11/4/2013 7:45 PM ET|
The Fed has no endgame
Whenever tapering begins, the Federal Reserve will still face the bigger challenge of unwinding its $4 trillion balance sheet. That will shape the market and economy for years to come.
The financial markets are focused on guessing when the Federal Reserve will begin to reduce its $85 billion a month in asset purchases.
A move to buy fewer Treasurys and mortgage-backed securities -- say, $70 billion to $75 billion a month as a first stage, instead of the current $85 billion a month -- would lead, the market fears, to a rise in U.S. interest rates and a stronger dollar that would provoke a selloff in global markets.
The consensus now says this tapering won't begin until March 2014 at the soonest, although the Fed’s press release after the October meeting of its Open Market Committee led to a pickup among traders and investors in votes for January 2014.
The Federal Reserve itself, however, has moved on in its worries and plans. While the timing of any taper remains an unsettled issue, planning at the Fed is now concentrating on the endgame.
After building up its balance sheet to a record $3.84 trillion -- including $2 trillion in Treasurys and $1.4 trillion in mortgage-backed securities -- the big question, and the one with much more impact in the long-term on the U.S. and global economies and financial markets, is how does the Fed sell these assets so it can cut its balance sheet back to normal levels?
The startling answer that’s starting to emerge from studies by the Fed’s own economists is that selling these assets isn’t an option. There is no quick exit strategy for the Fed, these studies argue. The Fed -- and the U.S. economy -- will be stuck with its current nearly $4 trillion balance sheet for a decade or more.
And that means this Fed-driven market will be with us for years to come. Here's why, and what it means to investors.
The massive expansion
Remember that before the financial crisis, the Fed’s balance sheet totaled less than $1 trillion. (In August 2007, the Fed held just $785 billion in securities of all kinds.) That has changed for the foreseeable future. As late as 2025, these studies say, the Fed will still be holding a substantial portion of the assets that it owns today.
The Fed owns so much of some classes of assets that it has become the market for those assets. Any significant effort to sell these assets would send prices down and yields up, producing big losses for the Fed.
The political effect of those losses, which would end the Fed’s current contribution to the U.S. Treasury, would be something close to a rebellion in Congress.
Therefore, the Federal Reserve really has no option, these studies say, but to hold these assets until they mature in seven or 10 or more years.
That’s the best endgame strategy open to the Fed.
Which is really frightening to me because that strategy is really no endgame at all. The likelihood that the global financial system will give the Fed 10 quiet years to sell down its portfolio, without a crisis that requires new purchases to backstop another financial crisis somewhere in the world, is just about nil.
I don’t expect the Fed to ever say it, but these studies add up this conclusion: There is no endgame for the Fed.
Let me take you quickly through the Fed’s studies of the available strategies for its balance sheet and then suggest the effects of a lack of an endgame on the global financial system and economy.
Budgetary, political impacts
The most recent studies from the Fed’s economists focus on the central bank’s portfolio of mortgage-backed securities. But I think the conclusions of these studies apply to the central bank’s portfolio of Treasurys, too.
The newest study is a revision of a truly scary paper published in January by economists at the Fed. The January study calculated that rising interest rates -- a result of the success of the Fed’s policies to strengthen the economy, of the end to the Fed’s program of asset purchases and of asset sales by the Fed to reduce its balance sheet -- would produce unprecedented losses in the Fed’s portfolio. (Rising interest rates would lower the price of existing Treasurys and mortgage-backed securities held by the Fed. For example, the price of today’s 10-year Treasurys would fall by about 2% if yields rose to 2.8% from today’s 2.6%. A 2% loss is big money if you hold $2 trillion in Treasurys. Holders of Treasurys are already looking at a loss of about 4.5% in 2013.)
Those losses would have a huge impact on the politics of the U.S. budget. Last year the Fed earned a profit of $88.4 billion, with about $68 billion of that coming from income from its holdings of Treasurys. That money finds its way in the U.S. Treasury, helping to reduce the U.S. budget deficit. If interest rates rise, and the Fed is looking at losses instead of income from its portfolio, those payments would come to an end -- for as long as six years, the Fed’s January study concluded.
A second paper in February looked at some of the political consequences of the end of those payments to the Treasury. The Fed’s grip on policy may weaken if losses from its portfolio coincide with a high U.S. budget deficit and continued disagreements over the budget between the White House and Congress. It would be only reasonable to assume, in my opinion, that big portfolio losses at the Fed that ended the Fed’s payments to Treasury would increase the already considerable opposition to Fed policies in Congress.
The Fed is aware of efforts to constrain its independence, such as Kentucky Republican Senator Rand Paul’s proposed legislation requiring a Fed audit. Showing big portfolio losses in this atmosphere isn’t exactly a way to win friends and influence people.
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Of course the Fed has no end game. This is because the economy is and has been on life support ever since Obama stuck his socialist nose in it. The economy is a complete mess and the only thing keeping the band aid from coming off is that 85 billion a month the fed prints up in new dollars. Take that away and the illusion of a functional economy will evaporate and it will come quickly crashing down.
it always amazes me how there are still some that think Obama has done anything but bring the country to the brink of disaster, but I suppose there's no cure for stupid.
I think the Fed does have an end game. It’s analogous to a SCUBA diver who rises too fast without following proper decompression procedures. There’s an expression for it, “They’re already dead, they just don’t realize it yet”.
What worries me is that the US dollar has been the world reserve currency for decades because middle east oil is sold for dollars only around the world. China, India, Russia, Japan, and many countries around the world are making agreements between themselves to dump the dollar for commodity transactions.
The days of the dollar being king around the world is coming to an end and this will make the great depression of the past look like a walk in the park. It is now a world commodity market and the US is losing it's big slice of the pie fast.
Doesn't help that the US government has pissed off many countries around the world by recently spying on their government and people not to mention buying and proping up dictators around the world.
I often think about what the outcome would have been if the fed didn't print any $ from the begiining of this mess. I remember reading an article back in 2009 about how it would be worse than the great depression if the fed didn't start quantitive easing but I really wonder.
Wall Street hasn’t stood on its own since about 1980 and it looks like it never will again. It is a gargantuan unstable puppet (think Macy’s parade) barely held upright by wires, tethers, scaffolds, braces, and a-lot of hot air. The face upon its big empty head is that of a goofy ventriloquist’s dummy, yet of a look that is stupider still and then sinister, with an extra thick coat of smeared red lipstick. And the President and his cabinet, the Congress, the fed officials, bankers, and the rest of them look up at it with feigned pride as it bobs past and they all publicly assure one another of what a fine job they’ve done on it.
So what's going on with the Kardashians?
And who got the boot on Dancing with the Stars?
Oh, sorry. I'm in the wrong comment board. This one has 31 comments right now.
I'll jump over to the subject of Kardashians and DWTS's.
That one the other 349.99 million Americans
are most concerned with.
that's the endgame, if there is one, these stupid msn stories are nothing more then recycled ones from 4yrs ago, just a new date is on top that's all, absurd to no end....then again did you expect anything more from a lying phucked up marxist obama regime, OR THEIR MINIONS? a piece of vermin in the white house that outright lied in the face of the 'clueless in denial' American public...I mean idiot thugs like the obama and his obamaites KNOW NOTHING about business plans or making payroll, but spending money that isn't theirs, no problem!
they sit around consumed by and drowning in, their own smug arrogance and intolerable ignorance in universities and wax poetic about policies they'd make if 'they were in charge' and filling the heads of mindless kids hopped up on ADHD (a phony psychiatrist liberal-created condition that doesn't exist) drugs with the same Marxist drivel and well? they're in charge for 4 yrs now, and those kids are living with mommy and daddy wondering where the hell the jobs are and how the hell they're gonna foot the bill for student loans and obamacare that the messiah they once worshiped said was FREE!! and we're in downright ruins here!
oh and hey you liberal vermin welcome to the CONSERVATIVE CAFE!! looks like everyone from Sarah Palin, to Ted Cruz to the Tea Party was right, from the death panels to the insane belief that you'd be able to keep your doctors or health plan, (man that must be KILLIN" you fools isn't it? ;-D oh how great that makes me feel!) AND HOW STUPID DO YOU FEEL YOU PIGS! JUST KILLIN' YOU ISN'T IT? THAT YOU FEEL FOR THE BLACK GUYS LIES HEH, GOOD LUCK COMING UP WITH THE MONEY! AS LONG AS YOU BURN WITH THE REST OF US I COULDN'T BE HAPPIER! ;-D
I assume their end game was to hope that the government would get their house in order and we would start rebuilding a sustainable economy again. That would enable them to exit in a controlled manner as people returned to work and incomes began to rise. Well that's not going to happen so what you are seeing is the last gasp effort to postpone the inevitable decline of a country that sold it's future in the name of free trade and stock market returns. The Fed can't sell any of their holdings because that would cause rates to rise and the government simply can't afford higher interest rates.
The stock market will continue to rise as long as the Fed is buying securities. All the ups and downs are just the big boys churning things trying to make their bonuses for the year. As long as the Fed is buying, the stock market has to go up. sure, there may be a correction when the taper begins but there will still be money being created so the loss will be short term and the market will continue it's false march ever higher until the Fed is not creating money anymore. There is no where else for the money to go. By the time those securities mature, everyone that's in charge now will be long gone and living the good life.
Good that this topic is coming up again. READ. Go get a copy of Andrew Dickson White's: Fiat Money Inflation in France. READ how France came to it's Revolution, what Napoleon returned to, then how France was forced to endure incredible hardships restoring basic functions. Our Hydra has more than one head: a lack of self-sustenance skills, a lack of craft and tool expertise, aging systems, reliance on lunatic technology that accomplishes nothing while sapping the thinking skills of users AND THEN the Federal Reserve and a financial sector so screwed up, that it cannot determine what to do to stop it's own failure.
What we all need to grasp is-- that our excess becomes toxic. We cannot have 20% of our nation owning 80% of everything and expect anything shy of dysfunction. At best- you get a revolution and at worst- you get anti-economy for a duration. Sadly, we already have the ingredients for massive failure. Consider this- if you graduated from high school in 2007 and went on to college, you have not had the opportunity to latch on to life and become something in it.
Sadder yet- odds are we will lose most of our billionaires nearly at once. Even greedy grubbers realize that with that much in assets changing hands, wealth takes a major unpredictable hit. The smart move is to: Close the banks, end the Federal Reserve and to get RID of Wall Street. Why? Because as it is now, bad people can control and manipulate because of the constant influx of cash funding their corruption. Pull the plug and both the good AND bad must stop, cooperate and fix the cancer or face extinction. We're already mortally wounded out here, so forcing it back on the makers gives the rest of us pause and potential to play a role of influence. I couldn't give a crap about government's role in anything right now. Too much dysfunction, no relevant solutions. Let's get this done on our own and see if cream really does rise to the top and elect them to replace all the deadbeats we're stuck with now.
Now, after the massive new injections [QEs] are about to start wearing off will little effect, THE BIG DROP TO THE FLOOR IN UNCONTROLLABLE SEIZURES WITH FOAMING AT THE MOUTH FOR THE ECONOMY IS ABOUT TO START.
And anybody --- who supports or does not raise their voice against yet another fed chair (pusher) confirmation without demanding a fed audit is by default an enabler.
They know what is coming thanks to Obama and the policies the Fed has had to introduce to try to mitigate the damage he has been doing. CHINA is already signing deals with other nations to STOP using the US Dollar, the latest being the EU. When the Dollar is no longer the Worlds Reserve Currency, you can kiss your lifestyle goodbye. Think things are bad now, wait till that happens, and you won't have long to wait. But don't take my word for it, just google "China enters currency deal" and read how many they have to date.
Why are they pumping $1T+ into the "economy" now, it is for one reason, to prop up the bond markets because nobody wants to buy our debt. After the first failed bond auction happens, the domino's will fall fast, and what Obama hasn't destroyed of our economy till then, will go up in ashes in a flash.
After that, you can expect within a few months at best, the dollar will be devalued in a vein attempt to strengthen it, which will only hasten its demise, destroying whatever wealth you have remaining in the process. But rest assured, the fat cats and politicos will have long since taken measures to protect themselves, as should you too.
Everyone best take action to protect themselves while time remains, as the time of reconning is fast approaching.
"I often think about what the outcome would have been if the fed didn't print any $ from the beginning of this mess. I remember reading an article back in 2009 about how it would be worse than the great depression if the fed didn't start quantitative easing but I really wonder."
The same thing that happens to a fire when it has eaten all the available oxygen in a room. It snuffs and will grow cold unless somebody opens the door and refuels it's rage with fresh air. A reminder that Bush restored Wall Street immediately after April, 2001. In just 2 months they were back investing as reckless and irresponsible as they had before that crash. He redesigned the currency, bought faster printing presses and raised the debt ceiling more times than all prior Presidents. TARP and QE serve one purpose and ONLY one purpose, to ensure old wealth stays wealthy, regardless of what it does to the rest of the world. End it and the same thing that happens to a fire when it has eaten all the available oxygen in a room. It snuffs and will grow cold unless somebody opens the door and refuels it's rage with fresh air.
Crazy, isn't it?
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