…initially at a pace of $45 billion per month.

I like this part. As demand for US treasuries continue to drop due to the obvious fact that the administration intends to monetize the debt this leaves room for the Fed to buy a larger percentage of supply to artificially prop up demand.

I would have won my wager; after the FOMC the Fed announced they’ve scrapped the whole idea of a target date to unwind their balance sheet:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.

…To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance.

What ails the economy will not be cured by the Fed’s remedies. They’re going to keep pretending they know what they’re doing through Obama’s second term and drop this load of crap into their successor’s lap.

Then pretend this mess they’re creating has nothing to do with them (Jay Carney’s universal BS: we do know that this has nothing to do with the Obama administration or its policies) and whoever came after them screwed up what they had no idea how to fix but did know how to make worse.

So they are buying about double of that $45 billion in terms of US debt. But it’s not all treasury debt.

It’s just insane to think the Fed can sell $3 trillion dollars in US debt to unwind its balance sheet over a 2-3 year period starting in 2015 while the Treasury and the GSEs are still selling debt.

Because their largest purchaser, the Fed, will no longer be buying but selling. Selling to whom? Who’s the market supposed to consist of if it’s no longer the Fed?

I can’t explain how it’s supposed to work. But then, no one can explain how it’s supposed to work. It’s never been done.

I’d wager that the Obama administration will kick the can down the road until the end of 2016. So the Tunguska impact of economic catastrophes will happen on someone else’s watch and he can blame his successor.

Consumer confidence tanking.
(even worse) Consumer spending drying up.
Exports at lowest point since your inauguration.
Tax revenues stagnant, while your spending increases – Looking at a fifth-straight Trillion-Dollar deficit!

You Da Man!

The story puzzles me because the Federal Reserve by its own numbers is already buying more than $45 billion a month in treasuries. By about double.

They’ve got plenty of pot in Kali at medical maryjane clubs.

Whatever it is I believe Bernanke is smoking it too.

http://www.bloomberg.com/news/2012-12-07/fed-exit-plan-may-be-redrawn-as-assets-near-3-trillion.html

Fed Exit Plan May Be Redrawn as Assets Near $3 Trillion

That’s a hoot. As the ensuing article shows, there was never a plan. And they don’t have a clue how they’re going to get out of this mess. But what deflation-averse Bernanke has done is create inflationary fears.

A decision by the Federal Reserve to expand its bond buying next week is likely to prompt policy makers to rewrite their 18-month-old blueprint for an exit from record monetary stimulus.

It’s sort of putting lipstick on a hog to call what amounts to a sketch on a cocktail napkin a “blueprint.” But that’s par for the course from this administration.

“There is certainly an issue about unwinding the balance sheet” in a way that “is effective and continues to support the recovery without creating inflation,” St. Louis Fed Bank President James Bullard said in an interview in October. The central bank might have to “revisit” the 2011 strategy, he added.

The Fed is already buying $40 billion a month in mortgage- backed securities to boost the economy, and policy makers meeting Dec. 11-12 will consider whether to purchase more assets. John Williams, president of the San Francisco Fed, has proposed adding $45 billion of Treasury securities a month.

The bigger the balance sheet, “the riskier the exit becomes,” Richmond Fed President Jeffrey Lacker said during a Nov. 20 speech in New York. “That is something we need to think carefully about.”

Yeah guys, now is the time to start thinking carefully about all this. After creating Frankenstein’s monster, and deciding to double down and make it bigger, that’s just the time to think about controlling it.

If the Fed were to start bringing its holdings back to their pre-crisis level today, it would have to sell almost $2 trillion over a period of two to three years under its current exit plan. Assuming holdings grow to $4 trillion, asset sales could come to $3 trillion over the same period.

I’m sure the Treasury and the Fed won’t be competitors as they’re both trying to sell US debt at the same time, what with the huge demand for all that debt.

Demand that’s so huge…the Fed had to buy the vast majority of the supply to artificially boost prices.

There’s a lot of talk about “tools” at the Fed’s disposal, as if these craftsmen know how to use them. But there are no tools; the people assigned to creating them have no idea what to do. But they’re trying to portray the image of a certainty that just doesn’t exist.

From an earlier paragraph:

“The more they add to the balance sheet, the longer it will take to normalize,” said Hanson, who worked on designing tools that will be used in the Fed’s exit strategy as an economist in the monetary affairs division at the Board of Governors in 2009.

Juxtapose that with the final sentence of the article.

“We are deep into experimentation at this point,” Oliner said. “It’s understandable that people are worried.”

As a UT economist I was talking to after he had a meeting at the Dallas Fed put it, no one’s written the textbook that covers this. This’ll make the fiscal cliff look like the bunny hill at the local ski resort. These guys are in totally uncharted territory given the size of this mess and they plan on making it at least $1 trillion dollars bigger as they try to figure out how to get off the bull they’re riding.

Something to think about as they and their bosses keep coming up with Unicorns and skittles economic proposals. To Whit:

http://www.bloomberg.com/news/2012-12-10/california-democrats-covet-carbon-market-funds.html?alcmpid=view

The sale of carbon credits were going to turn California’s economy around. Kali was going to be a “green” economic dynamo; a model for the nation. How’s that working out?

If you believe California officials, you might think the state’s long-running economic and budgetary problems are over, thanks largely to the flood of money from voter-approved increases in already high income and sales taxes.

The Legislative Analyst’s Office is exuberant, releasing a budget report declaring, “The state’s economic recovery, prior budget cuts and the additional, temporary taxes provided by Proposition 30 have combined to bring California to a promising moment: the possible end of a decade of acute state budget challenges.”

…In late November, the California Air Resources Board held its first of these auctions, in which businesses such as oil refineries and utilities bid for credits that allow them to emit greenhouse gases. They must cut back their production or buy enough credits to cover all their emissions. Statewide emission caps will drop each year as California pushes businesses to produce fewer greenhouse gases or pay more to buy the declining number of credits for auction in this newly created government “marketplace.”

That is the plan anyway. “First cap-and-trade auction a bust for California budget,” read the headline in the Sacramento Bee. Budget planners expected that the state would receive $1 billion from the sale of credits, but the 2013 credits went for a low price and there was little demand for 2015 credits. As the Bee story explained, “The nonpartisan Legislative Analyst’s Office estimates that if trends hold in the February and May auctions, the state may only raise about $140 million in the first year.”

So they planned on raising $1 billion selling carbon credits in the first year, and they’re on track to sell $0.14 billion. If sales keep up the same awesome pace set at the out-of-the-gate auction.

This is par for the course for Kali “economic experts.” They are just dead wrong.

http://www.nbclosangeles.com/news/local/Californias-Population-Moving-Out-182914961.html

California’s Population Is Moving Out, Census Report Shows

But don’t worry; “economic experts” who say the cap&trade geniuses are going to turn things around believe the trend will reverse as the “green” economic dynamo takes off.

“We expect over the next couple of years that we will add jobs,” said Robert Kleinhenz, chief economist with the Los Angeles County Economic Development Corporation. “This year, we’ve added jobs in California at a faster pace than in the nation as a whole. So, we are moving in right direction. As that happens, we’ll see the migration numbers turn around some.”

Frankly if I were in Kali I’d move out now just based upon the optimism of these “economic experts.” Considering they’re almost always 180dg out from reality.

By the same token if Bernanke is worried about deflation then I’d say the thing to worry about is inflation. When the deflation-averse Bernanke realizes he’s gone too far and tries to unwind his positions he won’t be able to.

There’s a reason the value of the dollar is dropping against other major currencies in advance of tomorrow’s FOMC and it isn’t because there are too few of them in the world.

This article is from 1996 but the larger point remains valid:

http://www.albany.edu/~bd445/Money_and_Banking/Readings/Where_Is_All_the_U._S._Currency_Hiding.html

Recent evidence suggests that a growing proportion of U.S. currency is held outside the country by individuals who are uncertain about their own currency’s future value. To these people, the dollar is a refuge during times of political and economic uncertainty. Knowing precisely how much currency is held outside the United States, however, is no simple matter. Unlike checking accounts, currency flows do not leave a paper trail. However, informal reports to the Federal Reserve and the U.S. Customs Department regarding currency flows abroad do provide a rough indicator of foreign demand.

Having some idea about the magnitude of overseas holdings is important for several reasons. First, if the demand for currency is becoming driven largely by foreign portfolio decisions, then fluctuations in the level of currency outstanding may have little to do with domestic economic activity.

When those foreign holdings come flooding back in these concerns over a shrinking money supply causing deflation will look beyond silly.