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Thursday, August 27, 2015

Rate Hikes and QE...Simultaneously?!? Actually, Yes!!!

We are in such uncharted waters that as the Fed readies to raise rates, the plan is that QE will continue alongside interest rate hikes. No, seriously. At the minimum, the Fed will continue to repurchase maturing bonds to maintain its $4.5 trillion balance sheet...aka buying bonds or QE.  So, if they can continue repurchasing while hiking rates, there really is no reason they couldn't increase their holdings (embark on QE4 or 5 or whatever it is now) simultaneously..."if economic conditions warranted"?!?

In the days before '08, to raise rates, the Fed would sell bills and bonds to banks, paid for from banks excess reserves, tightening available money for lending from excess reserves.  This would force overnight interbank lending rates higher and that would begin effectively filtering its way through market rates.  However, that was in the days when excess reserves held by banks were like $25 a little open market operation by the Fed to remove a couple billion here or there was all it took.  Now, banks hold something like $2.5 trillion in excess reserves. So, for the Fed to tighten overnight rates, the Fed would need to remove something like $2+ trillion to make any impact. Not gonna happen and Fed has admitted this.

That's why the "plan*" (* this has never been done and is totally theoretical) is to increase IOER's (interest on the excess reserves banks hold) so banks are de-incentivized to lend as they can get higher returns parking money at the Fed?!?

All sounds pretty non-sensical until you remember the Fed works for the banks...well, then it all makes perfect sense to pay banks billions more not to lend money while simultaneously increasing interest payments for those who do take loans? There are also all kinds of concerns what happens with money market or other "non-bank" funds that aren't eligible for IOER and what happens in times of high systemic stress.

Still, bottom line is nothing can be ruled out and the fact the Fed will continue to buy bonds while simultaneously raising rates...well, it's just a key-stroke away from increasing it's balance sheet and raising rates...a particularly important detail when some of the largest holders of US debt, China and Russia, are making it clear they are going to hold significantly less. 

Further details on Treasuries, Gold, and the dollar...


  1. Thanks Chris! Always enjoy seeing attention brought to IOER and the normalization procedures this time around. It really is different this time. Could also be why there is so much hesitation to come off the bottom.

    A sign of things to come. Political pressure isn't really there yet, but will mount as the public recognizes what IOER is and also that approximately 40% is going to foreign banks.

    Highly recommend that article from the Atlanta Fed.

    Interesting times.

  2. They will never increase rates. Actually, they will lower them. They will even go negative -- ECB style with targeted QE.

    QE style strategies failed in creating inflation and real economic growth for the people. They never invented to do that. Just keep the asset prices rolling. Nominal GDP will continue to drop till wages rise or debts fall relative to wages -- the opposite is happening now.

  3. Looks like China is liquidating even more treasuries now. QE just to maintain interest rates in the treasury market? No need to raise rates, the market can handle that all by itself!

    Oh, raising rates really means paying the banks more for IOER. That makes more sense. Lol

  4. The Fed may increase rates 25bps, if they believe that this is necessary to maintain the narrative that the US is approaching take off speed.

    This weeks narrative is that everything is China's fault and before that Europe and so on. Perhaps the Fed will try QE4 if they feel they can spin a cover story that most will believe. At this point, the Fed will do whatever it takes to get the average American to continue to believe and have confidence in the dollar. The Fed will do and say whatever it takes to get the world to continue to believe in the dollar.

    Nothing more and nothing less. The longer the belief continues, the more wealth the owners of the banks can control and the more assets they can own.

    Ultimately, confidence will falter (2008) and weaken and eventually the average American will lose confidence in the dollar. At this point, the economists will state that take off speed is here. They will be wrong. People will just be spending their dollars quickly to acquire real things.

    What next? Generally, inflation in the prices of real things. If allowed to continue. We get hyperinflation. The prices of financial assets will start collapsing, central banks may try to prevent this. Thus accelerating the hyperinflation. Eventually, interest rates are forced to jump into double figures. At this point financial asset prices are crushed.

    Now, the people are ready for a change. The government will step in and condemn the banks and impose draconian measures. Credit will no longer be extended to the average man. The average man will accept this as necessary. Money will be tight, times will be hard, jobs will be scarce and wages will collapse. The rich will have access to credit and will still enjoy a vastly superior lifestyle.

    Under the circumstances described above, gold is usually used to restore confidence in paper / electronic currencies. Do bear in mind that this is a last resort. We are more likely to settle international trade imbalances with an exchange of intercontinental nuclear missiles than something as barbaric as gold.

    Anyway, make sure you have a months worth of necessities on hand in case there are interruptions in supply chains. Imagine everything fails and prepare accordingly.

    Then have some fun. We live in a time of great abundance, enjoy it. If we weren't so stupid to allow massive government and too big to fail banks to continue, life would be so much better. Anyway, stupid is as stupid does.

    1. It's not about owning assets but controlling. It's important because owning something invokes a tax, while controlling does not and one can still very much profit from controlling rather than owning.

    2. Is that you Peter? If so, so far you are batting zero bro.


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