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and I draw great comfort from the para: The simple fact of the matter is that in a negative carry world - or a flat yield environment for that matter - there is no role or purpose for banks because banks are forced into economically destructive practices in order to stay profitable."


Nipper, please explain how you draw great comfort from the virtual destruction of banking as we know it, do you really approve of anarchy?


Hyperinflation as per Germany before WW2?

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statements from Dallas Fed Reserve Governor Richard Fisher (who traces his roots to outback Australia ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ if you want to read a quintessential Aussie/US "rags to riches" story check out: www.dallasfed.org/news/speeches/fisher)


Interesting story but the above address did not work for me anyone interested in reading the story http://www.dallasfed.org/news/speeches/fis...12/fs120709.cfm

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continuation of earlier article - posted 2 days ago in this thread

Are there deeper problems with QE3?.


The idea that there is a deeper problem with QE3 stems from analysis of the macro results of QE1 and QE2, and suggests that there may be some less obvious and unintended consequences that flow from quantitative easing, with the prospect that quantitative easing may in fact be potentially likely to damage the US and global economic recovery. A bubble in bond markets is the most visible problem arising from QE1 and QE2. This debate is raging behind the scenes in the US markets (with the Euro zone debate following track but with its own German inspired inflation fears added to the mix). Fed Reserve governors like Richard Fisher are spearheading the concerns, which to properly understand take us directly back to the 1980s work of Milton Friedman and his analysis of the Great Depression.


Because of the import of the debate we look today at the rationale for QE3 and its critique, with the destabilizing question hovering above it all: "If QE3 doesn't work, does that mean that Fed has run out of tools to fix the ongoing problem of unsatisfactory economic growth"?


Key elements of quantitative easing


We have spoken about the mechanism used to create quantitative easing. The broad outcome of QE is the injection of liquidity into the system ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ designed to boost money supply (known by economists as "M1") and to boost the velocity at which money circulates through the system (known to economists as "M2"). In our LPAC sessions we have started to use the simple example of a $20 note spent by an LPAC student on buying coffee for the class. That $20 is paid to the barista, who may pay it to the coffee supplier, who may pay it to the courier that delivers the coffee to the barista, and the courier may on-pay that $20 to the service station where he buys fuel for his delivery trucks. In this example, that $20 circulates through the system and the aggregate value of the goods and services it pays for is $80, which shows the multiplicative effect of money circulating. M1 measures money in circulation; and M2 measures how quickly that circulation occurs.


We also look at the effect of the GFC (specifically the collapse in the CDS market) on M1 and M2. In the CDS value chain there were many, many players feeding off the trough of the credit swap market: bankers, brokers, structured finance houses, lenders, salespeople, etc. The removal of $1 from the system through a $1 loss on a credit default swap product, multiplied through all of these different players, produced a loss of M1 far in excess of the original $1 lost.


Apart from the need to restore confidence in the banking system and prevent bank "runs" which prompted global central bank action at the peak of the GFC, it was the real loss of liquidity (and velocity of money) in the system that triggered the multitude of additional liquidity injection measures. In fact, the responses to the GFC can be seen on at least 3 levels:

  1. Financial system bail out measures like massively reduced interest rates and the US "TARP" program were designed to inject liquidity into the banking system, teetering (but not insolvent) because of "temporary" declines in the value of assets held as security by the banksÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦the TARP program was therefore part of an effort to re-liquify the banking system and money markets to maintain the integrity of the system while asset (and security) values recovered;
  2. Bank bail outs were also designed to forestall economic contraction (and hence to support employment) that inevitably would follow the massive loss of money supply and the sharp fall in the velocity of money (see the POW camp example in the next paragraph to understand this point);
  3. The financial system bail outs were initially ineffective to stem the market panic, and culminated in the move by the UK Chancellor to mandatorily part-privatise UK banks (a move which was rapidly followed around the globe) ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ adding further to sovereign debt burdens (although experience with previous bank privatizations (eg the Swedish bail out in the early 2000s) showed that governments typically profit when they subsequently sell down their bank shares ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ which has been the experience after the GFC).
What prompted QE in the first place?


Most readers will be familiar with this one. After the initial post GFC liquidity surge had begun to wane (with the potential for the 3 problems listed above to re emerge), to further stimulate economic growth, interest rates in most developed economies continued to fall as their central banks tried to engineer the twin outcomes of:

  • Cheapening borrowing costs to lighten the burden on existing borrowers, and to stimulate new borrowing to help drive economic expansion;
  • Avoiding cash hoarding by reducing the appeal of deposits and signaling to investors that they should look to take more risk.
Essentially, these combined measures were a macro-attempt to prevent the bogey of the Great Depression ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ known as "deflation."


A simple way to understand deflation


And here's a really simple way to understand the link between money supply and deflation (courtesy of Peter Bernstein's great book on the history of gold: The Power of Gold).

  • In POW camps in WW2, cigarettes were the commonly used "currency," and these were introduced into the POW monetary system when they came in Red Cross food parcels;
  • Cigarettes were traded for food, soap, and other items;
  • Obviously over time, the fresh supply of cigarettes declined, as they were smoked and consumed;
  • As the cigarette supply declined, so did the amount of "currency" in the system;
  • This had the result that ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ because money supply was declining, so too did the price of the food, soap etc that were purchased with that money;
  • If that sounds counter-intuitive, perhaps think of it like this ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ if there are 10 cigarettes in the system the maximum possible price for an item will be 10 cigarettes; but if there is only 1 cigarette in the system, the maximum possible price for that item will beÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦1 cigarette.
That's why deflation is linked to declines in the money supply.


What is the deflationary problem arising from QE?


Deflation also arises when investors are scared to take risk. If transactions are deferred because of risk aversion, money supply declines, and profits/job creation falls too. So central banks use interest rates as a way to stimulate (or dampen) economic activity. As we saw above, when low interest rates were perceived not to be sufficient, the US Fed Reserve embarked on QE ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ which it implemented by paying above par prices for bonds ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ effectively triggering negative interest rates.


The problem with this is that it distorts the bond market and its pricing mechanism, because investors can manufacture artificial gains on bonds, when they buy them for par and on-sell them (to the Fed or other investors anticipating Fed purchases) for a profit. It's no wonder that massive amounts of money are sitting in government bonds around the world, (the US isn't the only country practicing QE ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ its alive and well across Europe, even in strong economies like Switzerland).


So what we are seeing in a number of markets is an unwillingness of investors to sell bonds unless they are paid a premium over par. This spills over into other asset classes, which become less attractive to investors because they lack the embedded capital protection available to bondholders who benefit from the central bank activity in the bond market.


Bond bubbles and market distortions


So if QE can be seen to distort markets (eg by triggering the bond bubble and distracting investors from riskier asset classes), the problems aren't just immediate ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ they spill over to downstream years ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ as markets have to absorb the impact of the unwinding of the bond bubble at some future point in time. Unless this is orderly (and when has a bubble bursting been orderly?), the volatility arising will precipitate some form of financial crisis. How big and enduring this crisis may be is open to debate, but the near term distortions from QE3 and their downstream impact are matters for real concern.


Maybe that's why QE3 isn't here with us yet ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ and why we may wish for it not to come, at all. Signalling to investors that low risk bonds are a better investment than riskier equities pulls money out of the risk markets, and like the deflationary impact of a declining money supply in WW2 POW camps, this complex interplay arising from QE3 may actually be capable of stimulating deflation ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ the very opposite of the result intended.

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Bloomberg article tonight, self explanatory:




European stocks fell for a second day as investors await tomorrowÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s European Central Bank meeting, while reports from the U.S. to China and Australia indicate global growth is slowing. U.S. index futures and Asian stocks declined. The Stoxx Europe 600 Index lost 0.3 percent to 264.65 at 8:59 a.m. in London. Contracts on the Standard & PoorÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s 500 Index dropped 0.5 percent and the benchmark MSCI Asia Pacific Index (MXAP) lost 1.3 percent.


ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“We are coming into the eye of the storm with regards to event risk, and today will really be the last day traders can tweak portfolios ahead of the key ECB meeting and US payrolls on Friday,ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ said Chris Weston, an institutional dealer at IG Markets in Melbourne, in a note to clients. ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“After last nightÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s adjustment to expectations to the upcoming ECB meeting, we feel the market has a more neutral approach to what is likely to be delivered.ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ÂÂ


European stocks retreated the most in two weeks yesterday as a report showed U.S. manufacturing unexpectedly contracted in August. The equity benchmark has still surged 14 percent from its lowest level this year on June 4 amid speculation that central banks will do more to support growth.


To contact the reporter on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net



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Bloomberg overnight: ECB decision known here about 8.30pm Sydney time.


European Central Bank President Mario Draghi's task today is straight-forward: produce a plan to save the euro.


Draghi pledged more than a month ago to do what's needed to preserve the single currency; now he's under pressure to follow through with details of a bond-purchase plan to lower borrowing costs in Spain and Italy and prevent a breakup of Europe's monetary union. Expectations have built to such an extent that Draghi risks losing credibility unless he delivers at a press conference after today's Governing Council meeting in Frankfurt, economists and investors said.


"Draghi has put his credibility squarely on the line," said Julian Callow, chief European economist at Barclays Capital in London. "He has made it his business to save the euro, so he is going to be called on that."


Draghi told the European Parliament this week that the ECB needs to intervene in bond markets to wrest back control of interest rates in a fragmented euro-area economy and save the currency, according to a recording of a closed-door session obtained by Bloomberg News. His blueprint, sent to council members just two days ago and opposed by Germany's Bundesbank, proposes unlimited buying of government debt with maturities of up to about three years, two central bank officials said yesterday on condition of anonymity.


Rate Cut?


Draghi will hold a press conference at 2:30 p.m., 45 minutes after the ECB announces its interest-rate decision.

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From the Wall St Journal, overnight:





The Bank of Japan should take more dramatic steps such as buying foreign bonds and raising its inflation goal to 2% to help pull the economy out of its long-lasting deflationary state, consumer affairs minister Jin Matsubara said Thursday.


"What the BOJ is doing right now is not enough to beat deflation. The BOJ should employ every possible measure to change people's minds about the state of the economy," Mr. Matsubara said in an interview.


Discussing central bank policy isn't part of Mr. Matsubara's cabinet portfolio, but his remarks are another sign of the intensifying political pressure on the BOJ ...

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