Tuesday, June 28, 2011

US Fed Prints More Money....

Read This : Fed May Buy $300 Billion in Treasuries After QE2

If you ever catch a Jim Rogers interview on TV, more often than not you will hear him say, "All they know how to do is print more money".  Then he goes on to talk about the virtues of investing in gold, commodities and farms.

In an earlier posting, I explained how the US Fed prints money. It creates money (out of nothing) to buy US treasuries from the US banks. What has all this printing done to the US dollar? I had a business contract in which I was getting paid in US$. The contract was signed 6 years ago and as the progressive payments come in the US$ drops from S$1.66 to S$1.23. This money printing serves several purposes. First it caises the US$ to drop and this makes US companies competitive. Second it reduces the US govt debt - debt that it has difficulty servicing and conspiracy theorists believes the Fed needs to do this because the US is no longer able to service its debt.. Third it keeps the interest rate low and that helps to stimulate the US economy preventing it from slipping into recession.

The problem is such massive printing of money causes inflation. Inflation so far looks tame only because the US economy is very weak - even so we see oil prices trading above $100 per barrel a few months ago before the recent falls. Commodity and food prices have also gone up. The MAS (under Tharman) tried to keep inflation out of Singapore by allowing the S$ to appreciate against the US$. There is a limit to doing this and stock investors know too well - the strong S$ has caused our exporters' margins to decline sharply in the last quarter so we cannot keep the S$ rising against the US$.

The options for central bankers around the world are quite limited right now. They have used up all their bullets to tackle the financial crisis and the Great Recession that followed that crisis. Right now they are just kicking various cans down the road - both the EU and US are doing just that. The financial markets appear to be temporarily rescued from a Greek default and each time they do it the escape becomes narrower and disaster seems to get closer. It is just a matter of time before we face another crisis when it is no longer possible to delay the inevitable.  While the latest QE (QE3?) might reignite the stock market and commodities market ....so far that has been only what each round of QE has been able to accomplish - the US economy has been pretty anaemic after 2 rounds of QE. While some argue that the economy will be in worse shape if not for the stimulus packages, low interest rates and 2 rounds of QE, the current slowdown just shows how bad the situation is....the best they can do is to just keep it going until something happens....

47 comments:

Anonymous said...

"It is just a matter of time before we face another crisis when it is no longer possible to delay the inevitable."
Lucky Tan

Agreed but not so soon lah, maybe not even in the next few years.

This type of situation can drag for a long, long time.

Like the Japanese economy since their property bust 20 years ago and even the recent natural tsunami, but they still survive what.

Anonymous said...

Hi Lucky,

Is it a good time to put money in AUD time deposit or gold? Which is better?

Anonymous said...

It's time for national governments to take on a bigger role in the economy rather than leave everything to the private sector.

Example:
Banks in USA are too scared to give out business loans.

They are using the bailout money (very low interest rates) from US government to buy Treasury bonds (higher interest rates). Interest rate arbitrage.

The US government should just hire all the retrenched bank loan officers to assess business loans that have been rejected. And lend money direct to the businesses instead.

Ghost said...

The simple fact of why the US Fed prints money is because they can get away with it. Banks around the world keep on buying US treasuries so why not? If Singapore can get away with it, you can bet that the MAS will do it also. To the US, printing money keeps sense because there are more upside to it than downside. I'm willing to bet that as long as people keep on buying US treasuries, they will keep on doing it.

Anonymous said...

China refused to let the Yuan appreciate. So the US Fed has to depreciate its currency to bring about balance in world trade.

In doing so, the US Fed wins in:
- reducing real value of its debt
- improving competitiveness
- keeping interest rates low to stimulate consumption
- exporting/sharing it's monetary pain with the rest of the world
- increase tourism
- etc...

pockaroo said...

Soon it won't just be the US printing presses running. The UK looked like it is a matter of months before they embark on QE.

Greece will default. What can't paid back won't be paid back. Rollng debt down the road and pretend all is fine will just make the problem bigger down the road. Has anyone looked at what's happening to the bond yields of Spain, Italy and Portugal while all eyes on Greece? Would not be surprised EU will embark on their version of QE to save the German and French banks considering their exposure to Greek debt. Remember we are all too big to fail?

hayek said...

PAP can certainly do something if they want to curb inflation.

1 Property "COE" on foreign buyer.
2 Rebuke GST on food, residential power supply, clothing, precious metals.
3 Hike CPF interest rate on par with inflation.

Blaming globalization, FED and external factor is simply a no excuse. Dont forget economics is about hard choices. In making those choices, PAP will definitely sacrifices the poor and middle class and protect the rich.

Anonymous said...

it's like that, cant help it
becos #we are price takers#, #template2# .. sorry.
ahem.. let's move on

Happier than Lucky! said...

Money values and interest rates are man-made.

debts too are man-made.

All it takes is the ah long says: "ok! ok!.. give you another 30 years, but you pay higher interest!!"

And thats what has happened... just open your mouth and say it... "all debts erased!".. and we can move on.

Why? becos you still have your LCD
your BMW, your blue cheese and your cannon camers and Ipad.. the lifestyle is here to stay and Govments will not allow this lifestyle to be interrupted.

Please, not another doomsday sayer!

Nothing happened in 2008
nothing happened in 1997
nothing happened with Ireland,Iceland and Italy
nothing happend with the Greek debt either.
JP Morgan is still there
CITIcorp is still there

DanielXX said...

QE makes sense to the US because they want to devalue the USD. But they cannot do it too openly. I believe QE3will occur eventually, but the Fed has to pay lip service to inflation so QE2 will end and Fed will wait for things to evolve before it starts QE3.

The US and European cultures and psyches are shaped by different things. The German psyche is shaped by the 1920s hyperinflation, hence they are hawks. The US psyche is shaped by the historical experience of the Great Depression, hence they would do anything to avoid that.

hayek said...

--How Elite Masturbate Keynes --

The theoretical origin of QE can be largely trace back to Keynes.

Then, everyone knows that debasing currency is bad. Keynes provided a certain insights, which probably drawn from Karl Marx. That is

-- The Great Depression occurred because the workers are too poorly paid. Hence, business is bad, as worker cannot afford anything. The problem can be solve by printing monies gave distribute to average Joe.

Today, instead of giving $ to the poor, FED QE and give to banksters. The banksters then use the monies to speculate and give us more trouble.

The QE today is leading us to the mother of All Disaster.

DanielXX said...

QE3 is instinctively bad because it goes against our morals of working hard to get money. Printing money is nauseating to the honest individual. However the way it is done --- the process --- is as important as the means. If the Fed can do it in a manner that avoids moral hazard and shows that it is always ready to put a brake when inflation starts to rear its head, then QE may not be bad.

The purpose of QE is to create jobs in the US. Once jobs are created, the deleveraging process can start in earnest and the housing market can recover. Jobs are the key to this whole equation, and if QE can be used to create that, then why not.

The key is also to sterilise the cash once the recovery cycle gets underway. There is a lot of idle cash in the bank vaults as a result of QE, and once the credit cycle recovers (once unemployment drops) it is crucial to sterilise the cash and withdraw it. This process will greatly affect whether or not the QE will eventually lead to high inflation.

Gold is not the solution said...

I would warn people not to be too bullish on gold.

It is true that the excessive amounts of money created by the Fed has resulted in massive depreciation of the USD and caused inflation globally. However, gold is not the solution for investors. As an asset on its own, it does not generate any earnings, cannot be eaten, the real supply of gold is limited and you do not know whether the gold ETFs out there are backed by sufficient real gold. Furthermore, it's value is based mostly on expectation and fear. When markets are spooked, its price goes up, and vice versa.

Now, the problem is that even the best economists in the world are unable to predict what will happen next. If you buy a asset whose value comes from fear, and is already trading at a high price, you could just as easily lose your capital if gold prices come tumbling down.

At best, I would say that gold is a speculative product, and not a good inflation or currency hedge. Do not be food for the big hedge fund sharks out there. Buyers beware!

Anonymous said...

pockaroo,

spot on, everyone is following doomsday prediction. i just think it will take years if not decades before even we start experiencing even slight downturn.you know why? because this century belongs to financial engineering, wizardry that can take us in circles and actually avoid any potential economic disaster for at least couple of decades. so don't wait for another 1998 kind of downturn. :) may be just another similar 2007 and the cycle goes on...

Anonymous said...

The woes of the humankind may not be a man made(cause) one.
It is more likely to be one from mother nature.

A Being

Confused said...

"The problem is such massive printing of money causes inflation."

Dear Lucky,

I don't get it. Why does printing more money leads to my pay of Nike shoes to be mre expensive?

Please explain. Thank you.

Anonymous said...

and the music played on....

Anonymous said...

eu cannot be backing us forever. the greek crisis is a scam. any time, they will turn their backs against us and buy up all the land in us. the harvest in eu is not good this year but the cows need to eat.

Anonymous said...

Tomorrow will be the same as today. Peaceful and prosperous, at least on the surface. And for a long, long time, as surely as the sun rises and sets.

Unless your time is up.

Anonymous said...

Simply put, QE is like Ah long san printing $$$$ and offer cheap loans all over the world through their runners. After distribution, up interest rates to recoup `old' $$$$ from the system.

Anonymous said...

Lucky, i didn't know how to contact you so i just thought of sharing this link for your next post. I mean look at the massive profits of our developers. ITS OUTRAGEOUS!!! They should be hanged for this! It's a legal robbery of the century!
http://www.businesstimes.com.sg/sub/news/story/0,4574,445375,00.html

Anonymous said...

Willing seller, willing buyer.

Anonymous said...

A deal between 2 consenting adults.

Hang Seng Parasite said...

printing money lead to inflation. using this analogy

when you increase the supply of money while demand remain the same, money will be worth less because there is now more money in the system. when money is worth less, people will increase their price because they know the same amount of money will buy less raw materials for the production of their goods.

what a currency is really worth depend on the international demand and supply of its currency which include speculators, trading partners, long term investors (govt), your GDP growth.

factors can come in and disrupt this balance. this include fx controls, monetary policy, tax incentives or penalty, speculators, liquidity of your currency. when equilibrum is not met, there is a profit opportunity. Like the way OZ dollar was oversold during the flood or Euro was overvalue relative to the USD due to understimation of it member countries debt issue.

the actions on tier 1 bank that supply world fx liquidity is a prelude and will tell you what value they put on a currency. follow their curve and pick up the inequilibrum and money is make easily but modestly. carry trade being the king maker often involve highly illiquid EM currencies and NDF. this trade is done on analyzing the outstanding liquidity and balancing it with tier 1 or broker exposure and comparing it with the outlook of the counter currency and you can anticipate the movement of the big players. whether a call back or increased lending of the currency. govt current account surplus or defecit also play a part.

Anonymous said...

"US Fed Prints More Money...."

Doesn't matter as long as the world still trust their Money.

To be a bankrupt is also OK as long as people willing to lend you money to spend.

Anonymous said...

There is no other way.

Just go along for the ride. You and I cannot influence the outcome, it will go on until one country declines to co-operate with the debtor country.

This may create conditions for war.

But as it is, everyone ( meaning the leaders, politicians, bankers, business people ) knows that the world economy is highly interconnected and will not challenge the status quo.. doing so means they will lose their jobs and their countries will have lots of problems ( Greece ).

people like you and I have no where to hide... so, no choice but to scrape enough out of the STindex and property markets, A$ deposits, MY$ etc..

Mind you, this scenario will last for a while... how long? 10 maybe 20 years!.. yeah, the can is being kicked already.. look at the new time frames for Greece!

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The Arthurian said...

Lucky,
My friend Hayward posted a short video on economic freedom here.

The opening screen shows Singapore above the U.S.A. and I thought of you immediately.

If you've not seen it, perhaps you would like to take a look.

ArtS

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