Why the Fed matters more

So is gold the ideal free market solution? It would be a global currency which was free of domestic pressures. I doubt it, but if the dollar is going to be subject to short term solutions (ie 2012) rather than long term solutions the future of our fiscal policy depends more on American house prices than any George Osbourne can think up. It could even decide the 2015 election.

It will not work. The printed money never makes it to households. Why is it so many economists do not understand this? Banks aren't going to lend to people who can't pay back, which is a hell of a lot of people.

You are just sending money to PD's who in reality are all bankrupt, and they are buying stocks and other risk assets. Retail investors have abandoned stocks in the US, look at fund outflows and you'll see this. So the ramp in risk assets just puts money in the pockets of traders and puts such assets further out of reach of retail investors. But it is short lived because everything becomes overpriced.

The banks have the system by its neck, if Bernanke doesn't do what the banks want then they will simply hit the sell buttons. If you look at market volumes of late, barely anyone is trading, because the system is rigged and the market is no longer free. The Fed knows that it really won't take much selling to tank worldwide markets and then it will only be a matter of time before failed bond auctions start to show up. Belgium isn't far away from that.

Remember who is buying those US bonds everyone. The primary dealers and the Fed, so liquidity for the PD's means bond auctions can continue. PD's are obliged to participate in bond auctions.

The Fed is buying Spanish and Greek bonds too :-) The Fed is desperate.

So the markets have already factored in what they think Helicopter Bens' QE2 proposal will be.

Unless Ben says
'No more QE'
which would startle them
or he says
'QE2 will be $8quadrillion and this time it will be loaned to the government at historically low interest rates in the form of a Credit Sale, repayment due sometime in 3052. The money will be spent by Americans on America, specifically on new housing, roads, railways, schools, hospitals, power generation, R&D, business development loans and street sweeping'
which would startle them more
then the results of QE2 will be much like QE1, indeterminate.


Stephanie, you asked the question

'Is that expansionary for the world economy - or contractionary?'

My guess is that whatever Ben does the effect will be stagnatry.

The problem with QE is that the extra money created doesn't stay within the US. The carry trade exports the money out of the low interest rate US to higher interest rate countries - incidentally destabilising them in the process.

What the US and the UK need is higher interest rates to attract money from other countries - at the moment more QE is akin to trying to fill a bucket that has a big hole in it.

Apart from upsetting the folks at the Bureau Du Change, is there any reason why a world currency wouldn't work ? Anything that unites nations has to be a good thing surely ?

If printing $2 trillion is the answer...What was the question?

How to tank an economy in 10 days?

If it sits in the banks its stagnant - the US has a Japanese style lost decade or more.

If it hits the high street it is hyper-inflationary - we have Weimar 1922.

Notice it is men with golden sacks again egging on the printing presses!

More US QE is crackpot economics designed only to re-inflate the busted US housing market.

The idiots in the Fed seem to think that low priced property that has been properly created in many parts of the USA is a bad thing - tell that to a first-time buyer!

The only people to benefit from the 1 trillion US bucks will be bankers, those inside the beltway and Wall Street - it is fundamentally corrupt!

What they need to do is the put up interest rates and get money from QE to the desperate and needy through labour intensive public works programmes - to get the USA back to work. These idiots just don't understand anything about real economics and haven't learned anything from the Japanese experience, or the 1930s. They are ignorant buffoons and they will without a scintilla of doubt create a terrible Depression.

#2 dj_gandy: "Banks aren't going to lend to people who can't pay back..........."

You sure about that? I was under the impression that banks doing just that were digging the hole we are still scrabbling to get out of.

Extra QE will help to improve the US balance of trade by reducing the exchange vale of the dollar, but it will not help to increase domestic demand, unless the US government borrows and spends the cheap money domestically, that the Fed is making available.
Obama is, as a result of yesterday's elections going, to be even more constrained. The likelyhood of an early US recovery is nil and the outlook for western economies in general is grim.

In the UK, RPI is 4.6% and fixed interest gilt yields 3%.
I have no idea what inflation or bond yields are in the US.

I suppose there’s no risk of default unless you count printing more money as defaulting.
But presumably there will come a point when foreign and private investors desert fixed interest US bonds and UK gilts because their value is being inflated away.

The money that will be printed will end up in the banks and flood out of the country and into areas with better returns. The net result?, bankers gain, joe public struggles along.
QE will not work unless this money filters down to the man on the streets. Those Governments who dabble with this policy should invest directly into projects that were previously not economical i.e renewable energy projects, waste minimisation, recycling, transportation etc. They should also look at minimisation of food imports and seek to become self sufficient i.e glasshouses, hydroponics etc. This way the money will be invested in a better future rather than filling the pockets of more failed bankers.
The US needs to allow money that has left the country to return. This means selling something that someone actually wants. The Chinese do not want Chevvy pick up trucks or gangster rap tunes. They want the tangible assets and resources, not dotcoms!

As this new post seems to suck away everyone from the last one I'll repost my idea for QE and the housing bubble again here as it's relevant.

There seems much consensus nationally and on this post that we have made a huge mistake in the last thirty years but in particular 1997-2007 with over-inflating house prices. How about a solution that doesn't throw out the baby with the bath water?

Here's my attempt: Let house prices fall by the government providing new land at sensible and much reduced price with planning permission for developers to build AFFORDABLE houses for first time buyers. Use QE to provide a nationalised bank with funds to provide 25 year repayment mortgages at 5% interest (£90K mortgages 10% deposit required). Monthly payment circa £600.

With an inflow of first time buyers able to buy their own affordable houses on affordable but reasonable terms property prices up the chain would have to fall drastically. To insure that this does not cause foreclosures the government must keep interest rates low so that buyers in these houses can afford their payments and successively over the next twenty odd years mortgages will be paid off.

At the end of the mortgage period owners will be debt free but will have lost money over the 25 years. (Investments can go down as well as up). However, crucially there will be no mass failure to keep up payments and they will have full equity at the end of the period.

If people need to move during the time they have negative equity (probably until the last 10 years or so of their repayment period) then they will need to rent out their house and move to another rented house/ cheaper bought house where their new job is. I believe that rental prices will fall but not too much if there is a properly controlled expansion of affordable houses to buy. Therefore the rental income on the house they moved from should cover the majority if not all of the mortgage payments on it.

We have made a mistake with house price inflation. The first step is recognising this. The second step is acting to mitigate it without cutting off one's nose to spite one's face.

Any other pragmatic suggestions or feedback?

#7 JFH,

"They are ignorant buffoons and they will without a scintilla of doubt create a terrible Depression."

You are totally correct about the consequences being terrible. However, you are wrong about the depression itself. QE2 itself will not cause the depression as the depression itself is already in-train. It will however make the length and depth of that depression even more terrible!

You are also wrong about the financial services being "ignorant buffoons". They are not ignorant at all. They are however acting in a very myopic self-interested way. They have created a fiancial environment wherein their 'reality' has little or nothing to do with life outside of their own bubble. Even within that bubble they have created sub-divisions that behave autonimously. It is rather like Ferrari engine designers discussing increasing acceleration rates whilst listening to road reports describing national grid-lock!

Lest anyone forget, this entire farcical mess was built on the buy-now-pay-later, bad-credit-no-problem, delay-repayments-until-next-year, house of (credit) cards. People with bad credit wanted more stuff and bigger houses, and banks were more than happy to shuffle their exposure around to meet (and maintain) this demand. The plug was pulled when all the bad assets came out from the basement, and the banks (and world economy) went into freefall.
The issue now is that for the last couple of decades (or more), bigger and bigger proportions of the world's economies have been built on the premise that lending can, and must, continue to increase. At the same time, governments are now requiring banks to protect a larger proportion of their exposure, and so have got less to lend. In addition, the banks are much more wary and selective about the people and businesses they lend to, in case this leads to too many bed debts again.
It seems to me that this is a fundamental and mutually exclusive situation. we can be printing money (QE/QE2) and telling banks to lend and people to spend, or we tell banks to be more prudent about who they lend to and to reduce their exposure. Attempting to do both is like trying to drive a car in two directions at the same time.
We need to choose one option or the other - one will perpetuate the previous and current reality, with a few tweaks here and there, and allow banks to lend and people to gather credit (with all the risks that entails), and the other requires a period of sustained world austerity and conservancy, which would be painful and undesirable, but would allow banks and governments to dig themselves out of the hole.
An individual can't continue to spend at the same level, once they've decided that they want to save a certain amount each month (unless they borrow someone else's money). Why is this any different for banks and governments?

When we get to the impasse of asking whether the dollar will go up or down in value in response to another round of massive quantitative easing, what this tells us is that the US currency is so close to meltdown that the markets cannot produce a rational response to another massive injection of liquidity.

TRADE is the problem - and therefore those who oppose a rational response to the massive trade imbalances are the problem.

My response to the mid terms results is to say that the failed Bush Republicanism has now been found out even by the right in american politics, so the REAL Right - i.e. the Tea Party - has had to step up to the plate and take on progressive politics directly.

This is a good thing because it ends the obfustication in US politics where NeoCons hide behind the facade of the American two party political system whilst plotting the wholesale abolitiion of the State and free rein for free market libertarian ideals.

It will also end Obama's room for compromise with the House firmly in the hands of the Right, he can only confront them in the public debate with the ultimate contradiction of their economic and social policies by advocating the sort of interventionist policies that stand a chance of working, not the watered down, line-of-least-resistance approach he has taken so far.

I think Obama will see the writing on the wall and close the shutters on Chinese etc imports and force corporate America to create manufacturing jobs in the US by making imports unaffordable. The strategy of trying to persuade the Chinese Communist Party to revalue their currency and end tax breaks for manufacturing in China has not worked - unless Obama makes the change soon, he's a dead duck at the next election and the right will return to the White House with a new President even more extreme and wacky than George Bush - could it even be someone like Sarah Palin...?

8. At 10:36am on 03 Nov 2010, jimbrant wrote:
#2 dj_gandy: "Banks aren't going to lend to people who can't pay back..........."

You sure about that? I was under the impression that banks doing just that were digging the hole we are still scrabbling to get out of.

Yes they were, but back then housing prices were going to go up 10% every year forever more right?

Remember a lot of the US boom was on home equity withdrawal. The banks are not going to lend to people who are already under water. This is where the problem with money injection occurs. Consumers are deleveraging, paying off their mortgages because the equity is negative, thus they are not spending on the streets.

Bernanke is trying to bubble the housing markets again, forgetting that the housing market was way overpriced in the first place relative to wages. He's bubbled the stock and bond markets, but they are easy to do since they are electronic, "virtual" markets. Houses require people to live in them, or to be rented. All that over supply in Florida has no use, and poor Bernanke can't just print people.

Maybe that will be the next thing. Importing 50 Million people to increase demand for housing?

The Ponzi scheme must not fail.

We have just witnessed in the US mid-term elections the short time scale in which a lot of people exist. However, if you need to pay the bills without any income then who am I to criticise.

QE2 from the view of the Fed is that it will boost domestic consumption, stabilise and improve domestic asset values and devalue the US dollar making imports more expensive and exports cheaper.

Some of this QE money will leak out to the advantage of Europe and countries around the Pacific Rim but since the US dollar is the reserve currency of the world it need not be the US which takes the full brunt of the negative consequences.

So politically, it is possible to understand this strategy.

The difficulty is that as a solution it is worse than the problem. What the US needs to do to get out of the recession is to restructure its economy, address its burgeoning deficit and bring back real money. QE does nothing to address these needs.

This is nothing more than putting off the evil day yet again. What is the point as we all need to face the evil day, deal with it and move on?

Fully agree with dj_gandy.

The Dollar is making a transition from safe haven status to toilet paper.

How long this will take is anyone's guess but I doubt it will be the world's reserve currency in 20 years time.

This will have a profoundly negative effect on the USA, and the transition will be rough for all of us. It is the inevitable outcome when you debauch your currency to the extent that Benny and Mr Greenspan before him, have done.

There will, no doubt, need to be a tipping point, which we can only pray does not lead to violence. This could be the discovery that China no longer holds $2 Trillion in Dollar Reserves and they just hadn't mentioned it. Or OPEC deciding to price oil in Euros. Or some such...

Until this kind of event, the PTB in the USA will continue to print to support their Ponzi scheme and meet their $200 Trillion in liabilities.

Can someone tell me what the big plan is? Is it simply to return the economy to another housing bubble?

What Mr Bernanke fails to understand is that he is mortgaging the future of coming generations. The US is in no position to pay back any of its debts yet it wants to pay peanuts in interest to those investing in its debt. Honestly the rating agencies should be rating American sovereign debt at BBB- rather than AAA. QE2 will prove another flop as it cannot stimulate the real Economy. It will fuel Asset bubbles even further, inflation in emerging economies will become unbearable and Bankers will become even richer. Wonder where the Americans learn their Economics, I think it is Zimbabwe.

AudenGrey, #5. You should have been warned that your question never really raises any interest. I've tried it once or twice in differing venues and it usually receives a very cold shoulder, though i did get told that there already exists such a currency - the SDR. However maybe you are thinking of a general currency, which realistically is aeons away. The SDR is possibly a trading currency.
The Economist recently dealt with the question, though I'm blowed if I can remember the answer they gave, if any.
It is only a question of time, probably when China really rivals the US, before the world can profitably discuss the formation of a workable world trade currency that is not beholden to some country's national policy. At present the US will not permit a realistic discussion to take place; they have too much to lose.

Wall Street will be delighted if the FED prints more money....More money to invest abroad. Obviously the USA agenda is to own the world...Print more dollars and buy/invest wherever there is profit to be made...China and the UK are doing the same, but they do not need to print more money.
These extra dollars will never reach main street USA and that is where the danger lies...If unemployment keeps on rising, there will be a point where social unrest is reached.
If main street USA is abandoned by Wall Street and it seems to be the case(Greed not social conscience is the order of the day), then unemployment will keep on rising.
Just exactly where are the jobs going to come from...There must be a limit to the number of people just employed to be chained to a desk...Millions are now just sitting in front of computer screens...This must be an attempt to have people occupied rather than sitting idly at home...Idle hands make the devil's work as they say....But putting faith in the free market to create sitting jobs is stretching belief a bit.
The biggest threat to the free world will be unemployment and the sooner this is realised the better. Wall Street and The City seem to be a huge barrier to the creation of jobs, in that these institutions which have grown so powerful (more powerful than the Governments of the day) only understand profit and the now Global Markets.
If Wall Street and The City do not provide jobs in their countries, then who will.?...The governments of the day?..Not at this time, with the governments we have at the moment. At least Gordon Brown atempted to keep the unemployment figures down.
We are still at a transition in human history with the advent of Computers, Internet, Technology, Peak Oil etc...What happened to the leisure society.?
It seems we are going backward or at least have gone into a cul-de-sac...
Or I could be wrong and the Free Market will be our saviour...Amen

#12. Sage_of_Cromerarrh précis: I can fix the housing bubble without a crash

Isn't the fly in your bread poultice the absolute reluctance of government or local authorities to release more land for building. Land has it has often been said is not being made any more.

Because of this my view is that we have to have a classic crash in the housing market and there is no alternative.

An amusing, refreshing article whose key sentiment, ie, we are in danger of talking ourselves in to armageddon, I agree with wholeheartedly. Having said that, I will be the first to admit that I do find myself getting rather alarmed by the extraordinary number of faultlines that have opened up in the global economy, certainly cannot ever remember such a complex period like it in my lifetime and I supect neither can Mr Osborne, though I could be wrong. From now on then its chin up, best foot forward and no more of this lily livered bleating.

This blog tends to imply that the moves expected tonight from the Federal Reserve will improve the US economy. I however have seen some criticisms of the policy on the notayesmanseconomics blog which end with.
"If QE2 is expected to work why did the previous effort QE1 fail and why is QE-lite not helping more?"
Also I notice that he points out that much of the media has forgotten the existing policy of QE-lite,which seems relevant as it is not pointed out here either.

https://notayesmanseconomics.wordpress.com

12. At 10:58am on 03 Nov 2010, Sage_of_Cromerarrh wrote:
'Any other pragmatic suggestions or feedback?'


A state owned bank with sensible lending criteria, and removal of taxpayer guarantees to private banks. We have an NHS, how about an NBS (National Banking Service).

@17. At 11:29am on 03 Nov 2010, stanilic wrote:
"The difficulty is that as a solution it is worse than the problem. What the US needs to do to get out of the recession is to restructure its economy, address its burgeoning deficit and bring back real money."
Couldn't they reintroduce Greenbacks for the domestic market? Lincoln used them to help fund the civil war and they seemed to work quite well - debt-free fiat notes created in just enough quantity to serve their purpose until that purpose had been achieved. They were reintroduced in 1914 but I think they were debt-based notes issued by the Fed rather than the debt-free ones Lincoln had issued 40 years before.

15 richard bunning ,

Excellent post,

I think Sarah is already on her way to the whitehouse. I reckon she also has the 'balls' to push the big red button, poor old Iran.

JFH: yes that is an issue that would need a change of heart centrally and locally.

As much as possible I would favour brown field development in cities as I feel such developments are more future-prooof with respect to transport and combined heat and power issues we will face in a world of diminishing and expensive oil.

I really like you Stephanie!
As for the US? Well the republicans can go to hell for all I care. They are the driving force that cripples this once great country.
Print more cash, balace a broom on your nose this place is now back on the great downward spiral and ONLY the republicans can't see it.
Stupid is as stupid does!

21. At 12:17pm on 03 Nov 2010, goldchest wrote:

"What Mr Bernanke fails to understand is that he is mortgaging the future of coming generations. ............Wonder where the Americans learn their Economics, I think it is Zimbabwe."
---------------

It may have been a flip remark, but this is highly relevant. I think they learnt economics from standard text books like Mankiw and they are all wrong! They are still teachings theories based on the gold standard and convertible currency era. This makes the decisions taken absolute rubbish and the effects are the reverse of what is needed to end this disaster.

Its too late now, the momentum is in the wrong direction; but we could try basing economic decisions on what actually happens in the real world. It would be a good start.

Trouble is all the traders etc, whether or not they have formal economic training, have their actions and reactions based on old theories. Changing that would be very difficult to do.

So expect more chaos as we lurch from crisis point to crisis point.

Growth and inflation:

If growth is when we make more
And inflation is when things cost more
Does that mean inflationary growth is printing more

#5 and #22

It already exists and is called Gold.

"Gold is money, and nothing else" JP Morgan.

Why the Fed matters more?
Because it prints the paper that people believe has value, and the day they stop believing the paper has value, will be the day that the world convulses.
You are ever so right: If the US central bank announces a second round of quantitative easing, it will be a more important for the global economy than the midterm elections.
The way financial business is being conducted in the United States,
there is NO hope for recovery. You cannot recover through artificial manipulation:
Bail-outs and Q.E. are the biggest forms of artificial manipulation. All that happens is the American dollar becomes more and more APPARENTLY worthless; people begin to see through the flimsiness of the thing.
The Federal Reserve Chairman, Ben Bernanke, has made clear that he wants to do more - the figure mentioned today will be in the region of $500bn (£312bn), but economists from the HSBC and Goldman Sachs reckon that it could have to spend $2trillion before this round is done. Oh right! Let's get out financial guidance from companies like Goldman Sacks (negative credit default faults, erivative bundling, betting, gambling, front-end loading computer trading). What is Bernanke thinking, or is he thinking not on behalf of the common people, but on behalf of the financial institutions?
Well, if anyone cares: Here is my advise: Stop the artificial manipulation! Stop! No more Q.E. No more bail-outs!
How much lower can the Fed lower the cost of borrowing for firms and households? It's next to zero now? Banks are not lending!
Hope for a stronger US recovery would be good news for the rest of the world. Maybe...or maybe it would mean an end to the American imperialism, its endless warring, the invasions and droning, the torture and the brutality...
If the US injects Q,E., the country will slide down the economic tube so fast that the suction will pull most of the rest of the world because the decision is so wrong - wrong time, wrong place, wrong artificiality when only equitable realism is required.
There is not a hope in Hell that Q.E. will work because:
Remember those bail-outs, where did the money go?
Where was the audit trail?
I think it went outside of the United States, but of course I can't prove it (right now).
So where will QE2 go?
Who is watching?
To re-balance the economy and feed the massive demand for jobs and income, the US needs really stiff financial regulation. Before it hands out more money, it needs to audit what happened to those bail-outs, including TARP? Where is the financial oversight on those huge bail-outs. Where did they go? The fact is we don't know, but oh well, we'll just throw somemore $$$$$ in the pot anyway!
Prepare yourselves. This will not be pretty!

16,

Excellent post, "......Just can't print people" lol

5. At 09:52am on 03 Nov 2010, AudenGrey wrote:
'Apart from upsetting the folks at the Bureau Du Change, is there any reason why a world currency wouldn't work?


Yes: who gets to control it.

24. At 12:29pm on 03 Nov 2010, John_from_Hendon wrote:

#12. Sage_of_Cromerarrh précis: I can fix the housing bubble without a crash

Isn't the fly in your bread poultice the absolute reluctance of government or local authorities to release more land for building. Land has it has often been said is not being made any more.

Because of this my view is that we have to have a classic crash in the housing market and there is no alternative.

-------------------------------

There is another very non-PC alternative. Reduce the demand for houses by reducing the population. If the UK becomes too untenable for a comfortable life, those that can will move. Those that cannot, suffer even more.

We need to change our attitude to bricks and mortar - they are homes we live in; they are not investments to provide as much money as possible in the shortest possible time, nor are they pension pots.

Houses are homes. That is all they should be, particularly when land is in short supply. Government policy should be derived from that 3 word sentence. Any minister, banker, commentor or financial analyst should be sent back to school for re-education, if they do not understand this simple concept. They are also not a pot of money for us to pass on to our children.

Everyone who comments using these bulletin boards,
everyone who sits on the MPC,
everyone who works at the Fed,
everyone in the government

has an opinion on what should be done.

But nobody absolutely nobody has a clue as to what will happen next.

This is because Chaos Theory rules this subject.

Go back to maths school.

And by the way get a house with a big garden & a high fence where you can grow some vegetables, and invest in a few big sticks.

22. At 12:23pm on 03 Nov 2010, thatmcgrath wrote:
AudenGrey, #5. You should have been warned that your question never really raises any interest.

Thanks for the tip off, I remember the Internet paranoia about 'The new world order' who wanted to force a single workable currency on us, I actually thought it was a sensible idea, But confusing the masses seems to earn an awful lot of money in certain industries.

Why make life easy for people, when there's money to be earned ?

Dempster, yes that's effectively what I envisage is required. JFH's and my point about government's willingness to make land available at a sensible price is valid though and would require a change of direction from the current NIMBY approach from local authorities and residents. I've got a house tough on the other's mindset needs to change.

#24. Because of this my view is that we have to have a classic crash in the housing market and there is no alternative.

If the crash happens too quickly all the rich older generation and Londoners who are still floating on the wealth from the housing and banking (QE) boom will just snap up all the cheaper property, creating even more of a 2 tier society of Landlords and serfs.

39. At 1:07pm on 03 Nov 2010, PaulattheRocks wrote:

"................
But nobody absolutely nobody has a clue as to what will happen next.
This is because Chaos Theory rules this subject.
Go back to maths school..........."
----------------------------------

Chaos theory or catastrophe theory? I suspect its both

The tower of Babel will come crashing down!

UK

SleepyDormouse - 38 - agree, houses are homes.

How many empty residential properties are there? The number of empty commercial properties that can be converted to residential?

jonearle - 42 - snapping up cheaper property; outlaw owning second/multiple 'homes'.

Throw in legislation for a minimum deposit of 25% and a maximum remuneration multiple of three times.

Forgot about QE :(

Another bottle for the alcoholic.

Lord Skidelsky in CSR and QE

https://blogs.ft.com/economistsforum/2010/11/lord-skidelskys-speech-on-the-uks-spending-review/

#47 Squarepeg


Lord Skidelsky is emeritus professor of political economy at the University of Warwick - and he probably reads Stefanie's blog.

When QE2 hits any investor with any sense will convert those dollars into hard assets, like wheat, oil, gold ...which is just what happened last time.

Did you ever think a loaf of bread,a jar of coffee or a trip to Tesco might become a luxury?

It is apparent that once again time has run out for the Fed and just to keep things running the only alternative left is to print more and more money.

Already we have heard that cash itself is no longer transported in large amounts becauae the price to transport it to the bank costs more than the interest that can be made on it.

These are awful warning signs that the value of money is deteriorating and the more that is injected into the economies the less value it has.

Time is important but not infinite and there seems to be no-one who can use it wisely to come up with the right answers or just admit that there aren't any.

QE is much ado about nothing. Long-term inflation expectations in the US and UK have hardly changed since the beginning of the year, despite all the media fuss about uncontrolled devaluations, raging price increases and currency wars.

https://www.indexuniverse.eu/blog/7626-much-ado-about-nothing.html?year=2010&month=11&Itemid=127

#5 Do you see what I mean? #22 has a different take altogether - gold being money and not a commodity. However we are far too far off the main theme which is how the Brit economy relates to the rest of the world. It rather relates to the rest of the world through the USD and that is the problem, hence your original post. So the US decides who will be taxed through a weakening of the dollar, who is being naughty and not supporting the US in the style to which it has become accustomed and dreams up a unilateral punishment for said naughty one. The problem for the US is that along came China which is growing quickly and becoming a worthy competitor, competing for the necessary commodities,skills and finance, and impervious to US threats.

No Ms Flanders, Congress isn't dysfunctional it is impotent. The good citizens of the US realize this and even suspect that its government is impotent because it painted itself into a corner and they want solutions that they can believe in. They know somehow intuitively that re-floating the past system just wont do. They also realize, I hope, that having a sound financial system is not the end all and be all; sound manufacturing and scientific based industries are equally necessary -sustainable jobs. Furthermore they are necessary in the US,not somewhere with cheaper labour, just as the UK needs skills and manufacturing through out the realm. They are fed up with sticking plaster solutions to heart attack problems. But the politicians and economists are aware that they need to get some quick fix before they look for sustainable solutions. What a position!

If America does indeed reflate their economy then they are indeed reflating the world economy.

They will be putting others before themselves because a weak dollar at this stage is not a benefit to them.

You could actually say , on a purely economic basis , that America was trying to save the world from the evil that is now causing this depression.

In the UK there is no real money in the system purely because banks are being repaid but are not re-lending.

I have to disagree about the midterms being unimportant. From the other side of the Atlantic it may not be apparent, but changes in campaign finance laws here permitting unlimited (and concealed) corporate contributions will have long-term and serious ramifications. As Europe struggles with banking reforms, you will have to realize there will now be NO meaningful banking reform in the US ($500+ million in campaign contributions do buy something), and without these reforms the US economy will not stabilize. Why lend to small business or consumers when investment banking is so much more profitable. Please note that Goldman-Sachs had their best year ever last year, and the US stock market is breaking 11K, so business here in finance, insurance and oil is great. It's only the 1-in-5 out-of-work-and-losing-their-homes that spoil the best corporate times ever!

#48 me

re: Robert Skidelsky,

Paul Mason did a piece on his book last year called The Return of the Master and he also has a blog which I shall be adding to my rss feedlist.

Europe and North America seem to be emerging from this recession, albeit unsteadily in some places. Overal, good news. But the bad news is that we'll almost certainly have lots more recessions. They seen to arrive about every seven to ten years. Please will you tell us when you expect the next recession, what you think will trigger it and how bad you think it will be?

Quoting Joseph Tainter from his book Collapse of Complex Societies -

“Emperors... were often faced with an insolvent government ...the more common stratagem was to defer the true costs of government by debasing the currency. This had the politically expedient advantage of shifting to some indefinite point in the future the cost of current crises. The inflation that would inevitably follow would tax the future to pay for the present, but the future could not protest.”

Go Rand Paul!

Hopefully, the FED will increase liquidity, thereby effectively reducing lending below 0%, thus devaluing the Dollar relative to the Pound(Sterling) and increasing U.K. purchases of Florida Real Estate.

I'll retire on that chump change.

The banks are flush with cash so the rationale for QE is very questionable. This is about insuring profits for the banking shareholders...again. Everyone must suffer but the banks. When they pay some attention to the losses of the middle class things will get better but this continued funding for the wealthy will do nothing but continue the problems. Employment is a result of buying, it is not as complicated as they pretend. Wrong policies again. Robber Barons of Banking.

Stephanie:
House prices in the US were inflated by too much easy credit. They are still above the long-term price/earnings ratio for households. They SHOULD continue to fall. Propping them up lengthens the process and prolongs uncertainty. Too bad that some households will suffer.

The growth rate of the US economy probably will never return to its old rate. There are lots of reasons for this (European destruction after WWII, US position as dominant world economy and currency, cheap oil, advanced infrastructure, starting economic base). REAL economic growth comes from rising population (US pop. has doubled over the past 50 years) and rising productivity. With a slowly growing population, economic growth can only come from productivity. This is at a lower level than you want, but it's all you should expect.

US policy should be focussed on job creation and preservation. Although QE pumps more money into the economy, not enough of this goes into job creation, so not an efficient policy. WHile many politicians talk about getting the economy going again, the real task should be in changing from an old economy (cheap energy, cheap imports, high consumption, high trade deficit, high profits to the financial sector, low investment in the maintenance of infrastructure) to a NEW economy. Supporting the old economy will land us back in the bad place we were in but with greater debt and less room for manoeuvre than last time.

47. At 2:51pm on 03 Nov 2010, Squarepeg wrote:
Lord Skidelsky in CSR and QE
https://blogs.ft.com/economistsforum/2010/11/lord-skidelskys-speech-on-the-uks-spending-review/


Great post. I'd given up on finding a mainstream economist who knows what he's talking about. I do believe he supports MMT. Correct me if I'm wrong.

As people have said, the Money of QE doesn't reach the ordinary Joe or Josephine in the Street.

They would be better off giving the money direct to individual States to spend on public projects, as a one off.

But, they need, like Britain, long term wealth creation and jobs.
They need to deal with underpriced imports.
Lots of problems.

57: The Roman Empire ran on Grain taxed from subject nations.......

MetalGasket,
"Great post. I'd given up on finding a mainstream economist who knows what he's talking about. I do believe he supports MMT. Correct me if I'm wrong."

I can't tell if he knows about MMT - he gets the importance of aggregate demand, and from his knowledge of Keynes he must get the importance of fiscal stimulus, yet he is suggesting a 'National Bank' (which I agree with) but no mention of further fiscal stimulus. I don't know if he gets the idea that the UK government is issuing debt unnecessarily, or other truths about what the collapse of Bretton Woods means for the power it potentially gives to our government/central bank.

I hope that Mr King resists any temptation to introduce a QE2 program in the UK. Inflation is high increasing and persistent in the UK so a slight monetary tightening, if anything, looks more appropriate to defend the purchasing power of the currency. Foodstuff and natural resource scarcities are increasingly likely looking forward.

The UK banks are worried that a near future significant fall in house prices risks exposing them to a second banking crisis as more mortgagees incur negative equity. Would-be debtors should always assess their ability to repay loans, factoring in unwanted economic shocks and the like before committing.

48. At 3:58pm on 03 Nov 2010, BobRocket

Yes, I know?

(not whether he reads the blog)

Ho-hum, here we go again, let's shuffle the deck chairs on the titanic whilst it sinks....

When oh when are going to find someone with the political will and financial savvy to find the big red "reset" button and send us all back to zero?? Probably won't and we'll be forced to "bump along" until resource and other "wars" force the issue for all of us.

It has to be remembered that the US housing market is not the same as UK - they have a massive glut of homes for people to move into (which we in the UK have less of). You can find what (by UK standards) are huge homes located in what were nice suberbs in the states for $6k - yes that's 6,000 dollars!! Andrew Neils' program the other night (about Tea-party) pointed that little fact out.

They, like the rest of the world, are quite simply flat-broke based on current standards and no amount of political shuffling, "QE" or other measures will fix that.

We need a new standard way of working and living - esp. in the financial arena and how we count costs veruses true value and worth.

Until the central bankers and economists PUBLICLY understand the relationship between the natural resouces that our economies the world-over rely upon - and the fact that "growth" as the s'posed mantra is now dead in the water (along with population overshoot and whole host of other issues plauging the sum of humanity) - are now very much coming into play, we will not get the debate, let alone the action that is really required.

I suspect that over the next few years the western economise will "peak" and "trough" until the issue is forced onto us all and we wake-up to a new reality (typical current human responses at the moment being: "that it's not my problem", "it's not a problem at all" and "it's a problem so far in the future I don't care").

In the meantime, if you can keep a job to maintain the level of your consumption at what you feel comfortable with, then great. Otherwise you'll feel hard done by and out of pocket (not that any of us actually pay for the true cost of what we consume and it's that little fact that will land us in ever deeper water).

If you're altrustic in outlook then you might feel for those more hard done by that yourself. Still doesn't change the fact we all over-consume, expect it all for next to nothing (in real-terms) and can't go on "growing" in the way that economists have expounded for years.

We must simply learn to get by on less (or achieve more by using less, if you like). Unless, of course, you'd like to find a humane way of telling a lot of the world's population they are not required and should quietly die-off so the remainder can continue their over-consumtive lives.

#38. SleepyDormouse wrote:

"Houses are homes".

Quite true... Unfortunately they are also, if not primarily, the assets which support the balance sheets of the banks and mortgage industry. Lower the price of houses much and the banks collapse.

So the banks must collapse, yet again, as house prices are far too high to be supported on the tiny wages and salaries of the British people - interest rates will rise, quite dramatically and to a very high level because of QE in the main.

The central banks of the UK and the USA know this quite well - you can hear it in phrases such as overly indebted borrower should take advantage of today's interest rates for when they rise, and they will rise, the overly indebted borrowers will need to have increased their financial assets to weather the storm.

Broadly, any borrower who has less than 60% equity in their property is at risk of default in the coming years, and quite soon, - the banks are already acting on this in their present lending criteria.

This is what debt-deflation is all about and it is inevitable and, what is more, essential for a real recovery.

67. At 9:33pm on 03 Nov 2010, natty_1 wrote:
When oh when are going to find someone with the political will and financial savvy to find the big red "reset" button and send us all back to zero??

I’d reset it for you.

A financial mess has been created for the next generation, when a financial common sense should have been created for them.

And from what I have witnessed thus far, the accumulated wisdom of the current crop of ‘economists’ and ‘financial experts’ could be fit upon the back of stamp and you’d still have room for the Lord’s prayer.

So to all you ‘financial experts’, and all you ‘economists’:
If there’s a debt problem; write the bad debt off; but don’t pass it on to the next generation for god’s sake, because that’s the mentality of a bloody idiot.

re.#57. At 5:33pm on 03 Nov 2010, truths33k3r wrote:
Quoting Joseph Tainter from his book Collapse of Complex Societies -

“Emperors... were often faced with an insolvent government ...the more common stratagem was to defer the true costs of government by debasing the currency. This had the politically expedient advantage of shifting to some indefinite point in the future the cost of current crises. The inflation that would inevitably follow would tax the future to pay for the present, but the future could not protest.”

----------------

At least the Romans got bread and circuses.

Let's hope the American government remembers to keep paying the legions.

#66 Squarepeg

cheers for the link, I didn't know who he was, now I do, his blog is interesting.

Thanks Stephanie and Robert for sparking such active debate - In fact I am finding myself much more interested in the comments section to these posts than the original story.

It is fascinating...

And thanks to all the comments people have left here, I am no economist but I have found the discussion really stimulating and clearly there are Guys and Girls from Hendon and other parts of the UK that really know what they are talking about. Kudos to Dempster, Sage and all the engineers out there, I really look forward to reading your opinions.

I guess we will have to wait and see what the actual outcome will be and I sympathise with a lot of the comments on here. Neither the politicians or the bankers should be feeling good about themselves at the moment. I can identify with Ben, and this is one of the many reasons why I chose to leave the country in 2005.

I have done a few calculations of my own and I think that (based on limited data) up to a 35% "bubble" still exists in the UK housing Market.

I have tried to break it down. I think there is on average a 9% difference between the asking price and the price that people are exchanging contracts for at the moment. That price is approximately 6% higher than the underlying long term average house price. So I think that a deflation of 15% is inevitable. The difference in the 3.5 times earnings multiplier could mean a further drop of up to 20% - although I expect the full drop of 20% to be unlikely. Please feel free to shoot holes in my analysis, I put it up to be shot down.

The problem is that there are so many vested interests wanting to keep house prices high...the Banks , the Politicians, the current Homeowners, that the average house price will probably take a long time to reach a more sustainable equilibrium. This is what everyone of these vested interests is hoping for, a kind of honourable exit from a rather embarassing, and frankly dangerous culmination of circumstances.

No matter what lessons we should have learned from economic history, the majority of people with any influence will be hanging on to this illusion of value in a kind of quiet desperation. The longer we hang on the slower the recovery will be.

Only we don't have much time left... Once the UK austerity measures kick in then the Helter Skelter will really begin. So there may be a glimmer of hope for the younger generation hoping to find an affordable home... if they still have a job, (and they will have, if they have the right skill set).

As individuals, we should be looking at ways to be more active. One thing this whole catastrophe has shown, is that we are fools if we think we can trust anyone else to look after our own best interest.

Over time more and more people will realise that they can take some responsibility for their own destiny, we can all make choices. I like to think of this as the "Big We", as opposed to the Condems "Big Society...Devil take the hindmost".

How about thinking of and implementing our own, micro-level, solutions? Change always creates opportunities, you just have to find them. Personally I am planning to become a politician, it will be a great way to fill the hole in my pension fund, and it sure beats working for a living. Who knows, maybe I will be able to make some positive changes from the inside :)

I was really hoping that the UK would be bold enough to face up, pay the price, count the cost, and move on. Now it looks like the UK (and the USA) are going to choose the long and painful route rather than the short, sharp, shock.

"No more lilly livered bleating"... I loved that quote, thank you and good luck - today is the first day of the rest of our lives, lets do something positive!

Morning Stephanie,
so let me see... the FED spent $1.7 trillion (that's 1.7 times 10 to power 12) on QE1. They plan to spend $900 billion on QE2 giving some spurious excuse about reducing interest rates to get people to spend more!
The real reason is two-fold and nothing to do with jobs in the US.
Firstly, it will devalue the dollar abroad, and at the same time reduce long term (5-7 years) gilt yields. This should have an effect on commodity prices, imports and exports.
Secondly it will promote a rise in share prices which will make the moderately well off happier with their directly invested pension plans (the so-called wealth factor).
I think another concealed benefit is to buy some of the dodgy mortgages which have raised their head recently and threaten to affect recovery of banks like Bank of America.
None of these consequences will create even 1 more job in the US. More likely as this additional liquidity will have to be "invested" or "gambled" abroad to get a required rate of return, jobs will be outsourced from the US, creating yet more unemployment and foreclosures!
Just look at what Japan is currently doing to offset the effects of its strong currency (building more production plants abroad and closing the ones in Japan).
Our pound has strengthened already and I can just see the BOE argue that we must engage in more QE to offset the strength of the pound and make our exports more competitive!
Make no mistke(sic) Stephanie, all of this is the direct result of Countries trying to manipulate their currencies -see for example India and Australia putting up their interest rates to try and combat inflation. A wall of money is about to hit the far East and BRIC countries, they don't want it and it will be terribly destabilizing for their economies. This is economic madness on a global scale.
There are some good things happening though. Commodities eg wheat and corn and cotton are at their highest for ages and that is inducing the growers to invest in machinery which is good in the long term as the West has had marginal commodity pricing for a couple of decades which wasn't good for the producers.
One final thought is that all of this liquidity injected by the ECB, the BOE and the FED can NEVER be unwound so the logical conclusion is that this debt must be defaulted. I wonder how many of our financial wizz-kids have factored this into their calculations?

re natty_1 post 67.
natty I read somewhere that the richest one percent of the worlds population consume 90% of the worlds resources. The figure may have been overstated, but you can see that logic dictates that to eliminate some of the worlds population to free up resources can only work if it is the richest people that are eliminated. The richest people are the ones who are in control, and that is the problem, it should be the brightest.

'But, of course, the overall strategy is not to push up the dollar. To re-balance the economy and feed the massive demand for jobs and income, the US needs a weak dollar - and stronger exchange rates in the East.'

.................................

The USA has no clear visible 'strategy', also in part because it has a global currency war to deal with.

The USA would, like the UK, benefit immensely in stratgic macro and micro economic management terms by having a robust, active 'national sustainability index'(NSI) model and this would show:

- urgent need for a comprehensive energy policy
- urgent need for splitting the domestic and national capital accounts
- urgent need to 'ring fence' its domestic economy
- urgent need to review its defence spending as no longer affordable
- urgent need for review and reform of rights and privileges on its banking and finance systems
- urgent need for applying their NSI and grappling with their national short medium and long term liabilities

The USA, like the UK, is spending too much time looking at short term GDP movements and has lost track of its own 'big picture'.

Dangerous things predictions. They can come back to bite you on the behind but lets try one.

The UK Govt may not annouce QE2 today but they won't announce the end of it for the following reasons.

They are either using it to try and reduce long term interest rates to encourage private investment. See what happened a few weeks ago when 0.8% GDP quarterly growth was announced, yields on long term bonds went up dramatically because the initial reaction was there would not now be QE. Since then yields have been dropping again.
If they announce the end of QE then rates will shoot up again and according to their own logic interest rates will follow.

The other reason they may think they need to do it is to improve banks balance sheets. I don't fully understand how swapping cash for gilts does this and would have though buying up dodgier debt would do a better job.

If they announce that QE2 is likely to go ahead, it will be very interesting to see how they justify it but the meerkats do seem to be expecting it at some point.

39 PaulattheRocks:

'But nobody absolutely nobody has a clue as to what will happen next.'

Really.

Try this - Housing has to drop in price where overinflated, that process has already been initiated. Recovery will be jobless. Vested interest will fight a rearguard action to preserve unearned advantage and try to slow any reform. Long term debt born in the bubble cannot be paid down short term. Debt removes independence, citizen or state. The West will still be a better place to be than the 3rd World. Voters will blow one way or the other looking for somebody to solve the problem in a quicker timescale than the economic cycle. Dumb is forever. Nationalism will rise.

In a global system multinational business can undermine individual national strategy they do not like more effectively than a national based business.

The banks will still be padding their bottom line. Captialism on the way up, Socialism on the way down, Capitalism on the way forward.

Together we are Santa

So the Fed will dig a 600bn USD hole. Less than the market had already discounted so the initial reaction of the market will be counter to that expected.

The fundamental error the the Fed and the BoE are making is that of completely underestimating the slightly longer consequences of their actions - this it must be said is what all bankrupts do - they borrow more money to pay back their debts so digging a deeper hole.

However in the case of monetary regulators their actions will tend to destroy the value of money for decades and along with that the whole culture of saving and investment that is the basis of capitalism. It is quite possible that so much damage has been done already by the last 2 years of disastrous and incorrect policies that the total collapse of money is now inevitable. The consequences of this are too appalling to discuss for fear of terrifying the horses. They are however widely discussed behind the scenes.

Make no mistake this QE is just printing money and of the very worst and most destructive kind - that is deliberately and crazily designed to inflate asset prices - no new infrastructure of long term benefit will be crated by these idiotic actions. When the TVA was created in the thirties, and deficit financed, with what we now call QE, something new was left in the end - these idiots will leave nothing but bigger debts! They are destroying money itself - QE must cease!

Steph
It seems that Bernacke thinks there is a money supply problem, but there is not, there is a demand problem, caused by the fact that the american people are drowning in a sea of private debt acquired over the last 20 years or so. More cheap money will not bring back demand. The debt levels need to be reduced, either by paying it off for the next 20 years, or through distruction of the debt. The debt is the inevitable result of have a debt based or credit based monetary system. Only monetary reform can fix this (https://www.positivemoney.org.uk/%29
The only other possibility is that Bernacke thinks the solution can be achieved by creating hyper inflation to erode the debt. This is an option, but the social chaos would be unpredictable, and personally I doubt he is 'smart' enough to think of this as a viable solution.

There is more intelligent thought on this blog than in the Federal Reserve or the Bank of England. For those that like a read of some proper analysis of the current situation have a read of https://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
Honestly, we could do a far better job.

71. At 10:40pm on 03 Nov 2010, BobRocket

Yes, always worth a read I think. He seems to have an amazingly broad grasp and a great style. The academic papers on his site are very good.

I originally picked up his site via Project Syndicate I think - for those not familiar with it I can very much recommend the site.

https://www.project-syndicate.org/

The USA are doing more QE, then so presumably will we.
Average wage increase = 1.5%
RPI = 4.6%

All those bad debts are quietly being passed over to us.

Is there a particular reason why the BBC generally has set its face against the possibility of liquidity trap economics? It looks to me as though a Friedmanite analysis of the Great Depression, focused as it was on monetary policy, is looking pretty debased. I was unaware that stagflation meant that BBC economics stopped in 1929. I know that Paul Krugman and Robert Shiller are both behind a fiscal stimulus of an adequate size and rate (this hasn't been tried in the US, whatever you've heard). Why are these two academics important? Unlike Bernanke, who in 2005 said that the US housing market reflected fundamentals, they said bubble. And they both predicted the previous dot com bubble. The facts have a well-known Keynesian bias.

Stephania,

I have just been watching a video on youtube...Alexander Lebedev....Russian owner of the London Evening Standard.
For some reason this influential Russian has decided to post on youtube some very controversial comments...not many have viewed these, but...

Worth a watch.

Excellent article by Stephanie Flanders. Actually I always liked to
read her analytical views.

I am not an Economics student of any kind, not even novice.
I am an Engineer by job.
But here is what I thought would happen in India and may be other
developing world.

1. U.S. applies Quantitave Easing.
(Easing, i.e., injecting large quantities of money,
i.e., liquidity in the U.S. markets,
WHEN THE PREVAILING INTER bank interest rates
i.e., REPO rates ARE ALREADY ZERO [ or near zero ].)
2. The injected money changes the hands with securities/assets with
financial institutions. Asset quality may be good, ambiguous or
very questionable.
3. The money thus in the hands of institutions at such outrageously
low rates (free money) will flow where returns are highest
(perceivably at a lowest risk, but that is a desirable but not a
necessary condition).
4. At least 4% of that money will come to India.
(A supposedly slightly undervalued currency, and a 8%+ GDP growth
rate and a great and vibrant private sector and huge market of One
Billion+ people)
5. Indian Government senses a suddenly strong rupee and see a pressure
and loss to exporters (Their export earnings in Dollars could
possibly fetch few rupees and hence pressure on their profits.)
6. Indian Reserve Bank absorbs incomming mamoth flood of dollars
brought in by Foreign Institutional Investors (From United states
principly to indulge in carry trade with India, also called HOT
MONEY by Economists) to keep Indian currency Rupee, low as a
response to the Dollar's onslaught.
7. That will inevitably cause a huge (undesirable, but not an option)
injection of Rupees in Indian market.
8. This money supply will run behind Indian assets, one of them is
Indian stocks.
9. This will cause a bubble in the Indian stocj markets.
10. As an another principle effect, will trigger a huge wave of
inflation in Indian consumer prices !!
11. So what do I do ? : I will offload as many over-priced shares
in my portfolio as possible when they have run up far beyond their
intrinsic value.

12. There are other great things as well for common man that will
come as opportunities. But there is no sufficient time to discuss
them here with me .... :)

600 Billion grains of Uncle Ben's rice (dry) would fill just over 4 Olympic size swimming pools.

Hi Steph,
Can anyone tell me what happened to the recent global anguish (2-3 years ago) aguish over 'moral hazard' or the Greenspan and now Bernanke Put? - Underwriting the market at any cost.
It is amazing that Mr Bernanke, a seemingly intelligent man, has not grasped that giving a country yet more hair of the dog is not going to solve a thing.
It is about time that he stepped up to the plate and addressed the binge problem which got us here, not encouraging more binging.
While on the subject, the Yanks in Congress are quick to point their fingers at China as currency manipulators. What is the Fed doing right now, if not an exercise in devaluation of the USD?

$600bn, that the US doesn't have unloaded into the economy. By itself it seems a no brainer. But its even worse than that!

As has been identified by many posters, this 'new' money will not create one new job in the US economy. It merely gives the financial vested interests (JP Morgan, Goldman-Sachs, etc.) more digits with which to play on a global basis. The consquences will not be beneficial internally. Externally it will unbalance an alreday inbalanced global economy. We can only speculate as to what those consequences will be but it is safe to say that they are unlikely to be beneficial.

The Americans used to say "its the economy stupid". They appear to have used this statement as the basis for their actions in their mid-term voting. However, they appear to have forgotten what the economy actually is! It cannot be overstated that, the economy is far far more than the interests of the fiancial sector. If what we call the 'real economy' requires stimulous then there is much that any government can do to provide it without giving the value of that stimulous to the very entities that merely used such resources for their own speculative self-interest.

I wonder how long it will be before the financial monoliths are demanding more stimulous because the $600bn had already been 'factored-in'?

Bubble bubble toil and trouble....


https://bbc.kongjiang.org/www.bbc.co.uk/news/business-11691638

This is a calculated decision to de-value the $ . The USA have tried to get the Chinese to de-value without success, so this is a means to the same ends.

It's a big risk and the potential outcomes will be difficult to forecast.

I think it's a mistake , the USA has a lot going for it, far more than the UK / Europe .But if the UK / Europe can de couple themselves from the credit bubble then so can the USA without shattering the $ value.

89. At 11:51am on 04 Nov 2010, newblogger wrote:

Bubble bubble toil and trouble....


https://bbc.kongjiang.org/www.bbc.co.uk/news/business-11691638

................
Nope, no surprise what so ever. I see no experts in the fed, only clowns in suits

To jjoshi2008
You forget to mention that cost of commodities including rice, grain, LPG and kerosene will also increase as the educated and the well off invest their gains from the US QE. This will lead to inflation of staple foods and fuel that many of the poor depend on. These people can barely afford the clothes on their back, nevermind investments in stock markets and currency speculation.
Not everyone is as fortunate as Ambani, Mittal and yourself.

https://www.businessweek.com/news/2010-11-01/oil-to-rise-as-capacity-drops-morgan-stanley-says.html
This issue makes QE seem small potatoes. Clear signs that oil has/is peaking and demand will outstrip supply by 2012. Be afraid. This will put the brakes on economic growth, even if there was not a recession going on. Too many issues coming together at same time, makes WOTWs predictions more credible by the day.

#88 - Its worse even than that: Fiscal capture has taken place and now Goldman Sachs effectively IS the US government. One whiff of a threat of cash machine ATMs closing and the politicians jump-to-it and do whatever GS and the rest want.

The purpose of this QE is to prevent the Zombie Banks having to realize losses on their property 'assets' securitized during the 'Great Binge' leading up to 2007/8. Funny money released by QE goes straight into asset price inflation generating fictional profit and bonuses for the investment banking fraternity, whilst simultaneously loading more debt onto the taxpayer - FISCAL CAPTURE

No fundamental correction in asset values occurs, thus making recovery impossible. The measurement of loss is deferred once again. Actually it gets worse each time: ordinary taxpayer demand for assets (particularly property) falls and at the same time asset values themselves do not fall commensurate with that demand. The fundamental link between supply and demand is thus deliberately broken in the interests of 'assets' created by the banks through fraudulent securitization.

Zombie banks cannot and will not realize their losses and so we arrive at semi-permanent QE at the behest of certain financial institutions. Each burst of QE makes the situation worse by increasing the gap between overpriced supply and weak demand as workers rightly fear redundancy. But of course in the end 'you can't buck the market' and the gap between supply and demand will suddenley 'snap' into place. That is the point to watch for. The fall-out might be catastrophic in some quarters.

Here another clown Joe in response to the 'no interest rate change' today.

"The Bank's "no-change" decision was welcomed by lobby groups and economists, but a number of commentators, including the British Chambers of Commerce (BCC) said they thought the UK economy would need its own QE boost n the near future, partly to help smooth the economy through the coming government cuts
The chief economist at the BCC, David Kern, said: "We believe there are strong arguments for injecting additional QE into the economy over the next few months. "

These so called economists amaze me. There was a 'senior' economist from Standard Chartered Bank on the radio this morning spouting gibberish on 5 -live.

How do they get their jobs? I need to know.

I'm afraid to say, but I think the whole financial systems in the UK and the USA are corrupted.

When you have financial managers paying themselves vast amounts of money, then is it not blatently obvious that there is something far wrong.

Note these people are not owners of institutions but mere employees.
Any business that allows its managers to pocket millions and walk away, whilst it is in dire straits...Surely this is blatant corruption on a vast scale.

There is no accountability, but made up rules so that maximum bonuses can be achieved...These systems are out of control.

The Governments cannot do anything but perpetuate these activities for fear of collapse of the whole jingbang...

Now where is this going to go...This great pile of corrupt ----.

Well, I would guess the rot will creep in very soon (it already has)...and we will all be in for a very rough time. The hurricane of corruption is upon us. Computers and the internet has only made it easier to corrupt.

Perhaps this hurricane will teach us all a lesson....Human Greed is something that we must all be watchful of.

94. At 1:20pm on 04 Nov 2010, TheNewPonzi wrote:
Zombie banks cannot and will not realize their losses and so we arrive at semi-permanent QE at the behest of certain financial institutions. Each burst of QE makes the situation worse by increasing the gap between overpriced supply and weak demand as workers rightly fear redundancy. But of course in the end 'you can't buck the market' and the gap between supply and demand will suddenley 'snap' into place. That is the point to watch for. The fall-out might be catastrophic in some quarters.
................
Very interesting, what form/implications might the snap take? I can see the high risk of hyper inflation, as commodities soar and people loose confidence that money have any value, but what do you see happening, I'm interested.

So despite over three years having elapsed, the current response to the financial debacle is print more money.

Up to press the combined wisdom of ‘financial experts’ and ‘economists’ has arrived at a solution inventively described as quantitative easing.

Do you laugh, or do you cry?
Or do you just give up on Fiat currency and purchase tangible assets?
Evidence suggests many are deciding on the latter.

Its not even printed yet and the stock market is in a frenzy of antici.........pation.
They know here the QE will end up.

POP !!!

#79 wrote "It seems that Bernacke thinks there is a money supply problem, but there is not, there is a demand problem, "

Not sure but I think this is merely two sides of the same coin.

There is a well known concept in monetarist economics known as velocity of money and money supply (in its broadest definition) consists not merely on hard cash and loans but also how quickly that money revolves around the economy. The argument, at its crudest, is that if you stick $1m under your mattress and never use then at the macro economic level that money might as well not exist. At a macro economic level the $100 which is spent by you at a shop in the morning, by the shop with the supplier at lunch time, by the supplier on employees at close of business and by the employer on a late night drinking session is far more important and the real money supply.

The effect of low demand is broadly equivalent to having lots of people putting money under their mattress. Hence it results in low real money supply.

The argument in favour of QE is that govt cannot force people to spend so cannot increase the velocity of money all they can do is increase the amount of money in circulation and hope that some of gets spent a few times also because the inevitable effect will be to increase inflation the hope is that people raid the mattress to spend some of the money stored their before it goes down too far in value.

It is a very risky strategy. It is like driving a car which seems to be stuck in first gear. Pressing the accelerator (ie increasing volicity of money) does not work so to go faster you get the car to the top of a steep hill and take the hand brake off. Yes the car will go faster down the hill but there is a very high chance of a major crash at the bend at the bottom of the hill