QE3

[David G]

Interesting:

http://www.slate.com/blogs/moneybox/2012/09/13/qe_3_is_here_federal_reserve_announced_40_billion_per_month_in_new_asset_purchases_.html

[peb]

Re: QE3

I do feel sorry for Bernake at times. He is not a dumb economist. He understands the high risks of what he is doing. He knows that he will likely go down in history as the person who enabled the federal government to continue its high spending. But he thinks he has no choice. The Federal Reserve has purchased around 60% of all new government debt since 2009 (some estimates are as high as 77%). He has to be aware of the following

- deficits on the order of 10% of GDP cannot be absorbed by the economy without high interet rates. This could likely lead to a debt spiral, as the federal government cannot now afford even a interest rate of 5% on 10 year treasury bonds (historically a very modest number).
- the higher interest rates and $1-1.5 trillion dollar deficits would suck up all, or almost all of the excess capital generated by the economy every year, starving the private sector for investment funds

So he just creates money out of thin air and buys up the excess bonds. This time, he is using MBS as opposed to directly buying treasuries. I have to think about this a bit. I am sure it seems more politically palatable. But since 90% of MBS are issues or backed by GSEs, who now enjoy an explicit unlimited backstop by the federal government; I do not believe it is really any different in any significan economic way. The amount $40B/month, half a trillion/year, has to be much larger than the new MBS coming on the market at any given time. So the FED buys them all, and forces other MBS buyers into treasuries.

And why does he do it? He feels like he has no choice, the current governemt deficits will drive the country down quickly if existing money supply has to fund it all.

We had a deficit of $170B in 2007, and it has been sky high since then. $450 in 2008 and then well in excess of $1T in 09,10,11, and again in 12. It has NOT worked. We have 40M few jobs today than in 07. Keynsian economics does not work at these levels when debt is about 90% of GDP and deficit are in the 10% of GDP. But Bernake is trying to limit the damange, knowing he may be considered the worse federal reserve chairman ever, since he is the first to monetize debt and he has done it on a huge scale.

Reference material:

http://www.nber.org/papers/w18015

We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90% for at least five years. Consistent with Reinhart and Rogoff (2010) and other more recent research, we find that public debt overhang episodes are associated with growth over one percent lower than during other periods. Perhaps the most striking new finding here is the duration of the average debt overhang episode. Among the 26 episodes we identify, 20 lasted more than a decade. Five of the six shorter episodes were immediately after World Wars I and II. Across all 26 cases, the average duration in years is about 23 years. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive. We find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates.

http://journalistsresource.org/wp-content/uploads/2011/08/Govt-Size-and-Growth.pdf

Abstract

: The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach—of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time—reveals a more consistent picture. The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation, and note several pitfalls involved in giving it a causal interpretation. Against this background, we discuss two explanations of why several countries with high taxes seem able to enjoy above average growth: (i) that countries with higher social trust levels are able to develop larger government sectors without harming the economy, and (ii) that countries with large governments compensate for high taxes and spending by implementing market-friendly policies in other areas. Both explanations are supported by current research.

We are facing long term growth prospects in the 1-2% range, half of the 3% range. And it will not end until the deficit problem is solved. And waiting to solve the deficit problem is not solving the problem, it needs to be solved now. There are no pain free solutions, but we are making it much worse. Employment cannot grow with a trendline GDP growth of 1-2%.

[RodSBT]

Re: QE3

So tell me again?
How do you fix your debt problem by increasing your debt?




..there was a physicist some time ago who had a definition for this.

[Kaa]

Re: QE3

So tell me again?
How do you fix your debt problem by increasing your debt?

You fix your debt problem by inflation.

Kaa

[wardd]

Re: QE3

prime the economic pump and grow out of it

[Kaa]

Re: QE3

- deficits on the order of 10% of GDP cannot be absorbed by the economy without high interet rates.

Um. Japan.

Not to imply that it's sustainable, but Japan is the poster child for huge deficits/debt and low interest rates.

Kaa

[David G]

Re: QE3

From some of Bernanke's comments - as mild and politic as they may have been - over the last several months... I get the impression that he, indeed, feels he has no choice. Part of why he feels he has no choice, I gather, is his sense that Congress is not doing its job. He has spoken to them and urged them to take some fiscal policy steps that would complement his efforts on the monetary side. For political reasons, they've refused... leaving more of a burden to be carried (or at least attempted) by the Fed.

[peb]

Re: QE3

You seem to be presuming that he DOES have a choice (assuming your presumption of what YOU think he's thinking is correct... maybe he has a very different perspective?)

He feels he has no choice, I am sure of that. Does he have a choice? Probably not as long as the federal government is spending money like it is. And I could certainly see that he is (barely) holding the country out of another recession. There is no way we would not be in a major recession without the monetizing most of the new debt; the numbers just don't add up. There would be no capital for any economic growth.

Very true. Part of the problem, however, is that the people in charge of coming up with the solutions are NOT the people who are going to feel the pain. Furthermore, the pain isn't by any means 'harmless'... for some, it can be not just debilitating, but life-endangering. Maybe that's part of Bernanke's thinking, too.

Of course it is part of his thinking. He is certainly a fed chairman concerned about main street more than wall street. But the pain is great. Those 40M fewer jobs are real people who are unemployed. And there is no end-in-sight. The only solution is to cut the deficit drastically, probably now, and error on the side of sooner rather than later.

[David G]

Re: QE3

So tell me again?
How do you fix your debt problem by increasing your debt?




..there was a physicist some time ago who had a definition for this.

Perhaps someone more sympathetic could give Rod a real explanation? Based upon his prior performances, I'd be more inclined to dismiss him as an ignorant, short-sighted fool who needs to go back to the intellectual sandbox and not bother the grownups. I'm betting someone else can do better than that.

[Kaa]

Re: QE3

Perhaps someone more sympathetic could give Rod a real explanation?

Sure :-D

If you stop, you crash right now. If you don't stop, you crash later. Later is better than now.

:-P

Kaa

[peb]

Re: QE3

Sure :-D

If you stop, you crash right now. If you don't stop, you crash later. Later is better than now.

:-P

Kaa

I tend to disagree with this thinking. We have already crashed. If you stop, you can start recovering now. If you don't stop, you will not recover. And by "stop", I mean stop the huge deficit spending. If you don't stop, we cannot recover. And by "stop", I mean stopping deficit spending. Monetizing debt can at worse be discribed as an enabler of the problem, at best can be described as a sympton of the problem. But it is not the underlying problem.

[peb]

Re: QE3

Cutting the deficit 'drastically' will skyrocket unemployment, since much of gov't spending is spent on salaries of people working both directly, and indirectly, on the taxpayer's nickel. Would you expect either Obama, OR Romney, to do this, and then try to explain away why unemployment just jumped from 8% to 10%, 11%, or more.... and why it was necessary, and just who would be hurt?

Your 'only solution' is fine, if you were someone in any position of power bent on suicide.

First of all, I do not agree with your statement. Cutting spending would free up a lot of money to be invested elsewhere in the economy; thereby creating jobs. Go back and read the reports I posted, continual deficits at this level lead directly to slower growth in the economy. Furthermore, nothing is instantaneous, nor likely needs to be.

More importantly, all evidence suggests that these levels of deficit spending have NOT worked. At all. Forget the baseline unemployment number. We have 40M fewer jobs than before the crash occurred. The economy is such now, that the means of tracking unemployment is no longer accurate, too many people are not counted as unemployed because they have left the work force out of despair. I am not one who thinks there is a grand government plot to make the numbers work better. Through the years, the BLS has continually fine-tuned its approach to calculating unemployment in an effort to make it more accurate. Unfortunately, all of those adjustments were geared for an economy that was structurally sound. Ours is not.

Why are we going to continue with something that has not worked? The current approach is suicide.

[Kaa]

Re: QE3

I tend to disagree with this thinking. We have already crashed. If you stop, you can start recovering now. If you don't stop, you will not recover. And by "stop", I mean stop the huge deficit spending. If you don't stop, we cannot recover. And by "stop", I mean stopping deficit spending. Monetizing debt can at worse be discribed as an enabler of the problem, at best can be described as a sympton of the problem. But it is not the underlying problem.

My explanation was sarcastic. :-) Maybe :-) Let's say the degree of irony involved is open to interpretation :-D

I am pretty sure that if we just stop, before starting to recover we'll have another crash, bigger than what we had four years ago.

Can you define the "underlying problem" that you've mentioned?

Kaa

[peb]

Re: QE3

My explanation was sarcastic. :-) Maybe :-) Let's say the degree of irony involved is open to interpretation :-D

I am pretty sure that if we just stop, before starting to recover we'll have another crash, bigger than what we had four years ago.

Can you define the "underlying problem" that you've mentioned?

Kaa

I thought I had been clear in all of my posts. The underlying problem is the huge deficits we are running.

[Garret]

Re: QE3

I thought this thread was gonna be about a new Ocean Liner.

Damn. Shoulda noticed it was in the Bilge...