QE the Chinese way

The People's Bank of China Makes QE3 Look Like Central Banking for Prudes

On September 13, 2012, when the Federal Reserve Open Market Committee decided "[T]o increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month[,]" the reactions ranged from exuberance to horror. The exuberance showed itself in the stock market, and the horror came from anyone holding dollar bills for the long term. Jim Grant sent his condolences to the lab rats. Marc Faber said his goodbyes to the middle class. Although the Federal Reserve has hammered more nails into the coffin of the U.S. dollar's purchasing power, let's not loose focus on the bigger inflator: the People's Bank of China. What does US$40 billion a month look like? The PBC is very familiar.

Last month, both Keynesians and gold bugs celebrated the U.S. M2 figure surpassing $10 trillion, but for completely different reasons. By the end of this year, they may also be able to celebrate another nominal milestone: The renminbi M2 money supply surpassing ¥100 trillion. Yet, the exchange rate is still hovering around one to 6.3000.

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Comment: There is not much market turmoil because all main markets flood the system with money. It makes not much sense to move out of the dollar when the euros, yens and yuans are also getting inflated and sometimes even more than the dollar. The current dullnes in the currency market is the proverbial tranquility before the storm.

America's new "green economy"

Inflationary expectations on the rise

Fed’s Fisher Says U.S. Inflation Expectations Rising

By Steve Matthews -

Federal Reserve Bank of Dallas President Richard Fisher said market expectations for U.S. consumer prices have surged following the Fed’s decision to purchase mortgage securities last week.
“I do not see an overall argument for letting inflation rise to levels where we might scare the markets,” Fisher said...
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Comment: Once inflationary expectations take hold, they become a self-realizing prophecy.

The mess we're in

The Magnitude of the Mess We're In

The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States.

By George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor

Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don't want, but need, to hear.
Where are we now?
Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.
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Comment: It's too late and people know it.

Fed announces QE 3

Statement by the Federal Open Market Committeeof the Federal Reserve System

September 13th, 2012

"... To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative..."
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Baby Bernanke

Don't miss this one:
http://5minforecast.agorafinancial.com/files/2012/09/Bernanke.gif

What's behind the "euro crisis"?

Giscard: We are the victims of a smear campaign that has its origins in the American banking system. We are in the middle of a communication battle that is fueling speculation.
Former German Chancellor Helmut Schmidt and former French President Valéry Giscard d'Estaing are two of the leading architects of the European Union. In a SPIEGEL interview, the veteran statesmen discuss the causes of the euro crisis and the lack of vision among today's European politicians.
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Backgrounder:
Antony Mueller: What's behind the euro crises and how will it end?

German constitutional court sanctions ESM

EUR-USD

1.2921

+0.0066

+0.51%

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Euro shorts are losing their shirts

EUR-USD

1.2816

+0.0186

+1.47%

I don't know how many times I warned at this blog about going short the euro. Now the short squeeze is here and it may get worse for the shorties because the recent surge may only be the beginning of a much longer rally.

Euro close to 1.27

No surprise for the readers of this blog:

EUR-USD

1.2697

+0.0066

+0.52%

Draghi goes quantitative

Draghi Says Officials Agree on ECB Unlimited Bond-Buying

By Matthew Brockett - 2012-09-06T13:17:49Z

European Central Bank PresidentMario Draghi said policy makers agreed to an unlimited bond-purchase program to regain control of interest rates in the euro area and fight speculation of a currency breakup.
The program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said at a press conference in Frankfurt after the ECB held its benchmark rate at a record low of 0.75 percent.“Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”
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Comment: Welcome to the loony bin.

Draghi bailout-plan

ECB Plan Said to Pledge Unlimited, Sterilized Bond-Buying

By Jana Randow and Jeff Black - Sep 5, 2012 9:22 AM GMT-0300

European Central Bank PresidentMario Draghi’s bond-buying proposal involves unlimited purchases of government debt that will be sterilized to assuage concerns about printing money, two central bank officials briefed on the plan said.
Under the blueprint, which may be called “Monetary Outright Transactions,” the ECB would refrain from setting a public cap on yields, according to the people, and a third official, who spoke on condition of anonymity. The plan will only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years, two of the people said.
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Comment: This news could be the final nail in the coffin of the euro shorts.

Quo vadis, euro?

Traders Diverge Most in 13 Months From Strategists on Euro

By Emma Charlton and Lukanyo Mnyanda - Sep 4, 2012 6:45 AM GMT-0300

With the euro facing one of the most pivotal months in its 13-year history, traders and strategists are more divided than at any time since 2011 over whether officials will be able to keep the currency from tumbling.
At about $1.26, the 17-nation euro is 3.3 percent above the $1.22 median year-end estimate of more than 50 analysts compiled by Bloomberg, after the gap expanded to 3.8 percent last week. The last time the euro exceeded the consensus by that much was in July 2011, and it tumbled 9.4 percent in the next 10 weeks.
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Backgrounder:
ECB: The International Role of the Euro
Comment: The majority is still overly pessimistic as to the euro. I guess I'll stay bullish.