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Why Bernanke will be forced to institute QE3

>>>>>>>>>>COUNTERPOINT TO THIS ARTICLE

By Jeff Harding
May 25, 2011 00:54:21 (ET)

SANTA BARBARA, Calif. (MarketWatch) -- Dr. Frank Shostak, an
Austrian theory economist<<<<<<< WARNING WARNING, haha who works
for MF Global, and who writes for Mises.org on economics, came out
with an article this week on what will happen when the Fed
freezes its balance sheet in June, as they have said they will do.


I very much enjoy Shostak's writing and have followed his ideas
for years.


In this article he says:


"We suggest that once Fed policy makers freeze the balance sheet
of the US central bank it will slow down the growth momentum of
the Fed's balance sheet. Consequently, this is going to exert
downward pressure on the growth momentum of the money supply. Note
that ultimately it is fluctuations in the growth momentum of the
money supply that set in motion fluctuations in the pace of
formations of bubble activities. As a result, various bubble
activities that emerged on the back of the rising growth momentum
of the money supply will come under pressure -- an economic bust
will be set into motion.<<<<<<<<One can perceive that Bubbles in
Oil, Gold & Silver, Housing and Land Development Prices, FOOD
Inflation, may just need to burst for the health of the economy.


Lower prices at the pump, value of the dollar higher to allow more
purchassing power and less bleeding of interest on deficit monies
being more and more with a dollar devaluation.


"Obviously it is possible to have a situation where commercial
banks' expansion of lending "out of thin air" counters the
freezing of the Fed's balance sheet. It remains to be seen whether
this is going to be the case in the months ahead. For the time

being, the Fed's balance sheet continues to expand at a rapid pace. ...


>>>>> THIS IS TOTALLY FALSE, the FED has just announced a
payback from AIG and GM and is in the process of reigning in its
balance sheet !!!!! that statement couldnt be more false. Here
is what is on the FEDS balance sheet as of a little while ago.


http://economix.blogs.nytimes.com/2009/05/07/fed-balance-sheet-expansion-some-takeaways/


"Now, we suspect that the difficulty the Fed has had in
meaningfully "reviving" the economy so far could indicate that the
state of the pool of real savings or the pool of real funding is
in trouble. This means that even if the growth momentum of lending
does currently show some strengthening ... it is highly unlikely
that, with the weakening of bubble activities on account of the
Fed's freezing its balance sheet, commercial banks will pursue
an aggressive expansion of credit out of thin air. Also, it
is quite likely that with the freezing of the balance sheet,
Treasuries will come under pressure, and the growth
momentum of banks' holdings of Treasuries will weaken. This in
turn will exert downward pressure on the growth momentum of total
bank lending, which includes lending to the government. ...


>>>>>>Whilest the FED has shrunken its balance sheet as of late
there has never been lower interest rates on treasuries and
higher participiation so the prediction of treasuries coming
under pressure is possible and it may even raise the returns on
treasuries from record lows. A GOOD THING...<<<<<<<<<<<


He predicts that CPI growth will reach 5% by year-end.


>>>>>>>>>Sounds relatively TAME to me


"We suggest that once Fed policy makers freeze the balance sheet
of the US central bank, the growth momentum of the money supply
will slow down.

As a result various bubble activities that emerged on the back of
the rising growth momentum of the money supply will come under
pressure. A visible strengthening in the growth momentum of the
CPI may prevent Fed officials from introducing QE3 as suggested
by some experts.

>>>>>>THIS IS A MORE LIKELY SCENARIO is that as has been stated
Quantitative Easing is effectively over so as not to raise
inflation any higher and to allow for strengthening of the DOllAR
and Interest rates on savings in the banks, and to heal the banks.



It makes sense that when the growth momentum of quantitative

easing stops, that this will eventually affect the markets,

usually six to nine months later.



>>>>> Financial system strengthening during the process of a
slight negative affectation on the markets will be necessary to
recover from too much false fed support of the markets leading to
a false economy and rising inflation for the consumer.


Shostak sees that this will put downward pressure on credit
expansion by banks and thus the money supply will shrink. I think
that is correct as well. We have seen some growth in lending
activity recently and, as I have written lately on this, it is
likely that this will stagnate.


>>>>>>RUBBISH the interest rates will remain low and excessively
low for some time, a new definition of extended period of low
interest rates will be defined by January of 2012 to put a
deadline on the "laissez faire" attitude towards interest rates
and lending....

But there are two factors which lead me to believe that it is more
likely that we will see more quantitative easing.


While Shostak concludes that the Fed is wary of price inflation
(that they are causing) and that this will deter another round of
money pumping, I think the primary motivation behind QE is
unemployment, not price inflation.


The consequence of taking their foot off the money pedal will lead
to higher unemployment and I do not think this is politically
acceptable to the Fed or to the Administration.


>>>>> This is basically farting out of the mouth, there is no
indication that removing QE is going to cause an increase in
unemployment, in fact with a healthier financial and monetary
system confidence may be returned more and less unemployment may
be a result

I think they will institute a new round of quantitative easing
(QE3) because politicians will demand that the Fed "do something."
Which is, of course, the worst thing they could do. It will lead
to more "bubble" activities and higher price inflation. See Will
Fed Insist on Trying to Ignite Unhelpful Wealth Effect?


>>>>> MORE RUBBISH <<<<<<<<

I believe the Fed and the Administration will be willing to
tolerate a higher level of price inflation and for a much longer
period of time, despite the inflation hawks' warnings. I think
this new money stimulus will occur no later than during the start
of the presidential election period (January, 2012), and will
continue until the winner is sworn in. I think Dr. Bernanke will
be fired thereafter.


>>>>>Unless Bernanke wants to be fired which is possible, I
believe he will come out smelling like roses if he removes QE,
bolsters the financial system by first allowing for some inflation
which is occuring as we speak, allowing for dollar inflation, and
then announcing the raising of the interest rates to provide
impetus for lending to occur more rapidly before rates go up.
There are other more advanced measures that he is taking to
bolster the financial system, banking system, monetary system as
well and with some faith those should go well as well.


This would also cast a different light on Treasurys. If I am
correct, then the Treasury market would, post-QE3 remain as it is
today. It is likely though, that between June and when the new QE
round occurs, the freezing of their balance sheet will take some
pressure off the Treasury market as Shostak suggests.


If pressure off the Treasury market means higher rates of
return that good enough !!!!!


Assume that I am incorrect, and the Fed doesn't embark on a new
round of QE. Where will money go? I believe there is sufficient
demand from institutional and foreign sovereign buyers to keep
the market up and keep yields low, despite growing price
inflation.

It is likely that eurozone problems will continue for quite some
time in the future -- at least two more years if I were to guess -


>>>Agreement here, meaning a sinking euro, and a raising dollar at
least for a brief period if not the whole 2 years.<<<<


- and that institutional and sovereign investors will continue to
park money in Treasurys, despite what China, Russia, and other
BRICs may say. China has no real alternative. It is conceivable
that Japan will reduce its Treasury holdings, and possibly be
forced to borrow on the international market in order to fund its
reconstruction. But the PIIG problem will continue to drive money
into Treasurys. The End of QE2: Does it Matter?


The Fed is serious about freezing its balance sheet starting in
June. They will continue to buy Treasurys as issues mature and
are replaced. But, as Shostak points out, the momentum of money
growth will slow down and that is the key to understanding what
will then happen. If Treasury rates do not take off, then my
assumption about domestic and foreign demand for Treasurys will
be correct. If they do take off, it will be an indication of a
shrinking money supply as Shostak points out which will lead to
economic stagnation or even a market bust.


If treasury rates are starting off at record lows they will
need to come up higher... THIS WILL NOT BUST THE MARKET !!!!
Raising the dollar value will put some pressure on it but not
like 2008 and it will recover fine within a year or two.



On the other hand, I don't believe the Fed will play "chicken"
during an election year, and when things turn ugly they will
announce QE3 and that will kick the can down the inflationary
road. QE3 may be the last installment of this monetary madness.


WRONG WRONG WRONG... QE3 WILL NOT HAPPEN this article is merely
trying to pump up the precious metals markets and put a floor
artificially underneath the equities markets, let them breathe
and self adjust I say !!!!

Editor's Note: This article was originally published at The Daily
Capitalist. Jeff Harding is author of The Daily Capitalist


YEAH WELL DOLLAR BULLS DONT REALLY APPRECIATE IT, haha.