Good Riddance To QE—-It Was Just Plain Financial Fraud

[planosteve]

QE has finally come to an end, but public comprehension of the immense fraud it embodied has not even started. In round terms, this official counterfeiting spree amounted to $3.5 trillion— reflecting the difference between the Fed’s approximate $900 billion balance sheet when its “extraordinary policies” incepted at the time of the Lehman crisis and its $4.4 trillion of footings today. That’s a lot of something for nothing. It’s a grotesque amount of fraud.

The scam embedded in this monumental balance sheet expansion involved nothing so arcane as the circuitous manner by which new central bank reserves supplied to the banking system impact the private credit creation process. As is now evident, new credits issued by the Fed can result in the expansion of private credit to the extent that the money multiplier is operating or simply generate excess reserves which cycle back to the New York Fed if, as in the present instance, it is not.

But the fact that the new reserves generated during QE have cycled back to the Fed does not mitigate the fraud. The latter consists of the very act of buying these trillions of treasuries and GSE securities in the first place with fiat credits manufactured by the central bank. When the Fed does QE, its open market desk buys treasury notes and, in exchange, it simply deposits in dealer bank accounts new credits made out of thin air. As it happened, about $3.5 trillion of such fiat credits were conjured from nothing during the last 72 months.

All of these bonds had permitted Washington to command the use of real economic resources. That is, to consume goods and services it obtained directly in the form of payrolls, contractor services, military tanks and ammo etc; and, indirectly, in the form of the basket of goods and services typically acquired by recipients of government transfer payments. Stated differently, the goods and services purchased via monetizing $3.5 trillion of government debt embodied a prior act of production and supply. But the central bank exchanged them for an act of nothing.

Contrast this monetization process with honest funding of government debt in the private market. In the latter event, the public treasury taps savings from producers and income earners and re-allocates it to government purchases rather than private investments. This has the inherent effect of pushing up interest rates and, on the margin, squeezing out private investment. It is a zero sum game in which savings retained from existing production are reallocated.

To be sure, the economic effect is invariably lower investment, productivity and growth down the line, but the process is at least honest. When the public debt is financed from savings, government purchase of goods and services are funded with the fruits of prior production. There is no exchange of something for nothing; there is no financial fraud.

And it is the fraudulent finance of public deficits which is the real evil of QE because the ill effects go far beyond the standard saw that there is nothing wrong with central bank monetization of the public debt unless is causes visible inflation of consumer prices. In fact, however, it does cause enormous inflation, but of financial asset values, not the CPI.

Despite the spurious implication to the contrary, central banks have not repealed the law of supply and demand in the financial markets. Accordingly, their massive purchases of the public debt create an artificial bid and, therefore, false price. Moreover, government debt functions as the “risk free” benchmark for pricing all other fixed income assets such as home mortgages, corporate debt and junk bonds; and also numerous classes of real assets which are typically heavily leveraged such as commercial real estate and leased aircraft.

In short, massive monetization of the public debt results in the systematic repression of the “cap rate” on which the entire financial system functions. And when the cap rate gets artificially pushed down to sub-economic levels the result is systematic over-valuation of all financial assets, and the excessive accumulation of debt to finance non-value added financial engineering schemes such as stock buybacks and the overwhelming share of M&A transactions.

Needless to say, the false prices which result from massive monetization do not stay within the canyons of Wall Street or even the corporate business sector. In effect, they ride the Amtrak to Washington where they also deceive politicians about the true cost of carrying the public debt. At the present time, the weighted average cost of the $13 trillion in publicly held federal debt is at least 200 basis points below a market clearing economic level—–meaning that debt service costs are understated by upwards of $300 billion annually.

At the end of the day, the fraud of massive monetization makes the rich richer because it drastically inflates the value of financial assets—–roughly 80% of which is held by the top 5% of households; and it makes the state more bloated and profligate because its enables the politicians to spend without imposing the pain of taxation or the crowding out effects which result from honest borrowing out of society’s savings pool.

In the more wholesome times before 1914, the Federal government didn’t borrow at all. During the half-century between the battle of Gettysburg and the eve of World War I, the public debt did not rise in nominal terms, and amounted to just $1.5 billion or 4% of GDP at the time of the Fed’s creation. Even then, the Fed was established as only a “bankers bank” which could not own a dime of public debt, but instead existed for the narrow mission of liquefying the banking market by means of discounting solid commercial paper on receivables and inventory for ready cash.

The modern form of monetization arose in the service of financing war bonds, not managing the business cycle, levitating the GDP or boosting the labor market toward the artifice of “full employment”. These latter purposes reflect a century of “mission creep” and the triumph of the statist assumption that governments can actually tame the business cycle and elevate the trend rate of economic growth.

But history refutes that conceit. In the early post-war period, central bank interventions mainly caused short term bouts of unsustainable credit growth and an inflationary spiral which eventually had to be cured by monetary stringency and recession. In the process of repetition over several decades culminating in the 2008 crisis, the household and business leverage ratios were steadily ratcheted upwards until the reached peak sustainable debt.

Now the credit channel of monetary policy transmission is broken and done. The Fed’s most recent massive monetization and “stimulus” has therefore simply inflated financial asset values—-meaning that the Fed has become a serial bubble machine.

There is a better way, and it contrasts sharply with the systematic fraud of QE. That alternative is called the free market, and at the heart of the latter is interest rates which are “discovered” by the market, not pegged and administered by the central bank. Stated differently, the free market requires that all debt and other forms of investment be funded out of society’s pool of honest savings—-that is, income that is retained out of production already made.

Under that regime there is no fraudulent bid for public debt and other existing assets based on something for nothing. Markets clear where they will, and interest rates are the mechanism by which the supply of honest savings and the demand for investment capital, including working capital, are balanced out.

Needless to say, free market interest rates are the bane of Wall Street speculators and Washington spenders alike. They can spike to sudden and dramatic heights when demand for funds to finance government deficits or financial speculation out-run the voluntary pool of savings generated by society. So doing, they bring financial bubbles and fiscal profligacy up short.

In stopping QE after a massive spree of monetization, the Fed is actually taking a tiny step toward liberating the interest rate and re-establishing honest finance. But don’t bother to inform our monetary politburo. As soon as the current massive financial bubble begins to burst, it will doubtless invent some new excuse to resume central bank balance sheet expansion and therefore fraudulent finance.

But this time may be different. Perhaps even the central banks have reached the limits of credibility—- that is, their own equivalent of peak debt.

“I think QE is quite effective,” Boston Fed President Eric Rosengren said in a recent interview with The Wall Street Journal, describing the approach as an option for dealing with an adverse shock to the economy.
http://davidstockmanscontracorner.com/good-riddance-to-qe-it-was-just-plain-financial-fraud/

[GFB]

You said it would never go away..that the Fed would never stop.

I even told you what month it would end, this one.

[planosteve]

You said it would never go away..that the Fed would never stop.

I even told you what month it would end, this one.

It won't be ended long. It will be back when the bubbles begin to burst.

As soon as the current massive financial bubble begins to burst, it will doubtless invent some new excuse to resume central bank balance sheet expansion and therefore fraudulent finance.

[GFB]

What bubble is that?

[planosteve]

What bubble is that?

"Financial assets". Stocks and bonds. Apparently, you didn't even read the article.

[GFB]

What bubble is that?

"Financial assets". Stocks and bonds. Apparently, you didn't even read the article.

No, I was on my IPhone.

I'm just curious to know what you think is in a bubble that will burst..and when.

So I'll know what point I can declare you wrong.

There is always a loon that declares we're about to go into a Depression, and one that says the Dow is going to 50,000 within 12 months..loons of all shapes and sizes.

So, I'm not really interested in your particular loons, other than..you latch onto them...which is why my questions are always for you..not them or their articles.

[planosteve]

I'm just curious to know what you think is in a bubble that will burst..and when.

Stocks
Bonds
Real Estate

There's no way to know when as it can be either accidental or intentional. If it's intentional there is no way to predict when they will decide to pull the plug. If accidental there are any number of causes, like an avalanche. Could be thunder, a sonic boom, a fast melt, etc.

[GFB]

I'm just curious to know what you think is in a bubble that will burst..and when.

Stocks
Bonds
Real Estate

There's no way to know when as it can be either accidental or intentional. If it's intentional there is no way to predict when they will decide to pull the plug. If accidental there are any number of causes, like an avalanche. Could be thunder, a sonic boom, a fast melt, etc.

So, what do you think is fair value for each?

[planosteve]

I'm just curious to know what you think is in a bubble that will burst..and when.

Stocks
Bonds
Real Estate

There's no way to know when as it can be either accidental or intentional. If it's intentional there is no way to predict when they will decide to pull the plug. If accidental there are any number of causes, like an avalanche. Could be thunder, a sonic boom, a fast melt, etc.

So, what do you think is fair value for each?

Values of everything are distorted by inflation to the extent that there is no way to know until the bubbles deflate and the economy hits bottom. That was not allowed to happen after the last crash in 2007. In March 2009 the FED started pumping them back up to make the Obama administration look like they had somehow ended the slide. Next time will be probably be a lot worse.

[GFB]

If you have no idea of an approximate fair value of something..you have no way to assess it as being in a bubble.

[planosteve]

If you have no idea of an approximate fair value of something..you have no way to assess it as being in a bubble.

That makes about as much sense and saying if you don't know when your going to die you will probably live forever.

[GFB]

First full say after the Fed quit QE..not exactly a bad day in the stock market.

The Fed quit..the market yawned and powered ahead.

[planosteve]

First full say after the Fed quit QE..not exactly a bad day in the stock market.

The Fed quit..the market yawned and powered ahead.

Just because the FED is not going to blow the bubbles bigger, it is going to maintain them. So, there was no reason for the market to go down.

[GFB]

First full say after the Fed quit QE..not exactly a bad day in the stock market.

The Fed quit..the market yawned and powered ahead.

Just because the FED is not going to blow the bubbles bigger, it is going to maintain them. So, there was no reason for the market to go down.

That means you're bullish.

[planosteve]

First full say after the Fed quit QE..not exactly a bad day in the stock market.

The Fed quit..the market yawned and powered ahead.

Just because the FED is not going to blow the bubbles bigger, it is going to maintain them. So, there was no reason for the market to go down.

That means you're bullish.

Very. This is probably the best time to buy gold and silver in years.

[GFB]

Just because the FED is not going to blow the bubbles bigger, it is going to maintain them. So, there was no reason for the market to go down.

That means you're bullish.

Very. This is probably the best time to buy gold and silver in years.

You said the Fed will assure the stock market powers higher..that's "bullish" on the stock market.

[planosteve]

[/quote]You said the Fed will assure the stock market powers higher..that's "bullish" on the stock market.[/quote] No, I said the FED was going to maintain it's portfolio, not reduce it. I have no idea what the stock market will do short term. But, the bubble will burst eventually. It always does.

[GFB]

You said the Fed will assure the stock market powers higher..that's "bullish" on the stock market.[/quote] No, I said the FED was going to maintain it's portfolio, not reduce it. I have no idea what the stock market will do short term. But, the bubble will burst eventually. It always does.[/quote]


Steve, I'm afraid you're going to your grave having never had any of your prophecies come true.

The good news is, I have no reason to believe you are not going to enjoy a long life..so you will have plenty of time to snap out of it.

[planosteve]

You said the Fed will assure the stock market powers higher..that's "bullish" on the stock market.

No, I said the FED was going to maintain it's portfolio, not reduce it. I have no idea what the stock market will do short term. But, the bubble will burst eventually. It always does.[/quote]


Steve, I'm afraid you're going to your grave having never had any of your prophecies come true.

The good news is, I have no reason to believe you are not going to enjoy a long life..so you will have plenty of time to snap out of it.[/quote]
The're not my prophecies. It is the historical record. Every empire collapses. Every fiat currency ends up worthless. Every inflation ends in deflation, every bubble bursts, every monitary printing binge ends in depression. Every one, every time. No exception exists.

[GFB]

You said the Fed will assure the stock market powers higher..that's "bullish" on the stock market.

No, I said the FED was going to maintain it's portfolio, not reduce it. I have no idea what the stock market will do short term. But, the bubble will burst eventually. It always does.

Steve, I'm afraid you're going to your grave having never had any of your prophecies come true.

The good news is, I have no reason to believe you are not going to enjoy a long life..so you will have plenty of time to snap out of it.[/quote]
The're not my prophecies. It is the historical record. Every empire collapses. Every fiat currency ends up worthless. Every inflation ends in deflation, every bubble bursts, every monitary printing binge ends in depression. Every one, every time. No exception exists.[/quote]

We are not an empire.

No one said the U.S. will last forever..that is not in any way relevant.

..but if I had to pick one for the long term..even the very long term..I'd choose the U.S.

Which one do YOU choose.