Bloomberg has released a report (October 28th) which indicates that the US Federal Reserve has finally given up the Halloween ghost and has laid down its conductor’s baton to ask the fiddlers in the orchestra to name their own tune on QEII:
The Federal Reserve asked bond dealers and investors for projections of central bank asset purchases over the next six months, along with the likely effect on yields, as it seeks to gauge the possible impact of new efforts to spur growth.
The dealers in effect get to choose how much money printing they would like:
Another question asked dealers to estimate changes in nominal and real 10-year Treasury yields “if the purchases were announced and completed over a six-month period.” The amounts dealers chose from were zero, $250 billion, $500 billion and $1 trillion.
This is linked intimately with the US Treasury’s need to keep getting its bonds out of the door, despite the feeble protestations to the contrary:
Treasury officials say they want to avoid any disruption to the $8.5 trillion market in U.S. government debt, the world’s most liquid, as the Fed weighs restarting purchases. The Treasury also doesn’t want to give any impression to investors, particularly those based overseas, that it might be coordinating with the Fed to finance the national debt.
So what’s the betting that the Federal Reserve will announce on November the 3rd that they are about to engage in a $1 trillion dollar quantitative counterfeiting scheme, to be implemented over six months, which will probably be followed by a similar QEIII scheme at the end of that?
If you win that bet, this will mean that the US Federal Reserve is about to engage in $2 trillion dollars worth of printing money out of thin air over a single fiscal year.
As Mr Spock would say; fascinating.[For more on this, you may want to read Tyler Durden at ZeroHedge.com. Gonzalo Lira also has a series of interesting predictions about how Bernanke’s quantitative easing banquet is going to pan out.]
The Fed is a central bank; it operates like a financial intermediary. When people or banks hold its liabilities (bank reserves or currency), they are effectively lending to the Fed. So-called ‘open market operations’ are just how the Fed invests the resources entrusted to it — it is the Fed’s obligation as a financial intermediary.
That this process increases the money supply is irrelevant, because what matters is spending patterns and relative prices. Centaris paribus, if banks and people increase their holdings of base money, then, ipso facto, they have increased their savings in proportion. This reduces spending on consumer goods and frees up resources for investment purposes. In these circumstances, monetary expansion is merely how the Fed enables this shift in spending patterns and relative prices.
It is certainly not counterfeiting.
I wrote: ‘This reduces spending on consumer goods and frees up resources for investment purposes.’
This should be: ‘This reduces spending on some goods and services and frees them up for other purposes.’
Comments are closed.