Tuesday, October 26, 2010

(Semi-) Official Words on QE2 from Experts

Words from "big shots" and insiders, summarized in a Bloomberg article.

Here are some snippets from the article that was posted on October 25, 2010 [my comments in blue]:

"Bernanke next week is likely to preside over a decision to launch another round of large-scale asset purchases after deploying $1.7 trillion to pull the economy out of the financial crisis, comments from policy makers over the past week indicate. This time, with interest rates already near zero, the Fed will be aiming to increase the rate of inflation and reduce the cost of borrowing in real terms. The goal is to unlock consumer spending and jump-start an economy that’s growing too slowly to push unemployment lower."

[Note that the Fed's aim is now openly to increase the rate of inflation. And reducing the cost of borrowing at the same time will accelerate the rate of inflation. How would that "unlock consumer spending"? The only thing I can think of is that the consumer would be fearful that his money would be worth much less tomorrow so he converts to tangible assets today - food, ammo, cotton undies, gold, whatever. And that would be considered "growth". NUTS, totally NUTS.]

Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York:

“By reducing real interest rates and trying to break the psychology of ‘Why spend today when I can buy goods cheaper tomorrow,’ they are hoping to drive growth that would be more commensurate with a pickup in employment”

[What's WRONG with trying to save money today to spend it later? It's called investment and capital formation, for God's sake, which is sorely lacking in the US during this decade of bubbles. Besides, doesn't he know about a place called Silicon Valley? It's been churning out ever-cheaper products with higher sophistication and power, and the companies there are thriving.]

William Dudley, president of the New York Fed:
current levels of inflation and a 9.6 percent unemployment rate are “unacceptable”...“To the extent that we can do things to improve the economic environment, we certainly owe it to the millions of people who are unemployed to do so"

[Oh my goodness... He thinks millions of unemployed Americans will well afford to buy necessities at ever inflating prices.]

Lyle Gramley, former Fed governor and a senior adviser at Potomac Research Group in Washington:
A second jolt of monetary stimulus would expand the Fed’s $2.3 trillion balance sheet to a record and likely work through the exchange rate as well as interest rates ... “It is a channel that works not only from the standpoint of encouraging more growth and making exports more competitive, but if you’re worried about inflation getting too low, this tends to put a little upward pressure"

[He's saying US dollar will tank, and it's good for us.]

Macroeconomic Advisers LLC in St. Louis, whose founder is Lawrence Meyer, another former Fed governor:
A 10 percent decline in the dollar in the first six months of next year would push the economy above estimates of trend growth, moving indicators on inflation and employment more rapidly toward the Fed’s policy goals..

[Here's their numbers:

GDP: 4.8% in 2011, 5.7% in 2012
Unemployment: 7% in 2012
Inflation (CPI without food and energy): 0.4% more in 2011, 0.7% more in 2012

What are they smoking?]

Steven Einhorn, Omega Advisors Inc. in New York:
“Exports will respond over the next six to 12 months, and a further lift in risk assets will have benefits in more consumer spending as it lifts households’ net worth.”

[More consumer spending I understand, as consumers will have to pay more for the same thing. But how will it lift households' net worth?? Households' net worth, for middle-class Americans, is tied to their HOUSES whose value keeps collapsing, thanks to people on Wall Street. Is he saying the value of the house will rise just because the Fed pumps more digital money in the system? Hasn't happened in QE1.]

[Now for some voice of reason and sanity, but they don't vote...]

Rainer Bruederle, Minister for Economics and Technology, Germany:
“It’s the wrong way to try to prevent or solve problems by adding more liquidity...Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate."

Charles Plosser, president of the Philadelphia Fed:
high unemployment may not be “amenable to monetary-policy solutions” and added that he was “less inclined to want to follow a policy that is highly concentrated on raising inflation and raising inflation expectations.”

Richard Fisher, president of the Dallas Fed:
“We need to be aware of the impact whatever we do has on other variables, and one of the variables is the dollar, the value of the dollar against other currencies”

Scott Minerd, chief investment officer at Guggenheim Partners LLC in Santa Monica:
“The history of the Fed, over the last 20 years, is one of bubble to bubble: one bubble deflates to create another bubble,” Minerd said. “We are certainly heading into the mother of all bubbles with commodities and gold.”

[20 years? Make it 97 years.]

There are very few economists and analysts who say that the Fed will NOT do QE2. Goldman's Hatzius thinks QE2 will be $2 trillion ($500 billion to start) but that the Fed really needs $4 trillion, as I reported on Sunday.

It is insanity even if it is $500 billion. But no one, NO ONE can stop Benny and the Inkjets on their way to the hyperinflation glory. They have their eyes set on history, determined to outdo the Weimar Republic.

So will it be sell-the-news, or not? 4 and a half days of trading remains until the Fed announcement.


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