Are More Fed Asset Purchases On Deck?

A: Hard to believe isn't it? With Treasury yields suggesting another bump in our road and rates already as low as they can go, the only real stimulus the Fed can provide is renewing liquidity programs and restarting the great debt monetization experiment. I certainly think that the fed at some point will be forced into buying treasury securities if/when buyers of our gov't debt deem yields way too low; especially at the longer end where the fed has less control. But that concern is likely a year or two away. Today, its all a question of the whether or not the so-called recovery can hold itself together. You know, that recovery that was part physics (naturally rebounding from unsustainable gloom) and part stimulus - not the strongest foundation for a sustained healthy recovery!

Ambrose Evans-Pritchard discusses how "Ben Bernanke needs fresh monetary blitz as US recovery falters" at The Telegraph:

Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral.

Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. Rob Carnell, global strategist at ING, said the Obama fiscal boost peaked in the first few months of this year. It will swing from a net stimulus of 2pc of GDP in 2010 to a net withdrawal of 2pc in 2011. The Fed's statement this week shows growing doubts about the health of the recovery. Growth is no longer "strengthening": it is "proceeding".

Deflation has been the theme since 2007; especially in the credit markets where we saw the destruction of trillions of dollars of wealth in the shadow banking system - almost crippling our entire banking system at the height of fear in early 2009. Since then markets went on a 14 month thrill ride all in The Search For Yield, as a fed engineered dollar carry trade was put in place to recapitalize that crippled banking system. It now seems the cracks in the dam are starting to show in various places!

With the M1 Multiplier still strongly below 1 and banks continuing to hoard more than $1Trln in Excess Reserves, its painfully clear that banks continue to choose NOT TO LEND! And this to me is probably the right call although politically the wrong one. Do we really want banks to aggressively lend to small business and consumers in a deflationary, high unemployment environment? Where would that put us in five years time? Our fractional reserve system of banking and multiplying money via credit creation is not working the way it was designed to work; which is a healthy reaction given the circumstances.

No, it seems that we are simply entering a new phase of the crisis. A phase that sees sovereign defaults, more debt monetization, more fiscal measures, more state and local fiscal problems that likely will lead to severe budget cuts, all at a time when bad/mismarked assets still loom on and off banks balance sheets. And who out there has dissected to what extent the Fed itself has compromised its balance sheet through all those asset purchases to what amounted to nothing more than a transfer of shit from banks to public balance sheets?


So many unanswered questions. The carry trade train ride was fun while it lasted and real in its ability to alter many minds out there - to instill hope and confidence that everything will be just fine. 10YR Treasury yields are on a downward trajectory and passing levels last seen in April 2009 - except going in the other direction. What is this telling us? I see Krugman already is discussing "The Third Depression":

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

More spending? Really?

The tug of war between politics and banking is getting intense. Are we ready to put in place austerity measures to end uncontrollable spending programs? Already The Senate denied another extension of unemployment benefits, "suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago". When do the mass state/city layoffs begin after years of gov't hiring? There are no free lunches and the piper will have to get paid. Therefore, I have little doubt in my mind that we have seen the end to Fed tricks as the next phases of the Great Recession ultimately reveal itself. The questions will be, in what form and what is the price we pay later on?