View Full Version : THE END GAME!

November 04, 2010, 12:05
This walks you through - step by step - what QE2 is going to do to us!

Bernanke's Folly: The End Game The Market Ticker ® - Commentary on The Capital Markets Posted 2010-11-04 11:49
by Karl Denninger
in Editorial Bernanke's Folly: The End Game

Consider the following number:


That's the "marketable" debt - $9 trillion.

Here's The Fed's numbers in debt held, as of now:

834,277 - Treasuries
1,059,445 - Mortgages (at what embedded loss?)
150,179 - Agency (Fannie and Freddie) debt

There are some other things in here too, but that's the basics as of October 27th.

The Fed proposes to buy $600 billion of additional Treasuries, and at the same time roll off agency debt and mortgages, rolling that into Treasuries. Call the entire thing $800 billion.

So their balance sheet will look like this:

1,600,000 - Treasuries
959,000 - Mortgages
50,000 - Agency debt

Over time they expect the balance sheet to shift, so that the Treasuries are all that's there. This means they want it to look like:

2,700,000 - Treasuries


Now remember, as of right now, China holds $860 billion of Treasuries and Japan holds $836 billion. The UK is down at $400 billion and then Oil Exporters, at $226.

So once QE is done The Fed will own more than China and Japan combined, about 18% of the total.

Why is this a problem?

Simple: The purpose of issuing bonds into the market is to provide a putative check and balance on Treasury overspending. That is, at some point the continued issuance causes the bond market to revolt and refuse to buy, driving rates much higher. That in turn causes the interest expense to go to the moon.

This threat is the primary check and balance on an out-of-control Federal Government.

The "Chartalists" (and their useful idiots everywhere) claim that the Federal Government simply spends money into existence, and thus they can do this all they want. Well, technically true - you can print all the money you want. However, you cannot control it's value except through relative scarcity!

The Bond Market, rather than being a monetary tool as these people claim, is in fact a fiscal discipline enforcement device.

This is what The Fed with its QE and now QE2 has destroyed.

When Ben Bernanke said "we will not monetize the debt" what he was saying is that he would not permit that fiscal discipline device to be removed from the scales of financial balance. He lied - he not only removed it with QE1, he has now ratified that this discipline function will remain removed via QE2.

The problem with removal of this device of restraint is that fiscal discipline is in fact the only way one avoids imposing taxes on the public. Taxes come either in the form of a literal tax that must be paid or they are financed by causing an increase in the price of things denominated in a currency as a result of debasement.

Taxes inhibit business profits by diverting income from the business and to government. Therefore, in the general sense, the lower the tax rate the more business prospers. Of course taxes cannot be zero, because the government must have funding to perform its essential functions - we merely argue over what those essential functions are and how to pay for them.

QE is effectively naked emission of currency into the economy by government spending. It thus always results in shifting the price equilibrium on commodities in that currency to the right - that is, higher. At the same time since input costs are effectively a tax on production pressure downward is increased on wages. This in turn means that while cost pressures go upward, wages go downward.

Thus QE cannot spur employment. It in fact does the opposite by imposing an effective tax on business operations and consumers, which tends to drive down after-tax compensation of employees.

Ben Bernanke claims that QE is intended to "spur investment" by increasing the "wealth effect." But any such effect is in fact transitory, as one cannot support higher stock valuations while margins are being pressured. You need margin expansion to be able to support higher valuations over time, and that means you need either lower input costs, higher employee after-tax earnings or both.

Bernanke's policies are in fact pushing both of these factors the wrong direction.

But worse, consider the certain "death spiral" scenario on the path we are now traveling:

1.QE is an implicit tax on the population. Input costs go up. This is an effective tax increase on everyone in the country. A dollar increase in the price of gasoline is an effective $140 billion dollars a year in additional tax, as just part of the impact. Basic staples are already up about 10% annualized, despite Bernanke's claim of "no inflation." Note that the "tax on the rich" everyone is talking about is a mere $70 billion a year by comparison.

2.This in turn means lower disposable income for consumers. That in turn hits discretionary spending. And that, in turn, means companies don't need to hire people to provide discretionary goods and services. This is what Bernanke did with QE1. He in fact destroyed job creation, which is a big part of why we still have 10% unemployment! Bernanke CAUSED that unemployment by creating a price ramp in the commodity space!

3.This, in turn, means more demand for social programs. More unemployment. More Medicaid. More food stamps. More government spending of all sorts. But there is no tax revenue increase coming in to pay for these increased demands (it's all going to the commodity producers) so the government once again turns to the bond market and issues debt to fund this increased spending demand.

4.Left alone, the bond market will react to this "never-ending" deficit spending cycle by increasing rates in an attempt to cut it off. This in turn provokes The Fed into even more QE to "spur employment and increase asset prices."
See the problem? The more QE you do, the more jobs you destroy because you continue to trash margins through the imposition of an effective tax on the entire economic system.

Eventually The Fed ends up being, for all intents and purposes, the entire government bond market.

At that point the issuance of credit money is no longer backed by anything at all - it is simply emitted raw, and for every dollar emitted in this fashion you have both a 100% transmission into prices and a premium applied on your threat to do more of it.

That's Weimar Germany folks - it is exactly what happened there, and exactly what will happen here unless Bernanke stops this crap. Since he won't stop on his own volition it is up to Congress and the people to stop him.

Metals will not save you if this spiral occurs. Nothing will save you, other than not being in the nation that this happens to. Government will, in its last gasps of trying to prevent itself from being able to pay the military, Congress, and of course Ben, find ways to literally confiscate everything in a futile attempt to increase the asset base upon which it issues its increasingly-worthless currency.

There is no exit that can come from a "growing" economy when you are continually increasing the implicit tax rates in the general economic system as your response to each previous tax increase. That is, when your tax increase results in more unemployment and you respond by further increasing taxes, you are simply tightening the noose around your own neck.

The implied tax that has been imposed on the economy thus far since QE1 was put in place is a stunning $250 billion annually due to oil's price increase alone, or nearly four times the so-called "Bush Tax Cuts" for the rich. QE2 will add another $1/gallon (roughly) to gasoline which is another $140 billion, for a total of almost $400 billion each and every year.

And that's just in oil prices - then you have to add in all the other input cost-push problems, from corn to wheat to oats to cotton to wood pulp. The total effective tax increase from QE2 is in fact the entire $600 billion QE package, plus whatever the market anticipates Ben will do as a follow-on!

What is being done here, if it is not stopped by Congress and/or the people, will destroy the economy. There is no ability to withdraw the QE-anything without causing all of the previously-hidden costs to immediately assert themselves in the economy. This is not speculative - it is factual. We cannot get wage inflation due to the lack of pricing power by labor in a market with 17% of the people either out of work or underemployed and another 7 million who are not counted as they are not part of the labor participation rate, which has declined by 5% in the last two years. The true unemployment rate is thus closer to 25%.

Without the ability to pressure wages higher there is no means available to set in motion Bernanke's "virtuous cycle" he is looking for as there is no pricing power for labor today.

We won't get a "high inflation" spiral. We will instead get a downward-spiraling economic disaster where employment and productive investment is successively destroyed by these artificially-imposed tax increases that amount to hundreds of billions of dollars over the next six months - north of a trillion in just one year, or some seventeen times the amount Congress is "debating" with the "tax cuts for the rich."

This is the true tax issue that will destroy our economic future - and nobody's talking about it.

Bawana jim
November 04, 2010, 12:11

November 04, 2010, 12:25
Almost Nobody:-)

November 04, 2010, 14:48
It all had to come to an end sooner or later. Now is the time to look ahead for ways to soften the blow.

What would be a good investment strategy? Hi-tech or manufacturing in India?

Move all money into foreign investments?

What would be a good country to invest in? Brazil or India?

What kind of time frame are we looking at? Some of the guys at Zero Hedge think June of 2011 before things fall apart.

November 04, 2010, 14:52
The world economy will again be put at risk. Safety in India? Ha!

The new guy in banking, Spencer Bachus, R.-Ala. Bachus, received well over a million dollars from political action committees representing banks, insurance companies and auditors over the past two election cycles. And wasting no time, on Wednesday, Bachus sent a letter to the Financial Stability Oversight Council -- the government agency charged with implementing the Dodd-Frank bank reform bill -- that reads as if dictated by bank lobbyists.

The Volcker bill, as elegantly explained by Simon Johnson, would "in principle ... force big banks to get out of the business of betting their capital in ways that can bring down the entire financial system." But in his letter, Bachus declares that "'proprietary trading' had virtually nothing to do with the crisis."

Hang on to your hats, the Republicans are back at the casino.

November 04, 2010, 17:02
And what did the dems do to fix it in the two years they had Dabtl???

Besides spend us into a deeper hole??

How many arrests/prosecutions?

You need to wake up to the fact that both partys are corrupt.

Gary Harwell
November 04, 2010, 17:35
and the first volley is fired......


November 04, 2010, 18:43
Gates, your case gets lost in such a long post.

Maybe it would be good to start with an explaination of what QE2 is.

QE is Quantitative Easing, not the cruise liner Queen Elizabeth. But WTF is Quantitative Easing? And why the number 2?

Q: There seems to be a lot of news about the Federal Reserve buying US Treasury bonds to push interest rates lower. Does this mean my money market rates are going to go down even further?

A: On November 3, the Federal Reserve announced an aggressive program to pump $600 billion into the US financial system by buying Treasury bonds. The strategy is known in economic circles as “quantitative easing,” and in plain terms it is a strategy which targets interest rates with the aim of driving them lower.

Despite that intention, it is not clear whether the strategy will impact money market rates, or the rates on savings accounts and other deposits. That’s good news for beleaguered depositors, who have already seen their interest rates driven to near zero.

The Fed is able to exercise a fair amount of direct control over very short-term interest rates, but the rates that control most real-world loan terms are influenced by longer-term interest rates, such as bond yields. Buying bonds sends their yields lower, and the hope is that loan rates will follow.

Since money market rates and other deposit rates are more function of short rather than long-term rates, and since short-term rates are already about as low as they can go, it’s doubtful that the Fed’s action will have any immediate impact on deposit accounts. However, unless quantitative easing is a rousing success, driving down longer-term rates could further delay the day when deposit rates eventually return to normal.

There is certainly no guarantee that the Fed’s strategy will work. Interest rates are already very low — even for longer-term rates, as evidenced by record lows on mortgage rates this year — but the real problem is that loan demand just isn’t there.

In short, the Fed’s latest move shouldn’t hurt short-term rates any further. However, it doesn’t seem likely to help the economy either.

Does the law of diminishing returns apply? With interest rates are already so low won't it take exceedingly large amounts of available money to drive them lower? What are we aiming for here, negative interest rates?

November 04, 2010, 18:46
I do get it that you are less concerned with interests rates than what so much additional money (which you beleive is being conjured up out of thin air) will do to the value of the dollar. But isn't the European Central Bank essentially doing the same (on a smaller scale)? Aren't those mortgages the Fed is buying (if "buying" is the right word) worth something? Or are they taking those mortgages off the table to keep banks afloat, providing a "bad bank" as it were? As I understand it the ECB is setting up a "bad bank" to buy up government bonds from Greece and maybe some other countries.

Bad bank is a term for a financial institution created to hold nonperforming assets owned by a state guaranteed bank.[1] Such institutions have been created to address challenges arising during an economic credit crunch wherein private banks are allowed to take problem assets off their books.

The financial crisis of 2007–2010 resulted in bad banks being set-up to handle the crisis in a variety of countries. For example, a bad bank was suggested as part of the Emergency Economic Stabilization Act of 2008 to help address the subprime mortgage crisis in the US. In Ireland, a bad bank, the National Asset Management Agency, is to be established in response to the financial crisis in that country.

November 04, 2010, 18:56
Originally posted by DABTL
Hang on to your hats, the Republicans are back at the casino.

More accurately, the spin doctor is back!

November 04, 2010, 19:03
Originally posted by carguym14
And what did the dems do to fix it in the two years they had Dabtl???

Besides spend us into a deeper hole??

How many arrests/prosecutions?

You need to wake up to the fact that both partys are corrupt.

I doubt you would understand why investors only go to law enforcement as a last resort. But, that is coming fairly rapidly.

And TARP was from your favorite President of all time, Bushie.

Get over it. The Republicans have your liver for lunch and the rest gets tossed shortly after.

D P Six
November 04, 2010, 20:15
Ever think that all those catchy abbreviations like ARM, ETF, FRB, GNP, NAV, REIT, QE, GDP, ROE, SEC......are just Wharton/Harvard snooty bullshitisms used to muddy the water. Maybe this financial stuff is as simple as: If an individual, a business, a government, consistantly spends more than it takes in, disaster is in the road ahead.

November 04, 2010, 20:43
Alant - interest rates are really a non-issue to the consumer at this point - we're already "debt saturated" any hopes Bernake had of restarting the economy via cheap consumer money are gone. HOWEVER, keeping rates in the basement are VITAL to the Fed and Treasury - the bulk of our national debt has been rolling down the curve to shorter and shorter durations - we have any kind of normalization and we're fuked RIGHT NOW! BB knows this.

Alant - that was not "My" case, it was Denningers and I think he covered alot of ground - don't see how he could have explained it in a shorter manner -these are extremely complex issues - thing about Denninger is this - he ABSOLUTELY can be an asshole - he has flaws - but his ability to figure out what is going on and put the pieces together faster than almost ANYONE I have read means one thing - RAW intellectual horsepower - he is flat out FUKING BRILLIANT! both Glen Beck and Rush Linbaugh we're quoting shit on their shows today that Denninger wrote YESTERDAY and the day before! almost VERBATIM!

I don't know about you but I follow guys like that - it's kinda freaky to read Karls daily, MULTIPLE, tickers and have the words repeated on NATIONAL radio and Tv shows the next day - almost word for word! you think maybe THEY follow him as well:-) - I know for a fact Beck does!

November 04, 2010, 21:18
And nobody hs come up with an investment strategy when all this is so simple?

Bama Steve
November 04, 2010, 21:23
I think they were trying to say that you should invest heavily in staying alive.

Toilet paper, food, fuel, ammo, meds, shelter, paying-off debt.

Ain't nothing to invest in right now - it's all cooked and manipulated.

At least that seems the case for the average Joe at this point.

Best wishes to all of us . . .

November 04, 2010, 21:30
Originally posted by Bama Steve
I think they were trying to say that you should invest heavily in staying alive.

Toilet paper, food, fuel, ammo, meds, shelter, paying-off debt.

Ain't nothing to invest in right now - it's all cooked and manipulated.

At least that seems the case for the average Joe at this point.

Best wishes to all of us . . .

Amen to that............:bow:

November 04, 2010, 21:38
Sigh... Denninger had a bit of a meltdown on his board today - people were asking the same question - how do I survive this while everybody else is fuked - his position is that you DON'T - if you stay in the country as it implodes YOU DO NOT SURVIVE FINANCIALLY! there is NO place to hide, there is NO place to invest, there is no place to park or hide your money. We, COLLECTIVELY, either work to stop this or we all go down.

I'm rolling the dice on PMs and lead.

November 05, 2010, 06:19
Another thought on QE2

Washington's Warning Shot on the Currency Front
Stratfor THURSDAY, NOVEMBER 4, 2010
The U.S. economy is, somewhat cautiously, on the mend. We don’t mean to proclaim everything hunky-dory, but consumer spending is back up above the peak level of the last recession. Since consumer activity accounts for roughly 70 percent of the American economy — and at some $11 trillion, that American consumer market is more than the combined economies of China and Japan — it isn’t that big of a leap to say the American economy is at least moving forward, even if it isn’t firing on all cylinders.
“The United States holds both the only major consumer market showing signs of life and unfettered control of dollar policy.”
There are two veins of concern that branch from this. First, this lukewarm performance has now been the state of affairs for nearly a year (regular STRATFOR readers will recall that this situation is, in essence, what we described in our 2010 annual forecast). Americans like breakout and that simply hasn’t happened, ergo the malaise. Second, the United States is the only major advanced economy showing such signs of consumer recovery: Japan is mired in a stew of aging and deflation and is probably incapable of expanding its consumer spending for reasons that have nothing to do with its recession; southern Europe is sinking into a vat of debt that is dampening growth across the continent; and despite the much-mooted talk of the advanced developing world making up the difference, their combined consumer base is less than half that of the United States. It will take another generation of growth before they can be considered a major absorber of global exports — and that’s assuming you believe all the statistics.

In the meantime, basically all of the major economies are pushing to export to the United States, hoping that by maximizing their take of the global — which is to say, American — import market, they might be able to improve their chances of recovery. To this end, many countries are engaging in policies to maximize their chances of selling to the American market — in particular, the world’s second, third and fourth largest economies.

• China maintains a de facto peg to the U.S. dollar to minimize currency risk and maximize reliability for their firms. True, Beijing had continually repegged the yuan higher bit by bit in recent months, but the yuan remains now roughly where it was four years ago. Add in that China funnels the savings of its citizens as loans to state corporations at subsidized rates and you have a country that could only consume more by transforming its entire financial system.
• Japan faces the problem of demographics. Large numbers of aging (low consumption) citizens and very few young (high consumption) adults have cursed the traditionally export-oriented country with a strengthening currency (low consumption/imports and high exports lead to a stronger yen). No wonder the Japanese economy is approximately the same size in 2010 as it was in 1991. Consequently, Tokyo is unabashedly intervening in currency markets to drive the yen down and hopefully spur Japanese exports — and with them some sort of domestic revival.
• Germany is in yet another situation. Situated at the heart of Europe, the only way Germany has ever been successful economically is to engage in massive projects that link the country’s disparate river systems and coastlines, with the autobahn perhaps serving as the most recognizable example. All this state-influenced investment provides Germany with not only a world-class infrastructure, but an extremely educated population and a top-notch industrial base. Modern Germany is by design an export juggernaut that favors investment over consumption. Luckily (for Berlin) many of its European partners’ debt problems are weighing down the euro, so German companies are getting a currency boost to their exports without Berlin having to engage in any currency manipulation strategies.

With economies No. 2, 3 and 4 all pushing for maximum exports, and import capacity weak at best, it should come as no surprise that the U.S. government is attempting to convince all the major states to agree to some sort of currency pact at the upcoming G-20 summit. Details are sketchy, but the bottom line is that Washington would like Germany, Japan and China — and many others — to publicly commit to refraining from currency manipulation, and let their currencies float to wherever the market will take them. To this point, such calls have largely fallen on deaf ears.

Then something interesting happened today. The U.S. Federal Reserve announced it would engage in a process called Quantitative Easing (QE), which in essence means printing currency and using the money to purchase assets that investors are shunning with the goal of stimulating economic activity. There are a number of reasons why a central bank might engage in QE, but none of them are conventional. For purposes of this discussion, there are really only two to consider. First, QE can be used as a sort of tool of last resort when tax cuts, deficit spending and interest rate policy are maxed out, as they arguably are for the United States. Second, large-scale QE can increase the money supply to a degree that it devalues the currency, a sort of semi-stealth means of driving the dollar lower.

Now, this batch of QE isn’t very big — “only” $600 billion over eight months. It is an amount that is not all that much larger than normal Fed operations for managing the money supply. It’s too small to have more than a marginal impact on either inflation or the value of the dollar. But the Fed manages the dollar, and the dollar is the only global currency. It is the currency that all commodities are bought and sold in, that two-thirds of global currency reserves are held in, and that everything coming in and out of the United States — still the world’s largest economy by a factor of three — is handled in.
None of America’s trading partners will think that this batch of QE is the beginning of a massive dollar devaluation — the change is simply too small for that. But it is a stark reminder that if it does come to an actual currency war, the United States holds both the only major consumer market showing signs of life and unfettered control of dollar policy. For states that have been tinkering with their currency policies, attempting to maximize their access to the American market, today’s QE announcement is a warning.

November 05, 2010, 06:52
everybody is fixated on what QE will do to the american economy. it's obvious there will be painful implications. that approach is a bit like blind men describing an elephant however as how QE will effect the rest of the world must also be considered.

from the freerepublic post 9 reasons why QE is bad for the u.s. economy:
#7 Quantitative Easing Is An Aggressive Move In A World Already On The Verge Of A Currency War

Quantitative easing will likely help U.S. exporters by causing the value of the U.S. dollar to sink. However, this gain by U.S. exporters will come at the expense of foreigners. It is essentially a "zero sum" game. So all of those exporting countries that are already upset with us will become even more furious as the U.S. dollar declines. Could we witness the first all-out "global currency war" in 2011?

bring it on. china has been manipulating their currency for a competitive advantage resulting in a trade imbalance as well as draining capital investment from america.

harley davidson to build bikes in india (http://www.cnn.com/2010/WORLD/asiapcf/11/04/india.bikes/index.html?hpt=C2)

china has established the "rules" so to speak and competition in the global economy now depends upon low labor. if america is to compete we "must" do the same. we may be damned if we do but we most certainly will be damned if we don't.

November 05, 2010, 07:21
Originally posted by TheJokker

bring it on.

You are clueless.

America will never compete against China in manufacturing until our standard of living and enviorment falls to china like levels.
Wage slavery and existing in a toxic chemical sewer, is that what you want?.

However an impoverished and collapsed US will end your cherished military empire. :uhoh:


November 05, 2010, 07:50
Originally posted by DABTL

I doubt you would understand why investors only go to law enforcement as a last resort. But, that is coming fairly rapidly.

Since when does govt have to wait for a crowd of screaming victims to prosecute fraud?

Originally posted by DABTL

And TARP was from your favorite President of all time, Bushie.

Yep, 3 pages of Bush's crony capitalsim and corporate welfare morphed into a megabill with the support of Patrick Kennedy, Barney Frank, Senator Obama, 40 DEMOCRATIC SENATORS and 221 DEMOCRATIC CONGRESS members (3 nay).
:rolleyes: :rolleyes: :rolleyes:

You and your genetic twin Jokker, always pointing fingers at the other party.


November 05, 2010, 08:05
Originally posted by juanni

Since when does govt have to wait for a crowd of screaming victims to prosecute fraud?

It never has to wait. So?

The problem is no one has walked in, so far as I know, to say a crime has been committed. We know it must be, but no one has yet to point out where.

The REMICs do not on their face appear fraudulent.

November 05, 2010, 10:38
Originally posted by DABTL

It never has to wait. So?

So why the wait?

When Lehman, AIG collapse overnight when they were wildly profitable the day before you know that there was massive fraud and bogus accounting involved.

Where is the investigation?

Waiting for Patrick Kennedy (D) to sponser a bill?