Saturday, November 13, 2010

Quantitative Easing Explained...

A few months ago, I wrote about a prophetic book "Debt and Delusion" by Peter Warburton [my earlier posting here]in the 90s that predicted the high debt levels in Western countries will eventually lead to govts printing money as a last resort to delay the day of reckoning but the attempt to shore up the system will prove futile.

In a game of chess, when the end game is reached, there are few pieces left on the chessboard. The remaining moves and possibilities are limited and expert players can calculate how the game will end if both sides play it optimally. Sometimes one side has a disadvantage that cannot be overcome no matter how well the moves are played...all the player can do is delay the inevitable end and hope for an outside chance that his opponent makes a mistake.

We may be seeing the economic end game of the past few decades being played out in the coming months. Govts have exhausted almost their options...in the US the only game left is QE2 (Quantitative Easing 2...aka printing money round 2). Earlier in the crisis, western govts tried to spend their way out incurring massive deficits. Many have given up on this and implemented painful austerity programmes - some are forced e.g. Greece, Spain and Ireland while others like the UK govt recognised that they are better off taking the pain early than being forced to do it later - the coalition govt there incurred the wrath of the students tripling university school fees and have announced they will cut those who refuse job offers from welfare. There was an interesting article in the Straits Times a week ago "The Lessons from the Great Depression" by Harold James[Link] that explained that the fiscal tightening during the Great Depression was brought about by events in the capital markets - a sort of forced move rather than mistakes on the part of govt as it is often seen by Keynesian economists. The lesson from the Great Depression is it will get ugly once there is widespread revulsion against all government debt in particular US govt debt - interest rates will rise and overrun all the positive soothing effects of QE2 ....In Asia and emerging markets, all the bubbles (stock & housing) will quickly deflate as speculative money flows out as quickly as they came in the past few months.

46 comments:

Anonymous said...

PM L:HL predicted todat in Japan that now war,I am not too sure about his judgement.

G20 has provided no practical soln to the currency war,and it is not going to stop any time soon.

I believe that Uncle Sam would win,and I just took up an offer by Bank of China to open RBM account!

Anonymous said...

The US govt is printing money and monetizing federal debt. Their credit rating must be in the ditch. Why then are their federal bonds showing such low yields?

Anonymous said...

A few days after announcing QE and US Treasuries yields were already rising.
The US doesn't want to admit; they are trying to devalue the dollar thru QE perhaps following an export-led growth that had worked so well for China? And yet they are critising others for currency manipulation!

Anonymous said...

The day of reckoning will come, but it will not be drastic or soon, maybe not even in some of our life time.

It will be almost gradual, very slowly and over a long time, with some small ups and downs along the way. For instance, 2 days ago, the US dollar strengthens a little again, despite QE2.

So in the meantime, as long as there are no riots or violent overthrow of govts, or new world wars (unlikely due to many countries now have nuclear weapons, so don't play play) things will look very normal and peaceful on the surface.

Yes, folks are experiencing the boiling frog syndrome, but the boiling will take a long time. The frog may die a natural death long before the start of unbearable heat and boiling.

Anonymous said...

I thought the QE2 was to deflat American debt, and to make China and Asian imports more expensive.

Anonymous said...

The main purpose is to bring communist,market socialist China to change its exchange policy to be market driven.

It is sad that the market communist would not follow because they are scared of unemployment.

They know that their GINI is approaching 0.5,a revoluation is due.

Communist China has been given all the wrong advice by LKY.

Ghost said...

I disagree with that article by Harold James. The Great Depression was hardly a forced move by the market. The market played a part but mistakes was also made by the governments of the day. Keynes might be over-rated but he was right on this point.
As for the US government printing money, I wouldn't worry too much about that. It will only become a problem if the Chinese stop buying US Treasuries. Since the Chinese government are not going to stop, why shouldn't the US keeping printing money. I would too if I'm them.

Anonymous said...

"As for the US government printing money, I wouldn't worry too much about that. It will only become a problem if the Chinese stop buying US Treasuries."

Anon 14/11/10 08:50

No, the Chinese cannot stop buying US Treasuries. If they do, they will be in trouble too. I think the FED knows that.

Lesson:

One must create a situation where there is no advantage to others if one is harmed by others, only disadvantages, maybe more. This is one form of deterrent from being harmed and so one can continue to do things the way one wants.

Just like having nuclear power. Applies to all areas, military, economic and politics.

http://vonhayek.blogspot.com/ said...

The downfall of every empires came to pass when power elites tried to preserve their power at all cost.

Technically, BOA, JP Morgan Chase and Citi were bankrupt.

If US government did not bail out AIG on terms that AIG paid its creditor 100 cent on a dollar, then Goldman Sachs and Morgan Stanley may tumble.

But those bankers were still drawing hugh amount of paychecks despite they are currently being supported by tax payer-- despite they have ruin the life of people on main street.

The is socialism to elites and capitalism to peasants.

The oil sheiks in Dubai World ironically showed the world more capitalism. The creditors including talents in DBS can get back only 60 cents on a dollar.

Anonymous said...

China has no choice but to buy the treasuries, for political reasons yes, financially wise no.

Lucky said, "In Asia and emerging markets, all the bubbles (stock & housing) will quickly deflate as speculative money flows out as quickly as they came in the past few months" Questions is where can the money go? Back to US? Impossible. The fact that the amount of money available is too great, inflation is expected. I think comodities prices will skyrocket.

The Great depression and the current situation is different.

To anon 02:22 If the credit rating is in the ditch, the bond would have high yield. It no one buys, the product will become cheaper and therefore high yield. The low yields is because the federal government is a big buyer creating a demand>supply pushing the yield down

Anonymous said...

by sometime next year, we should be able to see some impact of QE1,2,3 etc. the lesson is: gold is king.

http://vonhayek.blogspot.com/ said...

I believe we are in the early stage of world volatility as predicted by Karl Marx.

The economy of mature capitalism can only works when the poor must be paid 100 cents whenever capitalist produce $1 of goods. (Some form of trade protectionalism is inevitable, or alternatively increase China wages to USA level). Unless the rich can consume everything, else the economy will shrink.

The elites may have the power but the poor have the numbers. Currently elites are shooting their leg by their greed in ripping off the middle class into lower class. (in Singapore as well)

When the lower class gain a critical mass we would enter a phase of unprecedented volatility. Then those tycoon like Rogers, Jet Lee wil flee causing some sort like a bankrun on Singapore.

Property will drop 90%. Singapore will be in ruin.

This is already in early stage evidence by that PAP has to appreciate the currency else lower class are not able to catch up with food price inflation.

On the event of major economic depression, many Singaproean may need to face foreclosure. Singapore's may be just one step from major trouble.

Unfortunately, our elites seems to be complacent.

Anonymous said...

China buying US treasuries is not for political reason,I believe.

It is only for one reason,to keep the USA market for its export products.

Anonymous said...

Dear Lucky,''there is an interesting article in FT Chinese edition By Valentina Romei,Ranjit Lall
on Current Account Balanc as % of GDP.

http://www.ftchinese.com/channel/monthly.html

I hope it is useful for you.

I truly apprecaiate yr work,I learn a lots.

Pl do keep it up.Thank you very much.

Anonymous said...

sorry

http://www.ftchinese.com/story/001035439/en

Anonymous said...

"The elites may have the power but the poor have the numbers. Currently elites are shooting their leg by their greed in ripping off the middle class into lower class. (in Singapore as well)."

Does the elites have to rip off the middle class? Or are you saying the elites get to where they are by ripping off somebody?

"When the lower class gain a critical mass we would enter a phase of unprecedented volatility. Then those tycoon like Rogers, Jet Lee wil flee causing some sort like a bankrun on Singapore."

We have a large 'lower class' supported in part from the taxes from the elites and other govt aid. What percentage of population will be critical mass?

"Property will drop 90%. Singapore will be in ruin.

This is already in early stage evidence by that PAP has to appreciate the currency else lower class are not able to catch up with food price inflation."

Stronger currency has been a stated aim since GKS' days. It is not a reaction but a clearly articulated policy objective.

"On the event of major economic depression, many Singaproean may need to face foreclosure. Singapore's may be just one step from major trouble."

Singapore will always be a step or two away from trouble regardless who is in charge.

Anonymous said...

Dear Lucky,

Thank you for your blog. The commentators too are informative. I learn a lot by reading your blog and thinking through the comments. I try to apply the knowledge gained here & elsewhere to understand the interlinked global economy.

http://vonhayek.blogspot.com/ said...

Re Annon 14/11/10 12:56
////////////
Does the elites have to rip off the middle class? Or are you saying the elites get to where they are by ripping off somebody?
////////////

GST, property hike can be viewed as forms of regressive tax on middle class.

Our high foreign reserve in USD, maybe funded by our CPF. The plunge of USD has in fact wipe out many of our savings. And I speculate this could be the reason PAP ever reluctance in letting Singaporean withdrawing CPF. Because CPF is technically default.

So we can see CPF as a 30% tax on middle class Singaporean. Eventually even 1 million dollar CPF is not going to be enough for retirement.

/////////////////////
We have a large 'lower class' supported in part from the taxes from the elites and other govt aid. What percentage of population will be critical mass?
//////////////////////

The elite and rich do not share their due proportion. Their contribution to the state is among the lowest in the world. Must I mention Germany or Norway to compare.

The middle class suffered the highest taxation in indirect form.

Currently official figures seems to show 20% lower class. But if we reach a point whereby food price, housing and utilities constitute about 95% of expenditure for 40% of population, we may be in trouble. Nevermind PAP tell Singapore how much they earn.

//////////////////////
Stronger currency has been a stated aim since GKS' days
//////////////////////

Agree, this is one of GKS's benign legacy which offset food price.

But for last 10 years, inflation alot more high. The fact that we can appreciate out of inflation is long gone given it will hit competitiveness. Besides large part of inflation is due to property.

And also any good ways of old PAP has long gone ever since GOh CK and especially LHL took over.

Anonymous said...

"Stronger currency has been a stated aim since GKS' days. It is not a reaction but a clearly articulated policy objective."

Well,not exactly.

What the PAP did say since the day of GKS who was the arthitect of our monetary policy was that Singapore was not able to use interest rate as an effective instrument of monetary policy,unlike other countries such as USA,Europe,etc

Hence for Singapore ,it is exchange rate as the major instrument.

This has largely been followed since.

http://vonhayek.blogspot.com/ said...

Jungle Capitalism can only exist on the very early stage of capitalism. Every capitalist countries gone through phases to slave shop.

Eventually some form of socialism must be in place when a capitalist society mature.

The USA experience its highest growth as mature capitalist country under Rosevelt's new deal. The highest taxation then was around 80%.

You can call new deal communism.

Similarly, socialism has help Germany in its current form. When industries of UK hollowed out because M Thatcher thinks that it is good to exploit work, the German has steep progressive tax and good protection for labor.

Today, Germany remains the most competitive in the world, given that the protection of labor (in engineer) has create an ultra-techicians and ultra-engineer.

The German jobless rate is due to cost of unification with East Germany. Else, Germany would have same unemployment rate of around 2-4% like Holland.

LKY's elitism and jungle capitalism is bound to fail. It is already failing and we are already bearing consequences. (too long to explain)

Anonymous said...

"Well,not exactly.

What the PAP did say since the day of GKS who was the arthitect of our monetary policy was that Singapore was not able to use interest rate as an effective instrument of monetary policy,unlike other countries such as USA,Europe,etc

Hence for Singapore ,it is exchange rate as the major instrument.

This has largely been followed since."

It was a clearly articulated policy in fixing a policy trilemma. When trade grew and import content as it was and is, there was a conscious move to give up interest rate independence for exchange rates.

http://vonhayek.blogspot.com/ said...

http://www.youtube.com/watch?v=7M6AxjNAOzk&feature=player_embedded#!

How the rich has screwed Hong Kong. The striking similarity of HK with SG is the obession of unproductive elite towards property, low income tax...etc.

HK having the most hardworking highest IQ population is having some of the worse poverty.

Currently HK is kept afloat by China's patronage.

Having fertility of 1 per woman, HK property is slated of tumble but those greedy tycoon keep on importing people projecting even an overall increase in population.

Within 5 years, many china cities will have a better living standard compared to HK. No mainlander except scumbags would want to come to HK.

Singapore is not far behind from HK if we dont get rid of PAP. (Meanwhile HK media keep on projecting young HK people of choosy, weak and spoiled...etc)

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Anonymous said...

In one year time, the central banks will print another
$60000000 billion trillion to fill up all the oceans, seas, lakes, reserviors, rivers, caves, valcanos, undergrounds, buildings, etc.
With the property filled with so much money, peoples are forced to sleep on the roads.

Anonymous said...

With not enough properties for peoples to stay, more foreigners are imported to build more properties and more permanent residents are converted from foreigners to jet up the high property prices.
Finally, foreigners and permanent residents will fill up all the properties and Singapore Citizens are pushed out of Singapore to stay in Pulau Ubin, the only place reserved for Singapore Citizens.

Anonymous said...

Central banks understand the situation better. They know that so long as they print money and don't worry about inflation then they can spend their way out of their trouble. History has shown that by devaluing your debts thru inflation u will end up with a surplus as the value of your assets rapidly increase over the value of your liabilities. The real suckers are those holding your debts. Why QE does not work for the Japanese is due to some rather unique Japanese circumstances - high propensity to save, stagnating population and the emergence of China as a cheap global manufacturer. These have led to deflation rather than inflation. It is unlikely the West will see deflation. The saving rate is low and the people are geared towards spending their money. Moreover, the Chinese are not joining in the mad rush to over consume. With immigration policies taking in huge numbers of foreigners, their population are increasing leading to higher consumptions. We will most likely see high inflation in America. This is what the Fed wanted and this is what they will get.

http://vonhayek.blogspot.com/ said...

Re Anonymous 14/11/10 22:53
/////////
They know that so long as they print money and don't worry about inflation then they can spend their way out of their trouble
/////////

This is true when Rosevelt was living but no longer now in USA.

During the 30s, USA industries produces what she consume. So printing monies will keep its factory running and the people well fed.

Unfortunately, the last 2 decade has witness a hollowing out of US industrial capability. The elite basically enrich themselves by shifting all productive capabilities abroad, while the countries and people suffer.

This is why US elites are hell bent on globalization. They even forces the government to take on debt sustaining the unsustainable system just to enrich themselves.

Whenever US print monies, the are going to lose their wealth to China. Eventually China may refuse to vendor finance US because they are receiving worthless US dollar.

The painful adjustment will be combination of shift of production back to US (thru protectionalism.. as what Tim Geithener has preach on G20 aka appreciate China currency) and a rapid raise of China worker salary.

This is a lesson for all selfish elite especially those PAP who tried very hard to hollow out their own industries.

Monies printing will work for China and even Germany, because of their production capability. But not so "service" economy like US or UK.

The elites has shoot the whole country to the shit bowl.

Anonymous said...

http://vonhayek.blogspot.com/ said...
"Unfortunately, the last 2 decade has witness a hollowing out of US industrial capability"

This may not be the truth.

According to data from the United Nations Industrial Development Organization, U.S. factories are the world's most productive, accounting for 25 percent of global manufacturing value-added. By comparison, Chinese factories account for 10.6

http://www.cato-at-liberty.org/the-rumors-of-manufacturings-death-have-been-greatly-exaggerated/

http://vonhayek.blogspot.com/ said...

Re Annon 15/11/10 04:57

http://www.pittsreport.com/2010/06/us-manufacturing-crown-slips/

Cato Institute is basically supported by Koch family who is some of staunch opponent of socialism.

My above link bring you to Financial Times.

Yes, US is still having most manufacturing output in dollar terms today. But its share of world output is falling and would be taken over by China in the near future. US Create 19.9% of world output while china create 18.6%.

The biggest problem is China creates consumer electronics, toys and apparel that US has hollowed itself out. These are necessities.

The other big chunk goes to oil producer like Saudi Arabia and Venezuela. Any monies printing will straight away ended up into the pockets of oil sheikhs.

Unless US is going to produce all these stuff or the foreigner is going to finance US AGAIN, I see money printing only leads to inflation.

I hence suspect QE is not to stimulate but a secret bailout as well as de facto default of USA towards its creditors.

Anonymous said...

Thank you for yr info,but as a guy who makes his living mainly thro' Chinese export manufacturing I do find his argument below very persuasive,



Thank you for yr input

Anonymous said...

if the United States doesn't "make things anymore," nobody does. According to data from the United Nations Industrial Development Organization, U.S. factories are the world's most productive, accounting for 25 percent of global manufacturing value-added. By comparison, Chinese factories account for 10.6 percent.

That may be hard to fathom, given that U.S. factories tend not to produce the sporting goods, toys, tools, and clothing found in Wal-Mart and other retail outlets nowadays. But U.S. factories make pharmaceuticals, chemicals, technical textiles, sophisticated components, airplane parts, and other products. American factories have moved up the value chain.

Contrary to this last point, Meyerson asserts, "The long-term decline of American manufacturing has depleted our high-tech, cutting-edge industries as much as it has our more venerable sectors." To support his claim, he cites the value of our "high-tech" exports falling behind China's beginning in 2004. By "high-tech," Meyerson means computers, iPods, and other consumer electronic gadgets so ubiquitous nowadays. But in reality, the percentage of Chinese value-added in these so-called high-tech exports is quite small. Economists at the U.S. International Trade Commission estimate that only about 50 percent of the value of U.S. imports from China is actually Chinese value-added; the rest is value added in other countries and embedded in the components, design, engineering, and labor.

For iPods, the Chinese value-added is a few dollars on a product that costs $150 to produce and retails for $299. So, as China's "high-tech" exports leave America's "in the dust," their sale in the United States and elsewhere supports high-paying American engineering, marketing, and logistics jobs, while providing Apple with the profits to conduct R&D to employ more engineers and keep the virtuous circle going.

The factory floor has broken through its surrounding walls and now traverses borders and oceans. What we have now is a world in which it is no longer "Us versus Them," but rather "Us and Them," a formulation that has been helping U.S. manufacturing to thrive. Without complementary Chinese and other foreign labor, far fewer American manufacturing ideas would come to fruition.

American manufacturing is by no means in decline. What should be is Meyerson's myopic way of seeing things.

http://vonhayek.blogspot.com/ said...

Re Annon 15/11/10 08:58
////////////////
U.S. factories are the world's most productive, accounting for 25 percent of global manufacturing value-added. By comparison, Chinese factories account for 10.6 percent.
////////////////
The above is what you get from Cato Institute states only "value added". It measures productivity ONLY.

No doubt US company benefited most as you mentioned apple or IPod...bla bla. But I need to stress all these benefit goes to the elite and capitalist.

China peasant cannot afford to consume those iphone...etc. Hence the elite borrowed on behalf of US peasant, to enable them to continue their addiction on consumerism.

This ponzi process goes on and on and elite get richer and richer while in actual fact bankrupting the country.

I do not doubt US is still the biggest industrial power. But then, many of these work has gone offshore. The gain in productivity simply cannot offset the lost in wealth when China ship all those finished product back. Else how you explain the deficit.

Add to the trouble a large chunk of deficit goes to OPEC whereby because of US oil addiction.

Well, the stimulus may kick US industry somehow, but dont forget, they majority of jobless people are not those tech or intellectual elite who could get benefit from high end manufacturing.

Anonymous said...

"Well, the stimulus may kick US industry somehow, but dont forget, they majority of jobless people are not those tech or intellectual elite who could get benefit from high end manufacturing."
http://vonhayek.blogspot.com/ 15/11/10 11:06

So what about it? Will it affect the US political system? Will there be riots on the streets in the US? At most, Obama become a one term president. And anybody who replace him may also or unable to do a better job. Look at his predecessor, the Republican Bush. Was he a better President than Obama?

Hence the current US situation may continue for a long, long time.

Just like the current Singapore situation may also continue for a long, long time.

Solution? Be the tech or intellectual elite or what not elite so you won't suffer. Applies in US, in Singapore or any part of the world.

http://vonhayek.blogspot.com/ said...

Re
///////////
So what about it? Will it affect the US political system? Will there be riots on the streets in the US?
///////////
If the elite keep shooting their own country, my answer is YES.

The middle class US is a creation of venerable Roosevelt, not a natural development of capitalism. Remember how bankster screwed the entire world in 1929 great depression and how Roosevelt tamed them by shooting his own class. (Roosevelt is a 100% blue blood)

Unfortunately, the elite of USA seems to hate middle class so much and try to turn them into proletariat.

When the number of proletariat achieve critical mass, we may see something like Bolshevik revolution.

We need another Roosevelt. (not impossible)

Anonymous said...

A majority of Americans (the new peasant class) will face hardship with the devaluation of the USD. Is this the start of the American `long march' - leading to the Communist State of America or the Second American Civil War?

Anonymous said...

http://vonhayek.blogspot.com/ said...
Thank you for pointer on the article.
I have no problem with it.

On the other hand,what I do have is great faith in American creativity.

I checked up Microsoft web

"ounded in 1975, Microsoft (Nasdaq "MSFT") is the worldwide leader in software, services, and solutions that help people and businesses realize their full---"

The appearence of Microsoft heralded a wole new industry probably worth more than trillions.

When I look at LKY and his supporters,they are old,aged very grateful lot.They are the past.

How about the younger generation,MM himself claimed very recently that ;'THEY DO NOT BELIEVE ME"

Who are the future?

China is growing with old industry,old method.

Can the Chinese match or beat Uncle Sam?IAs some one schooled in chinese schoools and love China,I would liek to shout yes,yes,yes,and be positive,as many of my friends.

But I do not think so,inless China can change its political to one with rule of law,rule by law,checks and balance,it remains a dream for many years already.

Anonymous said...

Hey All, fyi, please check out this dead-ringer of a clip:
Malaysian Politics
http://www.youtube.com/watch?v=5d5jDwzZ9Rk
Thanks!

Anonymous said...

"Hey All, fyi, please check out this dead-ringer of a clip:
Malaysian Politics
http://www.youtube.com/watch?v=5d5jDwzZ9Rk
Thanks!"
Anon 15/11/10 17:20

So got hope or not? Hope from Pakatan Rakyat (Barisan Alternatif)? Or itu sama?

Anonymous said...

Feel very "useless" & boring when u are jobless or under-employed.
Even "old" people also can become "angry youths".
Who is going to be interested in all these "theories"?

Anonymous said...

nothing more useless than to make useless comments.

jamesneo said...

The economic game is not helped by our false thinking of perpetual growth: http://www.energybulletin.net/stories/2010-11-12/end-growth

Parag said...

Are these really phantom motives though? Is the information not correct? Is the head of the New York fed not a former Sachs employee and is QE not going to involve purchases of bonds from Sachs to their own profit? At the very least this creates the appearance of a conflict of interest. Perhaps the motive really is some altruistic nature seeking to increase lending for most in the Fed. But there are almost some people in this structure who really understand that it’s not helping people.
Quantitative easing in US

Anonymous said...

From a financial ignoramus - seems all the analyses have been wrong - print more money but the value goes up? Govt buys back bonds, more commercial bonds issued. Commodity prices drop. How to invest hard earned meagre resources - be a saver and be penalized?

What is happening? - looks like a drug rehab and continued abuse madhouse - things are getting better because we feel good - can this be the new reality?

We have only 3 choices - buy, sell or do nothing - we need to do all 3!! You guess is as good as the crocks in pin strips masquerading as "knowledgeable prudential bankers" - back your own judgement, nothing else you have the satisfaction of doing the gamble yourself and be educated in the process. Nothing like having your own skin in the great con game.

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