tonsillitis, sir! Fifteen minutes each morning with a wire brush, sir."

"Excellent, excellent, and what is your goal?"

"To git to that wire brush each morning before them other two, sir!"
 
MoM,

Thanks for an excellent summation of the outcomes of this perverse Fed action.

That said, I post an extract from Scott Sumner's blog to highlight the academic economist view on this. The problem, I think isn't just the Fed but the entire discipline:

"1. Will it help the economy relative to the no-QE alternative?

2. Is the announced policy likely to help more than the policy expected right before the announcement?

3. Is it adequate to meet the Fed’s implicit policy goals?

I believe the answer to the first question is clearly yes, the second question is “probably yes,” and the answer to the third question is clearly no.
 
MOM,

That joke is way too funny, lol.

My dad told me one military joke and I will never forget it. It involves "change" and I'm reminded of it every time I hear a candidate mention "change".

Men, you've been promised a change of underwear for many months. The government has not let you down.

Today is the day.

Fred, from now on you'll be wearing John's underwear. John, you'll be wearing Frank's underwear. Frank, you'll be wearing...
 
Mark, I hope that Frank is a big man with severe constipation.
 
Who Struck John,

LOL!
 
This year, I'm ASKING for coal in my stocking for Xmas. Practical AND expensive.
 
We all get wood stoves for our Dickensian Christmas.
 
This is not a surprise. The goal is cause inflation for two reasons: 1) It will raise wages of those with shaky mortgages, which will lead to fewer foreclosures and 2) It will punish / scare the the companies who have been hording cash.

It will also devalue the US $ leading to more competitive US manufacturing. The downside is it will grow the government and prolong the downturn.
 
Anon - what on earth makes you think that most workers will get raises with unemployment over 9%?

That's ridiculous. Only government workers will, and not even they immediately.

The effect of inflation will probably be to cut real wage and salary personal income, and in some cases it will cause nominal cuts. Wages come from company profits; companies can't raise prices much in this environment; ergo, the worker is going to stay with the job regardless of payment.
 
Here's some support for MaxedOutMama's claim.

Historical Real Hourly Wages

This chart shows the average hourly earnings adjusted for inflation. If rising wages were responsible for the stagflation of the 1970s, then the damage was clearly done before January, 1973. That was when average hourly earnings peaked.
 
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