Quantitative Easing?

Ron Paul Questions Bernanke at House Financial Services Committee This Morning
http://news.goldseek.com/RonPaul/1227028538.php

This exchange between Ron Paul and Bumbling Ben Bernanke is priceless. Bumbling Ben claims that the US Dollar is NOT dead, claiming that recent appreciation in the value of the busted buck proves that it is a safe haven. If I had not just heard it with my own ears...Bernanke is one smug POS. He is also full of sh*t.

Gold Investors "Will Buy the Dips" as Fed Moves to Quantitative Easing; Middle Eastern Buying & Mining Accelerates
"Looking forward, we think the need for safe-haven investments will grow," says the latest analysis from Scotia Mocatta, the London-based precious metals dealer, "while at the same time the level of distressed selling may ease."

[That] is likely to see Gold Prices trend higher again. If fresh weakness is seen, then expect dips to attract even more buying."

"Gold is caught between being a safe haven investment and being weighed down by the US Dollar," reckons Zhu Lv, head of research at the Shanghai Tonglian Futures Company, speaking today to Bloomberg News.

"Trade has been lackluster of late because of this lack of direction."

Meantime in Washington, "the two top salesmen for the $700 billion financial bailout are in for a grilling by Capitol Hill lawmakers" today, reports the AP, "just one week after the administration officially ditched the original strategy behind the rescue."

US Treasury secretary and Fed chairman Ben Bernanke have already lent and gifted $3.45 trillion in emergency aid to the banking on some estimates, "and that's before a likely handout for the auto industry," notes Tech Ticker.

"The Fed's focus has now shifted from easing the interest rate to increasing the quantity of money," agrees John Kemp at Reuters, noting how total sum of Fed credit extended to private banks jumped in the week-ending Nov. 12th to $2.2 trillion from the previous weekly average of $0.9trn – a clear policy of "quantitative easing".
http://news.goldseek.com/BullionVault/1227015893.php

Quantitative easing has begun
Quietly, without fanfare, the Federal Reserve has turned on the printing presses. The central bank is flooding the market with enough excess liquidity to refloat the banking system — and hopes to generate an upturn in both economic activity and inflation in the next 12-18 months to prevent the economy falling into a prolonged slump.

Since the banking crisis intensified in September, the Fed has been rapidly expanding the credit side of its balance sheet, providing an ever-increasing array of facilities to support the financial system (repos, term auction credit, primary discount credit, broker-dealer credit, commercial paper funding, money market mutual fund liquidity and term securities lending).

Total credit extended by the central bank has surged from an average of $885 billion in the week ending August 27 to $2.198 trillion in the week ending November 12. Credit extensions surged another $142 billion last week alone — mostly in form of increased term auction credit (+$114 billion) and other miscellaneous credits the central bank does not break out (+$41 billion).

Until fairly recently, the expansion on the asset side of the Fed’s balance sheet was matched by increased non-bank liabilities, mostly in the form of higher balances deposited by the US Treasury into its regular and special supplementary financing accounts at the central bank.

Since the Treasury was borrowing this money in the open market by issuing cash management bills, the impact of the Fed’s balance sheet expansion was being fully sterilized.

The Fed was providing liquidity in the narrow sense (helping commercial banks cover short-term funding problems arising from illiquid assets on their books) but not in the broader sense of inflating the money supply (money in circulation plus vault cash plus reserve balances).

But in the last three weeks, something very significant has happened. The non-bank part of the Fed’s liabilities has stopped expanding: combined Treasury deposits with the Fed plus cash in circulation has actually fallen from $1.517 trillion in the week ending Oct 29 to $1.467 trillion in the week ending Nov 12.

Instead, the Fed’s increased lending to the financial system over the last two weeks (+$325 billion) has been matched by an increase in the volume of deposits the commercial banks are hold with the Fed (+$331 billion).

In other words, the Fed is now lending to the banks, which are now lending the funds back to the central bank. The Fed is no longer supplying just narrow liquidity needed to enable the market to function. It is now supplying excess funds (more than the banks need) which are being recycled back into the central bank.

The volume of reserve balances with the Fed, which had jumped from $8 billion at end Aug to $280 billion by mid Oct, has now surged again to a staggering $592 billion in the week ending Nov 12.The Fed is now very deliberately supplying more liquidity than the banks need (or are willing to lend on to other banks, corporations or homeowners). By paying a low but positive interest rate on these reserve balances, it can ensure that the federal funds rate remains above zero (currently about 35 basis points) even as it floods the banking system with excess funds.

There are several startling implications:

(1) The central bank has successfully driven a wedge between interest rate policy (the target fed funds rate) and the quantity of money created (cash plus reserve balances). This was the explicit aim, foreshadowed a recent paper by the Federal Reserve Bank of New York (http://www.ny.frb.org/research/EPR/08v1 4n2/0809keis.pdf). The Fed is now free to expand bank reserves almost without limit while maintaining the fed funds target (at least very loosely).

(2) The Fed’s focus has now shifted from easing the interest rate to increasing the quantity of money, and the aim of supplying funds is no longer to ease concerns about narrow liquidity but to increase the overall money supply, thereby easing concern about the stability of the banks, while hoping to engineer an eventual upturn in lending, activity and (whisper it quietly) inflation.

This is precisely the radical strategy adopted by the Bank of Japan in the late 1990s and early part of the current decade, when it was described as “quantitative easing”. Fed Chairman Ben Bernanke, a keen student of liquidity traps during the Great Depression and Japan’s decade long banking and economic slump, threatened some time ago that the Fed could always increase the quantity of money by manipulating the size and composition of its balance sheet.
http://blogs.reuters.com/great-debate/2008/11/14/quantitative-easing-has-begun/

Can Central Bankers Prevent the Great Depression?
Amid the worst financial crisis and market meltdowns since the 1930’s, the world’s top-20 central bankers and finance ministers are busy at work, inflating the world’s money supply, slashing lending rates, and crafting stimulus packages, in order to prevent a normal recession from morphing into a Great Depression. The ECB has cut interest rates by 100-basis points to 3.25% since early October, and is telegraphing another 50 basis point cut at the next policy meeting in December.

Last week, the Bank of England slashed its base rate a whopping 150-basis points to 3%, its lowest in 53-years, and signaling more easing ahead. With new construction in China collapsing to its worst level in a decade, Beijing pledged to spend $600-billion over the next two-years, for new housing, road and rail infrastructure, agricultural subsidies, health care and social welfare. The stimulus package equals 16% of China’s total economic output.

But the dreaded “D” words – “Deflation and Depression,” are whispered quietly by the “Group of 20” central bankers, behind closed doors. Traditional monetary tools such as lowering interest rates are not working, because banks are hoarding cash and not passing along the lower costs. There is no light at the end of the tunnel until home prices finally stop falling, and banks can stop writing-off big losses.

“What this crisis reveals is a broken financial system like no other in my lifetime,” said former Fed chief Paul Volcker on Nov 17th. “Normal monetary policy is not able to get money flowing. The trouble is that, even with all this government protection, the market is not moving again. I don’t think anybody thinks we’re going to get through this recession in a hurry,” he warned.

The sub-prime crisis has morphed into a diabolical monster, spreading its tentacles across the globe. Bank credit remains tight in the United States and Europe, even for top-notch investment-grade companies, who are confronted with borrowing costs that are indicative of junk bonds. And the unregulated $55 trillion credit default swap market is a nuclear time-bomb, which can explode at a moment’s notice.
http://news.goldseek.com/GoldSeek/1227038579.php

Fed officials see economic gloom, policy bind
Financial markets fully price a one-quarter percentage point cut to the benchmark federal funds rate at the final FOMC meeting for 2008, to 0.75 percent, and assess a strong chance the rate will be slashed all the way to 0.5 percent.

The funds rate has already been cut from 5.25 percent since September 2007 in an attempt to shore up the sagging economy and jump-start credit market activity.

However, Plosser told reporters that technical problems confront the Fed in potentially pushing the rate any lower and he is "comfortable" with rates as they stand.

Cutting the rate below 1 percent creates problems for investors and mutual funds in short-term money markets -- "technical ramifications" that become more complex the closer the rate gets to zero.

"There are a lot of questions we're going to have to grapple with going forward," Plosser said.

"You have to think about what this means for policy, market functioning, how we manage reserves."

Stern said with the federal funds rate already at 1 percent, the U.S. central bank would be pushed into a regime of "quantitative easing," or flooding markets with enough liquidity to keep the effective funds rate well below the official target rate.

Many analysts concede that quantitative easing is well under way given a massive increase in the Fed's balance sheet over the past several weeks.

Plosser and Stern both stressed the temporary nature of the Fed's efforts to get credit markets moving, and the need to reverse those moves when conditions allow.
The Fed must be ready to shrink its balance sheet, but that process "might not be easy," Plosser said.

Similarly, Stern said "it will be difficult to unwind" all of the new programs and lending facilities the Fed has put in place since the credit crisis erupted in August 2007, whipped up by the collapse of the U.S. market for subprime mortgages.
http://www.guardian.co.uk/business/feedarticle/8021116

Quantitative easing then, is a fancy way of saying the Fed has a "magic" way of increasing the money supply and forcing money into the system without further cuts to the Federal Funds Rate. Inflation in the "price" of things may be dropping, and the "fear of deflation" may be running rampant, but the monetary base [the supply of money] is increasing at an alarming rate. This current, and behind the scenes, increasing supply of money will eventually lead to a new round of price increases that will make the just concluded 2005-2008 period of price inflation look like a walk in the park. Never forget, rising prices are a symptom of an increasing [inflating] supply of money. The savvy investor is accumulating tangible assets like Gold and Silver during times like the present. The Fed's present tact is certain to, in time, lead to the destruction of the US Dollar.

Under this developing scenario, Gold could very well be a frustrating asset to own, let alone trade, over the next 12 to 18 months as this "new money" is pushed into the system. However frustrating, it offers an excellent opportunity, and a second chance, to accumulate this Precious Metal at sale prices relative to it's potential two years down the road. It's no secret what the Fed is up to today. They're buying time today, and preparing for financial Armageddon in the months ahead. For Gold Bugs, it's time to buy protection.