Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

[Raz]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

"You get the same order of criminality from any State to which you give power to exercise it; and whatever power you give the State
to do things for you carries with it the equivalent power to do things to you."

Albert J. Nock (1939)

[Onlooker]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Maybe the shortest way of making my point would be this: a government that is large and powerful enough to fix all of society's problems is a government large enough to be coopted by powerful people and used for whatever purposes they want, including bailing themselves out.

Idealists think they can grow the government in power and size in order to do all the "good" things they want it to do, to work to perfect society through control by government via laws, regulations, taxes, programs, agencies, commissions, white papers, blue ribbon panels, etc, etc, etc, and then they expect that the ambitious, ruthless people who rise to the heights of power in that huge government they built will not use that power to dole out the people's money to their connected friends in business. These idealists think, "if only everyone voluntarily refrained from using the huge government we have built for their greedy, selfish purposes, then everything would work. These failures are the fault of the greedy businessmen using their wealth to buy influence and asking for bailouts from their former business associates who are now in government. We didn't intend for them to do that when we created these big government agencies and gave them all that power so they could fix our problems."

Well, if you build a big powerful government you are simply centralizing power and making it convenient for the ruthless to use it for their own purposes. It is unavoidable. The powerful and ruthless and smart are drawn to the centers of power. If you make government the major center of power, that is where they will go.

Excellent. Nicely put, really (all of it; I just excerpted the meat of it).

Speaks for me very well. Thanks

[Raz]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

The Fed said it will buy $40 billion of mortgages per month in an attempt to desperately foster a recovery in the real estate market. The purchases will be open-ended, meaning that they will continue until the Fed is satisfied that economic conditions, primarily in unemployment, improve.
Of course, this will also fail if they are buying mortgages from the bankers. Bankers will use this as a means to dump what they have been trying to get rid of all along, while it is not necessarily guaranteed to stimulate employment or housing prices. FED just created a dumping ground and golden parachutes for the bankers.

FED will never do anything to help 99% they are only concerned about 1%. It would be interesting to see when that will change if ever. As EJ has noted many times the only people that benefit from current policies are the connected ones.

+1. I've said for years that, being owned by the member banks, the Creature from Jekyll Island - like any good whore - works for her pimp.

Bernanke is all about saving the banks. And now with Romney stating publically that if he's elected "Bubbles" Ben won't be reappointed,
Bernanke just might be trying to save his own job. (Yes, I've become that cynical about our gov'mint.)

[slippery]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

EJ writes in:

It was QE technically but not the QE the markets were expecting.

This QE3 forecast was typical: "RBS looks for the Fed to announce open-ended asset buys, but to commit to buying at least $600 billion in Treasurys and MBS between October and March, and to announce it will keep buying both beyond March."

Instead it was limited to MBS only and was only $230 billion over six months rather than $600 billion with no additional Treasury bond purchases.

I'm calling it QE Lite.

By failing to commit to the full QE3 that markets expected, bonds sold off.

That did not happen after QE1 and QE2.

QE Lite was aimed at the housing market and at currency depreciation.

QE Lite succeeded in weakening the USD. That's why gold popped.

A bigger bone for Bill Gross than I expected, but not full-on QE, either.

I have to disagree with your forecast and framing of the announcement. While the initial plan for QE3 is $40 billion a month, only $240 billion over 6 months, the commitment is OPEN ENDED, so the total amount is unknown. Also, the Fed made a promise to INCREASE the rate of purchases if the labor market did not improve substantially, so the net is OPEN ENDED AND GROWING. There was also the extension of ZIRP until mid-2015. This was a huge QE3 in my opinion, nothing Lite about it.

Recent history does not agree with your statement about treasury rates after QE1 and QE2. Treasury rates rose immediately and substantially after both QE1 and QE2, and Twist (though the effect is less pronounced for Twist).

http://advisorperspectives.com/dshor...tervention.gif

Rates rose for several months after each announcement, but eventually fell again as the effects of QE diminished and the economy continued to deteriorate.

I think this was bigger than anyone expected. Time to reassess the situation.

[EJ]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I have to disagree with your forecast and framing of the announcement. While the initial plan for QE3 is $40 billion a month, only $240 billion over 6 months, the commitment is OPEN ENDED, so the total amount is unknown. Also, the Fed made a promise to INCREASE the rate of purchases if the labor market did not improve substantially, so the net is OPEN ENDED AND GROWING. There was also the extension of ZIRP until mid-2015. This was a huge QE3 in my opinion, nothing Lite about it.

Recent history does not agree with your statement about treasury rates after QE1 and QE2. Treasury rates rose immediately and substantially after both QE1 and QE2, and Twist (though the effect is less pronounced for Twist).

http://advisorperspectives.com/dshor...tervention.gif

Rates rose for several months after each announcement, but eventually fell again as the effects of QE diminished and the economy continued to deteriorate.

I think this was bigger than anyone expected. Time to reassess the situation.

All of the forecasts were for an open-ended commitment. Everyone expected that.

$230 billion is 62% less than $600 billion.

Restricting purchases to MBS represents a far smaller scale of QE than purchases of both MBS and UST.

QE Lite was smaller than expected and smaller than QE1 and QE2.

The purpose of QE is to inflate asset prices to increase aggregate demand via wealth effects by raising the value of assets on household balance sheets.

It is a bizzarre notion that the Fed believes that by making wealthy people feel more wealthy that the economy will add jobs unless he means FIRE jobs.

QE has improved employment in the finance side of the real estate labor market, albeit without helping the production side.

FIRE jobs back to 2005 levels while construction remains at levels not seen since the depths of the 1990s recession.

[magicvent]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

EJ,

Does this latest QE lite alter your position on how fast gold prices will rise?

[we_are_toast]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

As I said earlier in this thread, I don't find this QE3 very exciting, and without the purchase of UST and an accompanying fiscal policy, I don't see how this is going to help. I wouldn't call it QE3 lite, I'd call it QE3 fail.

Restricting purchases to MBS represents a far smaller scale of QE than purchases of both MBS and UST.

QE Lite was smaller than expected and smaller than QE1 and QE2.

The purpose of QE is to inflate asset prices to increase aggregate demand via wealth effects by raising the value of assets on household balance sheets.

It is a bizzarre notion that the Fed believes that by making wealthy people feel more wealthy that the economy will add jobs unless he means FIRE jobs.

All you have to do is follow the money. Approx $8 billion of new houses are built every month. The FED will buy $40B in MBS, which means the VAST majority of the purchases will be existing MBS. Who owns those existing MBS? The same big banks, hedge funds, investors... who've recovered nicely since this depression began, and who've failed to invest in the productive economy. How does simply giving them more money change anything? I just don't see how this is going to significantly impact the jobs market.

[slippery]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

QE Lite was smaller than expected and smaller than QE1 and QE2.

The baseline forecast was no QE unless there was an acute crisis, and that made sense. Maybe the Fed sees an acute crisis that is not in the news, or they are coordinating action with ECB re Euro sovereign debt. While many analysts expected open ended QE, it was a shock to me. If the labor market doesn't improve, does the Fed buy every MBS security for sale? It sounds like the Fed intends to create a serious bout of inflation, whatever the consequences.

It is a bizzarre notion that the Fed believes that by making wealthy people feel more wealthy that the economy will add jobs unless he means FIRE jobs.

So true.

[Guest]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I think this is the real deal. This is a maasive, all in QE that will break the bond market and increase inflation expectations.
This is not about the number of billions per month. It is about the message that was between the lines. What I am confused about is this... Higher inflation will inflate the debt away, however, the higher rates go, the more difficult it will be for the Treasury to service the debt. So which one will prevail? The beneficial effects of higher nominal growth or the negative effects of rising rates? I actually wonder how much the Treasury cares about rising rates.. I believe they extended the maturity profile of the debt substantially plus a big chunk is owned by the Fed.

I will repeat what I said before... Faber has it right... 25 pct in gold, 25 in cash, 25 in good equities, and 25 in corporate bonds. This game is becoming to difficult to navigate.

[Guest]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Toast,

You are missing the point. Check out the price action in ITB and XHB. What Bernanke is doing is making people start buying houses instead of paying higher and higher rents. Think about it. If you put off a house purchase for a while because you thought inflation was dead, now you should hurry up with locking in that low mortgage rate, and buy a house. Inflation expectations. It is like an avalanche... " oh crap, better buy that house, and i will need some new furniture and appliances. Money will be worth less tomorrow, etc...etc"

With business owners: my truck fleet is 10 years old, better replace it now while financing is so cheap and the trucks have not gone up in price.

[astonas]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

There is no doubt that powerful, connected people in business use their connections with their revolving-door friends in government to get bailouts and other perks that the average slob has no chance at.

So, where does the blame lie for this? How was it possible for this to occur? Is it the fault of the powerful, connected people who use their connections to protect themselves from loss? Everyone wants to protect themselves from loss. If there is a "legal" way to do that - to get your friends in government to bail you out - then I think it is human nature for people to take advantage of that. Would it be nicer if those folks just went bankrupt and didn't take advantage of their connections and power to save themselves? I suppose, but I don't think that's how people actually behave.

My diagnosis of the problem is that the federal government has grown in power to the point where it was possible for a Treasury Secretary and a Fed Chairman and some congressmen to have the ability to use the people's money to bail their powerful friends out. I don't think that would have been possible before so much power had been invested in the Federal government and the Federal Reserve (created by the Federal government).

Maybe the shortest way of making my point would be this: a government that is large and powerful enough to fix all of society's problems is a government large enough to be coopted by powerful people and used for whatever purposes they want, including bailing themselves out.

Idealists think they can grow the government in power and size in order to do all the "good" things they want it to do, to work to perfect society through control by government via laws, regulations, taxes, programs, agencies, commissions, white papers, blue ribbon panels, etc, etc, etc, and then they expect that the ambitious, ruthless people who rise to the heights of power in that huge government they built will not use that power to dole out the people's money to their connected friends in business. These idealists think, "if only everyone voluntarily refrained from using the huge government we have built for their greedy, selfish purposes, then everything would work. These failures are the fault of the greedy businessmen using their wealth to buy influence and asking for bailouts from their former business associates who are now in government. We didn't intend for them to do that when we created these big government agencies and gave them all that power so they could fix our problems."

Well, if you build a big powerful government you are simply centralizing power and making it convenient for the ruthless to use it for their own purposes. It is unavoidable. The powerful and ruthless and smart are drawn to the centers of power. If you make government the major center of power, that is where they will go.

The genius of the Founders of the USA was the idea to keep government small, to give it only very limited powers. It was not meant to be the first thing we turn to for every problem in society. It was not meant to guarantee pensions for the old, education for the young, "free" birth control for women, the security of every ally on earth, foreign aid, and the 9 million other things that the "progressives" have empowered it to do over the last 200 years. Now they have built a behemoth and given it the power to print money and spend it with practically no limitations, and they are shocked when the powerful use that edifice for their own purposes.

So I stand by what I wrote before. This problem is not caused by greedy businesspeople (Goldman) being helped by their friends in government (Goldman). There will ALWAYS be people who are ambitious and ruthless. There is no perfect way to prevent the rich and ruthless from abusing their power, but the best way we have is to insist that they be subject to the same free market discipline that everyone else is, and that we have a culture that values entrepreneurship, liberty, non-corruption, and small government instead of a culture of entitlement and positive "rights" where every time a problem arises people turn to the government to solve it. And the way to make sure they are subject to free market discipline is for there to be no alternative - for there to be no government entity powerful enough to hand them the people's money to bail them out.

Having said that, let me take off my own libertarian idealist hat and note that the impulse to look to government to solve all problems is probably as ingrained as the impulse to take advantage of things like government bailouts and to make friends with people in high places and use your connections to get wealthy. We'll always have rich ambitious ruthless people and we'll always have unconnected naive average joes that get fleeced. The reason I've been coming to this site for five years is to try to avoid being one of the latter. There are giants tromping around swinging massive clubs, and I suppose the opinions of ants like me about the morality of what the giants (in business or in government) do is irrelevant. I just have to watch out not to get stepped on.

This is a well-written and cogent analysis. Thank you!

But it is not complete. One may equally well apply many of the same arguments you make against government, to those collections of powerful individuals who would dominate, even more than they now do, in a world with diminished government.

The absence of government does not imply the absence of corrupt and powerful groups who will control other people's lives. On the contrary.

Collected power exists with or without government, whether in the form of collectives, corporations, or bands of marauding militias. The strong will in general take advantage of the weak, given the opportunity to do so. And there will always be both strong and weak.

But a properly constructed and maintained government (which I am not claiming we currently have) has a chance of doing so in the interests of the overall good. i.e. to reduce net-value-destructive predation. This helps all members of a society, strong and weak alike.

The solution is thus not to dismantle government, but repair it. I'm in agreement that government as it is today is not the answer. But that is a very different thing than saying government, in any form and at any size, is a fundamentally destructive influence, that varies only in scale and not in kind.

Thus, I feel that you have only made the first part of the argument to support your conclusion, and the easier part at that.

Put another way, the statement I highlighted in bold makes the assumption that it is the size, or perhaps the strength, of government, that affects whether its impact is positive, or negative. This assumption is, in my opinion, entirely false. I hold that it is the structural balance of a government that determines whether it is effective, or destructive.

What is needed is thus a government that is structured to make corruption harder. Mandatory transparency into all aspects of governance and campaign funding is a start. And many further steps beyond that would be required as well. But simply saying "smaller is better" is, to my mind, throwing the proverbial baby out with the bath water.

[astonas]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

It is a bizzarre notion that the Fed believes that by making wealthy people feel more wealthy that the economy will add jobs unless he means FIRE jobs.

Is there a reason to believe that the FED is not fully aware of this, and is therefore intentionally creating FIRE jobs?

FIRE shows up in GDP and employment numbers the same way productive work does, and while we here are aware of the difference between productive work and parasitic work, Keynesian economists treat them as interchangeable.

[CanuckinTX]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I'm with Toast on this one osmose. Look at this article for example which is a perfect illustration of EJ's comment re: the wealthy are getting wealthier. http://www.doctorhousingbubble.com/f...-income-areas/

A perfect quote: "One of the biggest ironies of current housing policy is that its initial target was in helping middle class Americans when the actual results have helped upper middle class and wealthier American homeowners get sweeter deals on their home purchases."

I myself have re-fi'd twice in the last 2+ years and sure it's helping with my monthly cash flow but I wasn't really a target for any bailout in the first place. I have lots of equity in my home and wasn't behind on any payments. I'm not spending any more money either because I was already comfortable but I sure enjoy putting more into the bank each month. How does that help our economy?

It sounds like a nice theory that wealthy or well off upper middle class people are going to start spending more money and it will trickle down into the economy to kick start it, but when you realize how few 'well off' people there are in this country compared to the masses, and that they typically save a lot of their money anyway, this amounts to nothing more than helping the rich get richer.

[Guest]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Canuck,

You want to tell me you are just going to shovel money into that account earning zero, if you start seeing inflation pick up?

There is an awful lot of money in the US still. It will start to shift from bonds.

[jk]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

2 comments.

over at ftalphaville [and perhaps elsewhere, i don't know] it's called QEnfinity. doesn't sound lite to them, apparently.

re the purpose of this round of qe: i agree with osmose that it is aimed very specifically at the housing market. they are going to buy approximately half the monthly issuance of mbs, for an indefinite time until employment improves. this will lower mortgage rates, very directly lead to another round of refi's for those who can qualify, and stimulate the low end of the market and especially first time buyers. more first time buyers will promote more step-up buyers. i am very dubious that it will work, but this is what i think they have in mind.