

Fed Undertakes QE3 With $40 Billion in MBS Purchases Each Month - simonreed
http://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.html

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johnnyg
First the problem:

Say your company brought in $1M a year in revenue and you had $1.04M in debt
and growing. Say you had 40% margins and were trying to service that debt with
your 400k of gross profit.

You would not be in business long.

The fiscal reality of the US government is the same save for one key fact:
they can print money. As a result, they can carry on this sorry fiscal
situation for an amazingly long time, but not forever.

Japan has been in this situation more than a decade. They remain powerful.

This state of affairs will affect you as a company in these ways:

1\. Your taxes must go up. This isn't a political thing so much as bottom line
math thing. The more they take in revenue from you, the less they have to
borrow or print and the longer this whole system keeps going. They can tax the
rich at 100% and still not have nearly enough money to service their current
debt, let alone the constantly increasing spend.

2\. Market certainty will go down. No one wants increased taxes - politicians
or citizens. This pressure from both sides creates things like the coming
'fiscal cliff' where either we reach a budget cutting agreement or draconian
cuts go into effect. The market hates not knowing and people spend less in
these cases. It looks like there will be a pattern of these occurring in the
foreseeable future, which means less people spending less money with your
business.

3\. Dollars will be worth less. To hold the true value you receive for your
service steady, you will have to increase the number of dollars you ask for
from customers. Unfortunately, these customers will have less dollars in their
pocket because wage inflation tends to trail price inflation. Be aware that as
long as the US can borrow money and keep interest rates on bonds low as a
result, inflation reported by the feds will remain low. It also pays to be the
tallest midget. US dollars remain the world standard, so when there is a panic
in Europe or Asia, people rush to buy our bonds, which bolsters our dollar and
purchasing power relative to other nations. This ends when the market no
longer believes we can pay. This could be tomorrow, next year, in 10 years or
never if we really get our act together.

4\. The dollars you've earned might not be worth much when you go to spend
them. Say there's nothing to worry about for the next 10 years, but then it
gets so bad that the market says 'enough, we're not buying these bonds anymore
USA.' The USA at that point can print the money and pay the bonds with it or
default. Either way, the dollars you earned through sweat and tears aren't
worth much and the business that made them isn't attractive to customers at
the "new normal" price points. At this nearly worst case point, you are poor,
hit from both sides of the inflation game. This is one reason any thread of
this nature has at least one mention of 'Gold!', as it holds its value no
matter what the government does - assuming you can both hold onto it and trade
it for fair value when you need it.

~~~
nirvana
One additional point you didn't mention: The US Dollar was, for a long time,
the worlds reserve currency. It still is in many ways.

This means that for nearly 100 years the USA has been able to print dollars
and have much of the effects of this monetary inflation absorbed by foriegn
countries that needed to hold dollar reserves.

Or put another way, there is a massive amount of inflation that has been
exported. It will remain overseas so long as the dollar remains the worlds
reserve currency.

But as that changes, and the dollar loses credibility due to this
"Quantitative Easing" (which is nothing more than a euphemism for monetary
inflation) at some point the rate of people switching from dollar reserves to
other reserves- gold, yuan, whatever-- will reach a tipping point and as the
dollar declines ever faster people will panic to get out of the dollar.

This is like an axe over our heads. We've got hyperinflation built in, because
once that turning point happens, the panic will trounce the dollar, and that
will imediately force the government to crank up the printing presses even
faster- trying to outrun these ramifications, and we'll wake up one morning in
Zimbabwe.

And I'm not kidding about it happening "one morning", when this happens it
often happens very fast. The Ruble lost half its value between breakfast and
lunch when it happened. In argentina it was a matter of weeks.

Neither of those currencies were world currencies.

No way to know when it will happen, or exactly how-- we've been helped by
europes problems. Since they've been going down faster they have made the
dollar look good in comparison.

We've also been helped by China's dependance on exports- as europe went down
and we slowed down, that's hurt china, making them not look as relatively
strong compared to us.

Finally we've also been helped with outright manipulation of the market. One
of the key indicators is the price of gold (which is really the price of
dollars measured in gold.) The FOMC is an entity within the fed whose job is
to "stablize prices" which is also known as market manipulation, and it takes
big chunks of that QE money and uses it to short gold. Notice how gold was on
its way to $2,000 when they killed that momentum and brought it back to
$1,500? That helps shore up the percieved value of the dollar.

If this sounds like conspiracy theory, google GATA and read the details-- the
FOMC minutes come out eventually and their interventions in the gold market
are documented.

I can't say what a fair value for gold is, but it is well north of $2,000.
(Say if you compared the monetary inflation in dollars since the last time
there was gold peg to the gold price then.... )

But so long as people are made to believe that a currency is stable, they will
keep using it and the currency remains stable.

When people realize the currency is worthless paper being pumped out at insane
levels, then it will be treated as such and quickly attain that market price.

~~~
YZF
You said it. You can't say what the fair value of gold is. Can you eat it? Can
you build a house out of it? It's just a bit of shiny metal that the world has
no shortage of.

~~~
anonDataUser
You can exchange it for something that you can eat and you can exchange it for
somebody to build a house for you, just like dollars. Unlike dollars, you
can't produce it out of thin air.

~~~
YZF
You used to be able to exchange salt, seashells, large stones for all these.
Try getting someone to build you a house for salt. Gold could be worth 1/10th
of what it is worth today (purchase power) or it could be worth x10 in 10
years. It's purely a speculative play, people pay more because they think
someone else will pay more tomorrow. That's all it is.

------
jstalin
The PhD's at the Federal reserve, the same ones who have gotten every major
economic and financial prognostication wrong, think that printing more money,
i.e., debasing the currency, is going to create jobs.

Since the Federal Reserve now is the largest single owner of US government
bonds[1] and since it has come close to purchasing all available bonds at the
long end of the spectrum[2], it is doing the last thing it can think of: an
open-ended, unlimited purchase of Mortgage-Backed Securities. This is the
terminal end-game of central banking.

This won't end well.

[1] See [http://cnsnews.com/news/article/fed-now-largest-owner-us-
gov...](http://cnsnews.com/news/article/fed-now-largest-owner-us-gov-t-debt-
surpassing-china) (2011), updated data here
[http://www.federalreserve.gov/monetarypolicy/files/quarterly...](http://www.federalreserve.gov/monetarypolicy/files/quarterly-
report-20120630.pdf) and here [http://www.treasury.gov/resource-center/data-
chart-center/ti...](http://www.treasury.gov/resource-center/data-chart-
center/tic/Documents/mfh.txt).

[2] [http://www.zerohedge.com/news/scary-math-behind-mechanics-
qe...](http://www.zerohedge.com/news/scary-math-behind-mechanics-qe3-and-why-
bernankes-hands-may-be-tied)

~~~
nirvana
Printing unlimited money has a political advantage as well-- not only does the
Fed profit from it, but the government, and more specifically, politicians
profit from it.

A good example is Obama's "stimulus" which was a big old pork package,
underwritten by the Fed that he got to pretend was "taking action" to "improve
the economy" / "create jobs".

It was a complete failure by even its own promises, but that has not hurt
Obama's re-election chances, because people don't hold politicians accountable
for damaging the economy.

And this goes for Bush, Clinton, Bush 1 and Reagan -- all of whom took at
least some actions that damaged the economy.

------
mindslight
.. and just when I was starting to forget the details of the insane rabbit
hole called the "economy" that make leading a simple life, getting a salaried
job, and making an incremental contribution to society an utter non-starter.
Even more direct subsidies to the bankers who own "your" house, so they can
continue their charade of overinflated home prices and demanding hefty rent
simply for a place to _exist_. Never mind that you're still responsible for
the maintenance, and probably have not the knowledge nor time to do it
yourself, as you're too busy working to service your indentured servant mouse
wheel.

I just don't get what keeps most people complaining about one or two narrow
pieces of the puzzle, but yet completely accepting of the entire perverted
ball of wax of over-abstracted, hollowed out, and corrupt institutions. This
mild dissent is then amazingly converted into _support_ every time an election
roles around, where the socially acceptable thing is to cheer on your chosen
republocrat, pretending that electing new faces will change anything (not that
a third party would magically fix things either, it's just a minimum viable
dissent). Is it just straightforward cognitive dissonance because of how
painful it would be to admit most things you take for granted are simply not
there? Is it that most people smart enough to actually see how rigged the game
are still able to achieve an "above average" place in society and thus aren't
interested in meta questions ? I suppose anything is easier than developing an
adversarial individualist perspective which can't be unseen.

------
politician
Based on the results of QE1 and QE2, I expect the price of gold to rise, and
the action to provide no long term benefit in terms of jobs or GDP growth. The
answer to our problems is cheap energy, not more paper.

.. looks like gold spiked up 2% on the news.

~~~
raverbashing
Gold is already overvalued, I'm really not sure of its outcome

~~~
nirvana
Please share with us your calculations to determine the intrinsic value of
gold.

I don't think you can do it, which is why I don't have an opinion about its
intrinsic value.

But if you look at the price of gold as actually the price of dollars measured
in gold, then things look much different.

By that measure, taking monetary inflation into account over the past 100
years, gold is historically cheap.

~~~
raverbashing
Well, it's simple, isn't it

Gold has "two values" (and one sale price)

It can be a "money substitute"

But it is also a mineral, with an extraction cost, and usage in the industry

Now let's compare to oil

Oil is very liquid (pun intended), it can almost anytime be converted into
money. And then, used, converted into products or services.

Gold has no such property.

Yes, seeing "the price of dollar in gold" is certainly eye opening, still, the
US has enough gold (and other resources) to keep the price of dollar (compared
to gold) high enough.

------
fbuilesv
Can someone with knowledge of economy explain what's going on here and how
does this affect me as an individual or as a company?

~~~
cjlars
Finance geek here. The whole point of this is to raise inflation. Not by a
lot, but by a little. The market is currently forcasting ~2.5% inflation
looking forward and this won't likely push that expectation above 3-3.5%.

The reason for this is because the fed's 'dual mandate' to keep inflation low
and unemployment low. The big theory behind this is the so-called Phillips
Curve, which states that there's an inverse relationship between unemployment
and inflation. The reasoning here is threefold:

1\. It's believed that inflation 'lights a fire' under capital (i.e. it's
expensive to hold cash), which spurs people to invest, which in turn creates
jobs.

2\. Wages are sticky -- after losing a job, people tend to be reluctant to
take a big pay cut when accepting new job and so tend to wait for something
better to come along. Paradoxically, people are more willing to take a REAL
pay cut when the NOMINAL pay cut is smaller, as would happen in an
inflationary environment (note: there's no change in actual spending power).

3\. Higher inflation acts as a transfer to borrowers from lenders. Any debt
currently issued before a change in inflation will have been valued in light
of lower epected rates of return. A change in inflation expectations
effectively decreases the debt burden on any debt held before the change. This
improves firm's balance sheets by decreasing the value of debt on their
balance sheets, making them more able to invest.

As an individual, there's not much to guard against here. We should expect
this to have a slightly positive impact on jobs and asset prices. We should
also expect inflation to run a little higher, but there's little risk of any
sort of run-away, or "hyper," inflation because of this -- the fed can stop
inflation as easily as it can start it by

[Edit: Corrected Taylor Rule to Phillips Curve]

~~~
ajtulloch
I think you mean the Phillips curve instead of the Taylor Rule here - but
excellent explanation.

~~~
cjlars
Thanks, you're right and I changed it above. For those curious, the Taylor
Rule is more accurately a method for optimizing along the Phillips Curve.

------
confluence
Fellow HNers - the comments you see here are from random people on the
internet without the slightest qualifications and their own pet theories and
agendas so please take them with a grain of salt.

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ww520
Is that why the BitCoin is roaring back?

~~~
sp332
Is it? It's still only around $11 after previous spikes of $15 or even $30.

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bira
Got gold?

~~~
ryanaghdam
yes :)

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Toshio
I'm confused, how is this hacker news?

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bstewartnyc
Well it is a kind of hack

~~~
boon
Hah, for finance geeks, this was a particularly clever rebuttal :)

