Stealth QE!
This story is a few days old but I have not had a chance to write about it. You thought QE was over? Sucker! Here’s Terry Burnham:
Google “Fed ends QE,” and you’ll get 7.8 million hits, including:
“Fed Closes Chapter on Easy Money” — Wall Street Journal
“Dollar jumps as hawkish Fed ends QE” — Financial Times
“[China’s Finance Minister] Lou cautions of risks linked to Fed’s plan” — China Daily
“Federal Reserve Ends QE” — Bloomberg TV
“US Fed set for Post-QE era” — New Straits Times (Singapore)
These headlines proclaim QE done and gone. But they’re wrong.
“Stealth QE” continues. Stealth QE is the purchase of more bonds with the interest the Fed earns on the bonds it has already purchased.
The Fed earns about $100 billion a year in interest on its holdings. But in its recent statements, the Fed is silent about these interest payments. For example, the Oct. 29, 2014 FOMC statement — the one announcing an end to the asset purchases program — includes, “The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.” The word “interest” is nowhere in the statement.
The New York Federal Reserve implements the central bank’s policy, and it also omits mention of the interest earned by stating, “As directed by the FOMC, the Desk is rolling over maturing Treasury securities at auction.”
But stealth QE occurs regardless of what the Fed does with the interest it earns. If the Fed reinvests the interest it earns to buy additional bonds, then QE continues directly in the standard manner with an increase in the Fed’s balance sheet. If the Fed does not reinvest the interest, it simply sends the interest to the U.S. Treasury. The U.S. Treasury will then issue fewer new Treasury bonds. In either case, the interest on the Fed’s current bond holdings decreases the supply of bonds in the market.
In order to stop stealth QE, the Fed would need to shrink its balance sheet by the amount of interest that it earns.
I dislike the “this search will get you x million hits” trope, but otherwise this guy is right on the money. If the Fed is continuing to buy bonds with the interest on the bonds it holds, to the tune of $100 billion a year, then QE has not ended. Indeed, as Burnham points out, $100 billion of bond purchases per year is 10 times the historical average — and that amount alone would have made headlines in 2005. QE2 was $600 billion over eight months; stealth QE at this rate would be $600 billion over six years — nothing like the same rate, but nothing to sneeze at.
Of course, any QE is a distortion that interferes with the normal processes of the free market in allocating materials to different lines of production. It’s nice that it’s a little lower now, but let’s not pretend it has ended.
people at the fed are genuinely terrified of what would happen without these kinds of training wheels on the obama presidency
happyfeet (a037ad) — 12/2/2014 @ 7:32 amWhat is the difference between QE and currency devaluation?
nk (dbc370) — 12/2/2014 @ 7:41 amQ4 2016 they will stop, and dump the crash on the next President.
JD (86a5eb) — 12/2/2014 @ 7:42 amSo the fact that this ‘recovery’ is still limping along after what..6 years?…despite the QE is just proof to the progressives that we must need more of it…
Georganne (e37667) — 12/2/2014 @ 8:10 amWell, someone has to fund the next real estate bubble.
Patricia (5fc097) — 12/2/2014 @ 8:25 amThe interest is the small part of the problem. The statement that they are “rolling over maturing Treasury securities at auction” is the more significant portion. They create dollars out of nothing when they *purchase* the Federal Notes and Bonds. When these securities mature, the Treasury pays the Federal Reserve the principal, so the magically created dollars are returned to the Federal Reserve. In ordinary times, this payment would disappear thus closing the loop, easy come, easy go. That is to say, the dollars that were created from nothing, are returned to nothing. But by rolling over the maturing securities, the Federal Reserve is just reinserting those dollars back into the economy. So QE is continuing at the same rate today as it was when the bonds were initially issued. The effect of “reinvesting” the interest means that the QE amounts will compound over time, which is to say that the dollars in circulation will grow exponentially.
There must be a bunch of Gruber-like-guys who think they are the smartest thing to hit government finance since Germany in the 1920’s. I hope someone is recording their seminars. The videos will be good for a few laughs when we will need to take our mind of other things, like how to buy a dozen eggs.
Buy and hold physical gold.
bobathome (348c8a) — 12/2/2014 @ 9:13 amThe videos should be Exhibit “A” if there were any justice.
Hoagie (4dfb34) — 12/2/2014 @ 9:32 amWith collapsing oil prices and the dramatic shift in economic fortunes it portends, QE will soon be yesterday’s news. The real question now is how adroitly the Fed will adjust money supplies as the velocity of money accelerates – we will all feel wealthier and more willing to spend if we see a long-term decline in one of our biggest cost items. Unfortunately, I have little faith in the Fed to smoothly transition.
ThOR (5d4ee2) — 12/2/2014 @ 10:16 amhttp://cnsnews.com/mrctv-blog/terence-p-jeffrey/ponzi-treasury-issues-1t-new-debt-8-weeks-pay-old-debt
Judy Eaton (8a35ed) — 12/2/2014 @ 10:55 amThere is nothing remarkable about the government rolling over its debt.
Additions to the Federal Reserve Banks’ holdings of Treasury issues have accounted for about 25% of the increase in outstanding federal debt since Sept. 2008. Most of the debt was bought by the public. During the most recent quarter, about 17% of the increase in debt stocks was accounted for by Federal Reserve Bank purchases.
It’s had little effect on price dynamics because the increase in the monetary base has been absorbed by increases in bank reserves.
Buy and hold physical gold.
What’s the point of that? It’s a dead asset which is subject to speculative price flux.
Art Deco (ee8de5) — 12/2/2014 @ 12:35 pmI assume you’re using the word “earns” advisedly.
jakee308 (d409c2) — 12/2/2014 @ 1:08 pmI could tell they were easing the easing when my savings interest went up from .02 to .024. That’s an extra pepsi per retirement if you save early, kids.
Dustin (2a8be7) — 12/2/2014 @ 1:22 pmIF the gubmint wants to impress old dopey me, they can get rid of the baseline accounting b.s.
mg (31009b) — 12/2/2014 @ 1:43 pminteresting map.
mg (31009b) — 12/2/2014 @ 2:43 pmhttp://www.businessinsider.com/countries-vs-us-states-gdp-map-2014-2
The world has changed. There used to be liars, damned liars, and statisticians.
Now there are liars, damned liars, statisticians, and politicians pretending to be statisticians.
htom (9b625a) — 12/2/2014 @ 3:12 pmArt, it has become routine for the Federal Government to “roll over” its debt, by which we mean we borrow the money we need to pay the principal on maturing bonds. The Federal Reserve is nominally a private banking system, and they are distinct from the Federal government. They have been rolling over short term assets (the notes they hold) and turning them into long term assets (bonds.) If they intend to do this forever, then we are on new ground. By “investing” the interest they receive on their Federal notes in new Federal debt, they are compounding their holdings. They have used their intervention in the capital market to force down interest rates so as to facilitate the extraordinary deficits that Federal government incurs in each new fiscal year. I would have liked to say each new budget, but there has been no budget under Obola and Reid. If inflation rears up, the Federal Reserve will be in world of hurt. They have $2700B in long term Federal obligations that pay very low interest rates, say $2.5% to 4%. If the market puts interest rates at 7%, the market value of the Federal Reserve’s holdings will drop by about 50% or more. This means that they will show a loss of over $1T, which far exceeds their reserves. This will bring us into uncharted waters.
As for gold, it is one of a number of things we all should hold, if only an ounce or two. You might feel comfortable that your insured bank savings account is secure, but with Obola, those funds are only a pen stroke away from being converted into bank stock should the need arise. This is what happened in Cyprus, and there is a move to apply this idea to all EU bank accounts. So it’s not far fetched. I’d also recommend a lot of stock, a slightly smaller amount of selected bonds, cash, and real estate. And if you have the means to store it and the needed expertise, artwork or other valuable and rare collectibles. And if you have stocks, I’d steer clear of margin accounts. Your holdings will be loaned out to short your holdings, and your ability to recover that loaned stock is dependent upon the solvency of your broker. When the next big collapse occurs, your assets might amount to nothing more than a place in line in a class action suit.
With gold, you can easily reassure yourself that your holdings are of a given weight, and that won’t change no matter what Obola decides to do. It will always be worth something if only to trade it for eggs or firewood. Everything else is subject to taxation, regulatory intervention and manipulation. And on a different level, gold is an example of the marvels of our universe. It is formed in the collision of neutron stars, and the ejected materials must undergo a number of improbable processes in order for us to find them on the surface of the earth. It is another example of how we have benefitted from highly unlikely events.
bobathome (348c8a) — 12/2/2014 @ 3:15 pmWell I never….You just might want to sit down for this:
http://politics.suntimes.com/article/springfield/justice-dept-labels-obama-pal-eric-whitaker-hostile-witness/tue-12022014-258pm
elissa (4b8e7d) — 12/2/2014 @ 3:35 pmElissa, as I recall from Hillary’s time on the witness stand (or table as was the case) the time-tested responce to troublesome questions is “I don’t recall”, followed by “At this point, what difference does it make?” And if those don’t work, Whitaker can always avail himself of the 5th. This also sheds light on progressive views of opportunities that can be grabbed in the midst of crises. Gruber did not overestimate the nature of the Democrat’s base.
bobathome (348c8a) — 12/2/2014 @ 4:11 pmOf course, any QE is a distortion that interferes with the normal processes of the free market in allocating materials to different lines of production. It’s nice that it’s a little lower now, but let’s not pretend it has ended.
You’ve confounded the product market with the money market.
Art Deco (ee8de5) — 12/2/2014 @ 8:44 pmArt, it has become routine for the Federal Government to “roll over” its debt, by which we mean we borrow the money we need to pay the principal on maturing bonds.
All governments do that. It’s done in the private sector as well.
Art Deco (ee8de5) — 12/2/2014 @ 8:45 pmThey have used their intervention in the capital market to force down interest rates so as to facilitate the extraordinary deficits that Federal government incurs in each new fiscal year.
The deficits registered during the the most recent fiscal year are now in a range that has some precedent during peacetime (about 6.4% of gdp).
Again, the utility of QE was to maintain the money supply in circumstances where conventional Fed policy tools were ineffectual. The policy was adopted when the country was facing incipient large scale deflation. Over the last six years, the gdp deflator has increased by about 1.5% per annum, so inflation has been modest and deflation avoided.
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Art Deco (ee8de5) — 12/2/2014 @ 8:57 pmThis will bring us into uncharted waters.
The Federal Reserve Banks’ obligations are in the form of dollar bills which are not convertable into specie. I would not give it much thought.
Art Deco (ee8de5) — 12/2/2014 @ 8:59 pmWith gold, you can easily reassure yourself that your holdings are of a given weight, and that won’t change no matter what Obola decides to do. It will always be worth something if only to trade it for eggs or firewood.
Like my brother said some years back, in the state of the world you posit, the only things of value will be land and guns-and-ammo. Enjoy your Krugerrands, Mr. McDuck.
Art Deco (ee8de5) — 12/2/2014 @ 9:01 pmin the state of the world you posit
1971 and prior? The world was not all that bad. Sure, there were wars and depressions and natural disasters but society progressed. We had sent men to the Moon.
nk (dbc370) — 12/2/2014 @ 9:09 pm1971 was when the US went off the gold standard.
nk (dbc370) — 12/2/2014 @ 9:10 pm“You’ve confounded the product market with the money market.”
Art Deco – No, you ignore that money is a product and that the Fed’s actions have distorted the market for several years now.
daleyrocks (bf33e9) — 12/2/2014 @ 9:18 pmArt Deco – No, you ignore that money is a produc
No, there is a distinction between goods and services and money. Money is not a ‘product’ but a medium of exchange.
Art Deco (ee8de5) — 12/2/2014 @ 9:27 pm“No, there is a distinction between goods and services and money. Money is not a ‘product’ but a medium of exchange.”
Art Deco – You can certainly call it a medium of exchange, just as goods and services can be used for exchange as well. Money has all the demand and supply characteristics of products and in this case, government interference in the market above and beyond historical norms.
daleyrocks (bf33e9) — 12/2/2014 @ 9:47 pmMoney has all the demand and supply characteristics of products and in this case, government interference in the market above and beyond historical norms.
No, it’s the business of central banks to act as the supplier. There is no ‘market’ to be ‘interfered with’ analogous to the trade in goods markets between private parties. (And, while we are at it, goods and services make piss poor media of exchange).
Central banks have a number of functions, among them acting as a lender of last resort and maintaining optimal price stability. The Fed has performed these two functions adequately over the last six years. There has been a complaint (from Scott Sumner) that they did not maintain growth rates in nominal gross domestic product according to historical trend. See John Taylor on the problems with NGDP targeting.
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1971 was when the US went off the gold standard.
We abandoned a currency peg in 1971, but the dollar was not under the Bretton Woods system convertable into gold by the public (only by central banks); also, exchange rates were not fixed but what Alan Walters called “Irish fixed” (“they’re fixed, until they change”). The convertability of the dollar into gold was suspended in the United States in 1933 and there has not been a true gold standard since. (Subsequent to that gold clauses in contracts were rendered non-enforceable). Since the maintenance of the gold standard was a disaster during the years running from 1929 to 1933 (and hobbled the British economy through most of the 1920s), good riddance. Floating exchange rates were the preferred by Milton Friedman, but I guess he’s just another RINO in these parts.
Art Deco (ee8de5) — 12/2/2014 @ 10:07 pmHyperinflation is the risk that the Federal Reserve is playing with. It is not that unusual, even in recent times. And it doesn’t mean that we revert to total anarchy, but it will take a toll on those who rely on the government dole and have nothing to barter with. Right now the U. S. is in a sweet spot because Europe and Japan have stumbled down the same path, only they are 10 and 20 years ahead of us (respectively.) So people with savings in Europe are looking for ways to protect their money, and for the time being, the U. S. looks pretty safe to them, even with near zero interest rates. If events should cause them to question the safety of the dollar, then we are in a world of hurt. If China was willing to risk the loss of a substantial percentage of their $1T of U. S. Treasuries in currency manipulations, then they might be able to undermine the dollar, and this might allow them to achieve some limited strategic goals without firing a shot. It would be a relatively cheap campaign compared to a hot war with massive loss of life and equipment.
bobathome (348c8a) — 12/2/2014 @ 10:08 pm“No, it’s the business of central banks to act as the supplier. There is no ‘market’ to be ‘interfered with’ analogous to the trade in goods markets between private parties. (And, while we are at it, goods and services make piss poor media of exchange).”
Art Deco – Think a little bit. Local banks are in the business of buying and selling money every day by competing for deposits and loans. While we are at it, I never argued barter was a great medium of exchange.
daleyrocks (bf33e9) — 12/2/2014 @ 11:26 pm“Central banks have a number of functions, among them acting as a lender of last resort and maintaining optimal price stability.”
Art Deco – Thank you for the information. I never really knew what they were supposed to do before now.
daleyrocks (bf33e9) — 12/2/2014 @ 11:29 pm“The deficits registered during the the most recent fiscal year are now in a range that has some precedent during peacetime (about 6.4% of gdp).”
Art Deco – Except there is no peacetime precedent for four consecutive years of 6.0%+ of GDP deficits.
daleyrocks (bf33e9) — 12/2/2014 @ 11:39 pm