Dear Friends,
It is not a coincidence that the appreciation in the dollar and fall in the euro both began to lose their respective momentum when it became clear that Quantitative Easing was now the primary strategy of the Federal Reserve. This method does not replace other methods, but is instead an addition to the multiple other approaches already in place.
In the same timeframe it appears the last of the weak longs exited the energy group.
I believe that the advent of Quantitative Easing is the beginning of Gold’s move to $1200 and $1650.
I believe the dollar rally is done at Harry Schultz’s PO of .88-.89 on the USDX.
The low in the euro has occurred.
All of this is a product of Quantitative Easing without sterilization.
When Bernanke referred to the Helicopter Drop of electronically created money without limits, he was referring to the following now famous speech:
Deflation: Making Sure "It" Doesn’t Happen Here
Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002
Since World War II, inflation–the apparently inexorable rise in the prices of goods and services–has been the bane of central bankers. Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an "inflation bias" in the policies of central banks, and still others. Despite widespread "inflation pessimism," however, during the 1980s and 1990s most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon. Although a number of factors converged to make this happy outcome possible, an essential element was the heightened understanding by central bankers and, equally as important, by political leaders and the public at large of the very high costs of allowing the economy to stray too far from price stability.
With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem–the danger of deflation, or falling prices. That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation–a decline in consumer prices of about 1 percent per year–has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.
So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier–a stable record indeed.
The following articles should also be reviewed.
Sincerely yours,
Jim
M3, where art thou?
With quantitative easing under way, money supply is going to become an increasingly important gauge.
Morgan Stanley notes the measure will be a key indicator of when ‘QE’ actually starts to kick in. Before adopting QE, all excess reserves created by the Fed were being hoarded by banks. Rather than increasing, the so-called money multiplier (the link between the Fed’s balance sheet and the money supply) had actually plummeted. The only other time this has happened is during the Great Depression, say Morgan Stanley. But there is reason to be optimistic. They write:
“…there now appear to be some tentative signs of a turnaround. In the latest weekly data reported by the Fed, M1 jumped a whopping US$44 billion. And this follows on the heels of a US$33 billion jump in the prior week. To be sure, the monetary aggregates can be quite volatile, and special factors such as the recent hike in the deposit insurance cap can lead to short-term distortions, but going forward we will be watching the growth in the money supply in order to gauge the effectiveness of QE.”
The pictorial Quantitative Easing
In words: The Fed’s liquidity programmes, such as the TAF, have combined to inject about $1,100bn into the financial system (Figure 10) — and simultaneously jacked up the Fed’s assets. Normally the Fed offsets an increase in its assets by selling new treasuries, which decreases the amount of currency in circulation and conversely increases its liabilities. This is called sterilisation and is one way the Fed can increase assets without expanding the money supply.
The Fed’s primary method of draining the excess liquidity (The SFP programme) has only gotten rid of about $500bn of that $800bn increase. The Fed is not fully sterilising its massive increase in assets — in effect it is increasing the money supply.
This is not necessarily a bad thing. For a start, inflation helps you pay off debts — which are fixed, and of which there are a lot in the US — by essentially devaluing your debt (and conversely, in a perverse sort of way, making the savings of those who had the foresight tendency to err on the side of prudence, worth less).
The inflationary effect is, however, mitigated by one thing — the breakdown of the money multiplier as bank lending has seized up. Thus, money supply has increased, in this case measured by M1, but it’s increased less than the rise in the base money supply would suggest.
A final word on the matter, from BoA’s Jeffrey Rosenberg, regarding yesterday’s announcement that the Fed would start buying mortgage-backed stuff (MBS) from the GSEs Fannie and Freddie (emphasis our own):
Today’s Fed announcement on GSE purchases launches explicit QE that kills two birds with one stone. QE offsets the current deflationary impact of financial system distress and directing these purchases towards GSE debt and MBS may help reduce mortgage rates, a key goal to stabilizing the housing market. While QE may offset current deflationary risks, longer term these measures must be temporary to avoid creating their own problems of inflation and dollar devaluation, a risk highlighted by today’s USD decline and increase in gold…
