QE3?

Put the 7% drop of the stock market in 8 sessions aside, the economic data has been aweful… slower GDP growth (or the lack of it), lower ISM, weaker consumer spending, relatively tamed CPI #, etc. If the jobs report on Friday is bad, what do you think the chance of a QE3? Or even a QE3 light? Thoughts?

I think it is likely now which is a recent change from my previous view. I don’t think the regional feds are going to like it at all but Bernanke may shove it down their throats as a student of the GD and believer in monetary stimulus. There is certainly still hope for a pickup in H2 that many people (myself included) have been expecting (incorrectly to this point) but it is looking like a rough time for consumption/investment with consumer and business sentiment taking such a beating in the past couple of months. Auto sales are coming back a little with supply chain disruptions out of the way and residential housing of all things is showing some signs of life too. The weak dollar should help the trade balance. But animal spirits are hard to reverse once they start trending down due to the self-fulfilling aspect. I’m not convinced more QE (if it occurs) will be good for the economy though, as monetary policy is in my opinion not very effective at the zero bound. A metaphor I use is that QE is for the economy is like bottled water: the federal reserve just picks up a bunch of publicly issued debt from the private sector, swishes it around, repackages it, and puts it back out in the private sector. No net value or demand is created the only thing that happens is longer term yielding debt is effectively swapped for short term no yield debt. There is plenty of high powered money out there now, just no demand to use it. Lower interest rates make borrowing cheaper but in general no one really wants to borrow they all want to save. Lower rates obviously can also lower interest income to investors which can paradoxically increase savings rates and hurt spending as happened in Japan as investors try to save more and more so they can live off their income without dipping into principle. It’s a tough trap to get out of. It’s eerie to me how similar this time period is to the 1930s where all fiscal deficit spending was widely criticized by politicians and the media and it took a world war to get the economy humming again. I think we are in a position currently to just stutter along but I don’t think the economy is in any kind of shape yet for the planned 1.5%-2.5% drag on GDP from fiscal spending draw-down next year.

This is amazingly like the 1930’s. Seriously, everybody calling for governments to stop spending need to dig out their economic history books and revist the causes of the great depression. Anyway, I think QE3 is about a 70% probability. US economic data is terrible and there is no sign of a catalyst for change (bar the assistance provided by a weak US dollar). I do think however that if Bernanke is going to unleash QE3 he also needs to stop paying interest on bank deposits at the Fed. There’s no point in flooding the market with cash if it all just ends up back at the Fed.

I wish people (especially news journalists) wouldn’t cite the stock market fluctuations, especially over a few days, as an additional reason that the economy is getting worse. The general market decreases are in response to economic factors. It is poor reasoning. And I don’t think you should use the great depression as a guide to today’s economic policy – the environment then was totally different. Not to say that history is irrelevant, you just need more examples in the sample.

@99 cannon Not sure what you mean by the first part of your post but as to the second part I think it is a decent starting point to look at the only major financial crisis in modern history as a general guideline. I agree with you we are in a different time period with a much different economy but history repeats and I think even just the timeline reveals some insights. http://www.hyperhistory.com/online_n2/connections_n2/great_depression.html If the Depression is not a good enough parallel, a very relevant real-time example that should be influencing today’s economic policy discussions is the Euro Zone. Note the problems the countries are going through that previously ran fiscal surpluses (Spain and Ireland), have desperately implemented severe fiscal spending cuts (pretty much everyone in the Euro Zone), and even those that were previously regarded as safe havens (France). The answer always seems to be “just cut more” even though it doesn’t work and experiments to date in real economies have continually proved that. It’s like applying leaches to an anemic person. Sorry for the political tangent. Monetary policy discussions always seem to morph into fiscal policy discussions.

I think it’s inevitable, but I wish they’d start buying other things besides treasuries given how low the yields are, in favor of things like corporate debt, perhaps even more asset backed securities, things like student loans, auto loans, credit card loans. But the only thing I can think of that’s going to get us out of this is a much more massive fiscal stimulus. Or another war?

Palantir Wrote: ------------------------------------------------------- > Or another war? Not entirely out of the question, the political clowns who lead us have been known to have dumber ideas than that. erhaps the best outcome would be an invasion from space…

I’ve been slowly coming to the conclusion that the kind of realignment of geopolitics seldom comes without a war, and the recent economic crash has made people angry enough to drift that direction. I don’t expect it imminently, but possibly within 5-10 years. I also hope I am wrong on this. War is a bad thing, particularly when people have nukes.

bchadwick Wrote: ------------------------------------------------------- > I’ve been slowly coming to the conclusion that the > kind of realignment of geopolitics seldom comes > without a war, and the recent economic crash has > made people angry enough to drift that direction. > I don’t expect it imminently, but possibly within > 5-10 years. > > I also hope I am wrong on this. War is a bad > thing, particularly when people have nukes. It is human nature for people to look for someone else to blame for their problems, while believing others are responsible for their own. I can easily see how geopolitical tensions could rise rapidly in an environment like today. Just needs a major catalyst like a dynamic misguided leader. The tea party is being compared by some commentators to “terrorists” which is clearly unnecessarily inflammatory language (probably offending a lot of people here), but the tea party to me does illustrate the point that when people are scared they will believe pretty much anything you tell them even if it is obviously not in their best interests. Quote from one of my favorite authors: “People are stupid; given proper motivation, almost anyone will believe almost anything. Because people are stupid, they will believe a lie because they want to believe it’s true, or because they are afraid it might be true. People’s heads are full of knowledge, facts, and beliefs, and most of it is false, yet they think it all true. People are stupid; they can only rarely tell the difference between a lie and the truth, and yet they are confident they can, and so are all the easier to fool. Sense of purpose is more important by far than the truth. People are stupid; they want to believe, so they do.” The other side of the argument is that the world is a much more open place today and global economies are tied together symbiotically. Information is available to a degree that is in no way comparable to previous decades/centuries. Those things do count for something in minimizing conflict, it is just not clear to me how much.

“History doesn’t repeat itself - at best it sometimes rhymes” Mark Twain Since the credit crisis of 08, we have been in the grips of the Second Depression. That’s what happens when the easy money stops flowing and the private sector stops spending. The whole point of QE 1, 2 & 3 is to get people back to the party. A reverse of the normal job of the Fed if you will: “to take away the punch bowl just as the party gets going”. So now the punch bowl is being filled, but the room has turned teetotal. Effectively banks aren’t willing to lend as they have joined Alcoholics Anonymous. So QE3, absolutely yes. Will it work. Who knows. Looks at Japan’s lost decade. The question comes down to how to play it best imo.

Dwight Wrote: ------------------------------------------------------- This is so true. It reminds me of a guy with a mustache who wasn’t a fan of the Treaty of Versaille. When people suffer a prolonged reduction in their quality of life, it tends to breed a political hero. Unfortunately as you say, they so often seem to be misguided, and the end result is war. > It is human nature for people to look for someone > else to blame for their problems, while believing > others are responsible for their own. I can > easily see how geopolitical tensions could rise > rapidly in an environment like today. Just needs > a major catalyst like a dynamic misguided leader.

The apposite quote is that society is only ever three sqaure meals away from revolution

newsuper Wrote: ------------------------------------------------------- > This is amazingly like the 1930’s. Seriously, > everybody calling for governments to stop spending > need to dig out their economic history books and > revist the causes of the great depression. > > Anyway, I think QE3 is about a 70% probability. US > economic data is terrible and there is no sign of > a catalyst for change (bar the assistance provided > by a weak US dollar). > > I do think however that if Bernanke is going to > unleash QE3 he also needs to stop paying interest > on bank deposits at the Fed. There’s no point in > flooding the market with cash if it all just ends > up back at the Fed. I don’t know as much as I should on the topic, but if I recall… hasn’t it long been argued that the new deal prolonged the depression?

^ Yes, historians and economists disagree on whether the new deal was a good or bad thing. It’s probably obvious what camp I’m in haha. Replace the dates in the following paragraphs with random 4 digit numbers starting with “20xx” and see if anything sounds like deja vu. (From wikipedia: http://en.wikipedia.org/wiki/New_deal) But the Administration’s other response to the 1937 dip that stalled recovery from of the Great Depression had more tangible results. Ignoring the requests of the Treasury Department and responding to the urgings of the converts to Keynesian economics and others in his Administration, Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938, an effort to increase mass purchasing power. The New Deal had in fact engaged in deficit spending since 1933. Now they had a theory to justify what they were doing. Roosevelt explained his program in a fireside chat in which he told the American people that it was up to the government to “create an economic upturn” by making “additions to the purchasing power of the nation”. Business-oriented observers explained the recession and recovery in very different terms from the Keynesians. They argued that the New Deal had been very hostile to business expansion in 1935-37, had encouraged massive strikes which had a negative impact on major industries such as automobiles, and had threatened massive anti-trust legal attacks on big corporations. All those threats diminished sharply after 1938. For example, the antitrust efforts fizzled out without major cases. The CIO and AFL unions started battling each other more than corporations, and tax policy became more favorable to long-term growth. When the Gallup poll in 1939 asked, ‘Do you think the attitude of the Roosevelt administration toward business is delaying business recovery?’ the American people responded ‘yes’ by a margin of more than two-to-one. The business community felt even more strongly so." Treasury Secretary Henry Morgenthau, angry at the Keynesian spenders, confided to his diary May 1939: “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot.”

Nice article out today in the economist on this topic: http://www.economist.com/blogs/freeexchange/2011/08/fiscal-policy Flying blind Aug 3rd 2011, 14:51 by R.A. | WASHINGTON ON DECEMBER 16th, 2008, President-Elect Barack Obama met in Chicago with key members of his economic team to discuss their response to the deteriorating economic situation. Just two weeks earlier, the Bureau of Labour Statistics reported that 533,000 jobs had been lost in November, after a decline of 302,000 in October. According to the latest output figures, the economy had contracted by 0.5% in the third quarter, and much worse was expected of the fourth. The New Yorker’s Ryan Lizza describes the debate: The most important question facing Obama that day was how large the stimulus should be…A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion…[CEA Chair Christina] Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. [NEC Director Larry] Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”…In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option…[Chief of Staff Rahm] Emanuel made the final call: six hundred and seventy-five to seven hundred and seventy-five billion dollars, with the understanding that, as the bill made its way through Congress, it was more likely to grow than to shrink. On January 10th of 2009, Ms Romer and Jared Bernstein, economic adviser to Vice-President Joe Biden, released a now-infamous assessment of the likely effect of a “prototypical” stimulus package worth about $800 billion. A day earlier, the BLS announced a rise in the unemployment rate to 7.2%, after a December employment drop of 524,000. November’s employment drop was revised from 533,000 to 584,000. In their analysis, Ms Romer and Mr Bernstein projected that without stimulus, employment might fall to just under 134m, from a previous recession peak near 138m. With stimulus, by contrast, employment should be close to its previous peak by the end of 2010. Stimulus would limit growth in unemployment to about 8%, falling to 7% by the end of 2010. President Obama was inaugurated on January 20th, and a stimulus bill was introduced in the House of Representatives on January 26th. A stimulus package worth $819 billion passed in the House just two days later. Two days after that, Americans received grim news about the economy: in the fourth quarter of 2008, GDP contracted at a 3.8% annual pace—the worst quarterly performance since the deep recession of 1982. More bad news hit on February 6th, when the BLS released new labour market figures. It reported an employment decline of 598,000 in January, following on revised drops in employment of 577,000 in December and 597,000 in November—a three-month drop of 1.8m jobs. On February 10th, the Senate passed its version of the stimulus, worth $838 billion. In conference committee, the bill shrank to $787. On February 17th, Mr Obama signed the bill into law. In the months and years that followed, Washington provided additional support to the economy, perhaps ultimately contributing approximately $1 trillion in total stimulus. But that first bill was the big bite at the apple. The White House looked at the economic situation, sized up Congress, and took its shot. Unfortunately, the situation was far more dire than anyone in the administration or in Congress supposed. Output in the third and fourth quarters fell by 3.7% and 8.9%, respectively, not at 0.5% and 3.8% as believed at the time. Employment was also falling much faster than estimated. Some 820,000 jobs were lost in January, rather than the 598,000 then reported. In the three months prior to the passage of stimulus, the economy cut loose 2.2m workers, not 1.8m. In January, total employment was already 1m workers below the level shown in the official data. We can’t know exactly how things would have played out in a world in which key policymakers had better data. If the true scope of the economic disaster in the fourth quarter had been clear, however, it seems certain that Ms Romer’s models would have shown a need for more stimulus, that the White House would have agreed to push for more (and perhaps a lot more), and that Congress would have been much more receptive to a bigger bill. A drop of 8.9% does seem much more terrifying, after all, than a 3.8% decline. Bigger stimulus would have reduced the economic deterioration in subsequent months. The Fed might also have been more aggressive. Of course, it’s not impossible that knowledge of the dire state of the economy would combine with a bigger stimulus plan to shake faith in American finances. It is unlikely, however. At the end of 2008, America’s net debt-to-GDP ratio was less than 50%. Other large economies were also tanking, and money was flooding into Treasuries. In late December of 2008, yields on 10-year Treasuries fell to near 2%. America had plenty of room and every reason to borrow and spend heavily. What it didn’t have, unfortunately, was an accurate picture of the economic situation. And that was a crippling limitation indeed. What’s striking to me is that as new data have revealed the true dimensions of the 2008 collapse, the public’s perception of events hasn’t much changed. Critics still jeer the stimulus for its failure to deliver promised results, despite the now-obvious inadequacy of the package. Few in Washington seem willing to discuss how drastically officials underreacted in 2009, and how the results of that underreaction are still with us, waiting for a more appropriate policy response. I don’t know which tragedy is the more troubling: the failure to see the true scope of the disaster when accurate numbers weren’t available, or the failure to see it now that they are.

bchadwick Wrote: ------------------------------------------------------- > I’ve been slowly coming to the conclusion that the > kind of realignment of geopolitics seldom comes > without a war, and the recent economic crash has > made people angry enough to drift that direction. > I don’t expect it imminently, but possibly within > 5-10 years. > > I also hope I am wrong on this. War is a bad > thing, particularly when people have nukes. Make sense. Who will be fighting whom in this war? US, China?

bchadwick Wrote: ------------------------------------------------------- > I’ve been slowly coming to the conclusion that the > kind of realignment of geopolitics seldom comes > without a war, and the recent economic crash has > made people angry enough to drift that direction. > I don’t expect it imminently, but possibly within > 5-10 years. > > I also hope I am wrong on this. War is a bad > thing, particularly when people have nukes. any MAJOR war would crash the world economy. trade is too intertwined these days.

I’m not sure. US v. China would be the one that fits the theory best. I could see China deciding that it is time to reunify with Taiwan, and then the US having to put up or shut up on its security guarantee. Or possibly China-India getting into some conflict and then the US might get dragged into it. China might also get into a conflict with Japan, perhaps over the Koreas. I don’t think this would be a war that starts off as a direct conflict between powers. It would start off as a smaller conflict in which the US and China get drawn in on opposing sides. Still, I find it a little difficult to imagine a direct armed conflict between the US and China so soon. China benefits from the global security / policing that the US does, and China doesn’t have to pay for it. I think China will like to keep it that way for a while. The issue would be if there is a major crash or economic contraction in China that puts pressure on the Party. If that happens, then the temptation to use jingoism and/or xenophobia to distract attention from authoritarian politics in lean times is a tried-and-true tactic in many countries, including China. I think conflict with the Russians is actually more likely. The Russians have a more recent memory of being a superpower and are almost spoiling for the opportunity to prove that they still have it in them. And I think they think one of the best ways to do that to stick a thumb in the eye of the US. Perhaps the US and Russia get into a conflict over some place like Georgia or Ukraine, and China ends up benefiting because two major powers have weakened each other without weakening China. This might start as a Russia-Europe conflict, perhaps Russia-Poland, with the EU and NATO being drawn into it. All of these scenarios seem a little far-fetched right now, but if the US is seen as being unable to shoulder the burden of being the “world police” (for better or worse), other countries, particularly rising ones, are eventually going to assert themselves, perhaps violently. In the beginning, the US will probably decline to do much, given overtaxed resources, but eventually it will say, “OK, we got to do something to intervene,” and if there is a major power on the other side, it could get ugly. And small powers have an incentive to try to find large power patrons they can use to counterbalance the influence of other major powers.

a US-China war would destroy China’s economy and (to a lesser extent) ours. a little far-fetched? what’s your market on a 10-year option of one of these happening?

^ It takes long time for a giant to sink… the US is no exception… So, I doubt any country can challenge the US military wise in the next 2-3 decades. A more possible scenario is that China starts to engage regional conflicts with its neighbors (not Taiwan) over territory or resources disputes. US then intervenes to curb China. China will back down for a few times. Eventually, when the US is weakened economically and militarily to a certain level, China will make a stronger stance against the US. Things could get ugly and scary from there. But I think that’s at least 20-30 years from now, around the time our social security fund is expected to run out.