News Journal: Number 28, October 16, 2010: The Obama Depression Deepens–Federal Reserve Executes–QE II Plan–“Operation Pawnshop”–$2,500 Billion In Quantitative Easing–Money Printing–Will It Be Enough?

Posted on October 16, 2010. Filed under: Communications, Globalization, International Trade, Issues, Law, Magazines, Mass Media, News, Newspapers, Politics, Print Media, Radio, Web | Tags: Ben Bernanke, Central Banking, Fiscal Policy, Monetary Policy, Operaton Pawnshop, Printing Money, QE II, Quantitative Easing, The Federal Reserve System |

Non-conventional vs. Traditional Federal Reserve System Building

“Credit expansion is the governments foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.”

“The final outcome of the credit expansion is general impoverishment.”

~Ludwig von Mises

Peter Schiff – It’s Scary How Clueless Bernanke Is

The Gold Dollar | Llewellyn H. Rockwell, Jr.

Fed’s Next Move: What Will Boost the Economy?

Helicopter Ben Bernanke 10/15/10 Part 1

Helicopter Ben Bernanke 10/15/10 Part 2

Swonk Says Bernanke Laid Out Rationale for Fed QE: Video

Currencies, Phillips curve, inflation target, Ramsey, SchiffRadio.com

Bernanke Says Fed Stimulus Move Coming, Amount Unknown

Tyson Says Quantitative Easing ‘Only Policy Option Left’

Jim Grant on Bloomberg 10/8/10: Quantitative Easing Is Just Money Printing

Mandelbrot (Chaos Theory) Taleb (Black Swan) on markets

End the Fed | Ron Paul

The primary goal of the Federal Reserve System is price stability or the avoidance of inflation for the U.S. economy.

However, unlike other central banks, the Federal Reserve also was given several other goals by Congress:

“The goals of monetary policy are spelled out in the Federal Reserve Act, which specifies that the Board of Governors and the Federal Open Market Committee should seek “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” …”

http://www.federalreserve.gov/pf/pdf/pf_2.pdf

Since the Fed already has a zero interest rate policy or ZIRP with the Federal Funds rate target range of between 0.0% – .25% and a low inflation rate for the time being under 2%, the Federal Reserve now turns it monetary policy tools on the persistent high unemployment rates, now at 9.6% and headed once again to 10% or more.

Series Id:           LNS14000000 Seasonally Adjusted Series title:        (Seas) Unemployment Rate
Labor force status:  Unemployment rate
Type of data:        Percent or rate
Age:                 16 years and over

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

The Chairman of the Federal Reserve, Ben Bernanke, communicated in an October 15, 2010 speech in Boston what the Federal Open Market Committee (FOMC) unconventional monetary policy was targeting– maximum employment–by printing more money and purchasing Treasuries and other bonds:

“…In short, there are clearly many challenges in communicating and conducting monetary policy in a low-inflation environment, including the uncertainties associated with the use of nonconventional policy tools. Despite these challenges, the Federal Reserve remains committed to pursuing policies that promote our dual objectives of maximum employment and price stability. In particular, the FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate. …”

Translation, the Fed will be printing more money starting in November to expand the money and credit supply by purchasing Treasury securities including bills, notes and bonds in the market as well other assets such as bonds with the objective of lowering the unemployment rate.

http://nowandfutures.com/key_stats.html

The Fed will be attempting to “inflate” the economy out of the current “jobless recovery” into another economic boom.

Call it quantitative easing, credit easing or “nonconventional” monetary policy, I call it overdosing on interventionism.

Quantitative Easing–Videos

What is the size, scope and duration of the “quantitative easing” or overdosing on interventionism ?

How big will the Fed’s weekly habit be?

My guess it will start “small” with $2 to $5 billion per week and gradually increase to about $15 billion per week?

How long will the Fed persist in this habit before going cold turkey?

At least twelve to forty-eight months or until the unemployment rate is below 6% and core inflation is over 2%.

This will require another massive expansion of the Federal Reserve’s balance sheet.

How much will it take?

My guess is a 1% reduction in the U-3 official unemployment rate would take a minimum of $600 billion per year ($200,000 money or credit expansion times 3,000,000 new jobs in one year)

A 4% reduction in the unemployment rate from 10% to 5% or the creation of about 12,000,000 new jobs would require a minimum of $2,500 billion dollars over four years.

The U.S. official unemployment rate as measured by U-3 is again headed towards 10% with over 15,000,000 Americans unemployed.

The private sector needs to create between 250,000 and 300,000 jobs per month to reduce the official unemployment rate by just .1%.

Currently the private sector is creating less than 100,000 jobs per month.

The United States needs between 100,000 to 150,000 jobs to absorb new entrants into the labor market due to the population growth. There are currently over 1.1 million unemployed new entrants that have not found their first job.

Another 150,000 to 200,000 jobs is are needed to reduce the unemployment by .1%.

Unfortunately, the persistent unemployment problem is even worse.

The U-6 total unemployment rate increased from 16.7% in August to 17.1% in October 2010.

With a total civilian labor force of about 155 million, a 17.1% unemployment rate means that over 26,500,000 Americans are looking for full-time jobs.

This represents over twice the number of unemployed Americans, about 13 million, during the worse month of the Great Depression, March 1933.

Assume it takes a minimum of $200,000 increase in the money and credit supply to create one new job.

Assume it takes 250,000 new jobs per month to reduce the unemployment rate by .1% or 3,000,000 jobs per year to reduce the unemployment rate by 1.2%.

Then the Federal Reserve would need to expand the money and credit supply by about $600 billion per year.

If the objective is to reduce the unemployment rate official unemployment rate U-3 from about 10% to 5% then the Federal Reserve would need to expand the money and credit supply by about $2,500 billion over a forty-eight month period.

I fully expect both the U-3 and U-6 unemployment rates to rise by at least .1 to .2% per month for next three to six months.

This would bring the official unemployment rate or U-3 over 10% during the first quarter of 2011 and the total unemployment rate or U-6 over 18% by the start of the second quarter of 2011.

This would represent over 15 million Americans unemployed and over 28 million seeking full-time unemployment.

This in turn will mean the U.S. economy is entering a “new” recession or a “double dip recession” with declining and most likely negative growth rates in the second and third quarter of 2011 and an increased probability of deflation or a declining general price level for goods and services.

Therefore the case for an expansionary monetary policy is still strong and increasing.

With the Federal Funds rate essentially zero, the Federal Reserve will be purchasing assets such as Treasury securities and agency mortgage-backed securities starting in November and continuing for a least six months until the U.S. unemployment rates are down by at least 1% to 2% or more and growth in production or the gross national product is at least above 3% to 4%.

Assuming the Federal Reserve purchases $12 billion in assets or securities each week, the total amount of the quantitative easing will be about $2,500 billion over the next forty-eight months to bring the official unemployment rate U-3 to about 5%.

The Federal Reserve cannot count upon the central bank of Communist China, the People’s Bank of China, to appreciate the Yuan by more than 5% to 10% per year relative to the U.S. dollar to encourage U.S. exports and reduce Chinese imports to the United States.

The real problem is Federal government spending that should be drastically cut until a balanced or even surplus budget is the result.

The Bush tax rate cuts in 2001 and 2003 need to be made permanent as well.

Until such fiscal economic policies are actually implemented, the only monetary policy “bullets” that the Federal Reserve has left is quantitative easing or money printing to purchase assets by expanding their balance sheet.

The Federal Government has for the last two years run deficits exceeding 1,000 billion each year and totaling over $2,500 billion not counting interest and this is likely to continue for at least one or two years until the U.S. economy fully recovers and the unemployment rates are well below 7%.

These budgetary deficits need to be financed by the Treasury Department issuing Treasury bills, notes and bonds.

The Federal Reserve will monetize some of these Treasury debts as part of its quantitative easing operations to the extent other buyers of Treasuries cannot be found.

What is the size or quantity of the quantitative easing?

I do not expect this to be announced, but at least $2,500 billion may be needed in the next forty-eight months to avoid another recession, significantly reduce unemployment to under 6%, and increase the growth of the economy above 4%.

Will such a “nonconventional” monetary policy work?

Only if the Congress and the President drastically cut the Federal Budget so it balances, do not increase taxes, and repeal Obama care.

In other words,this “nonconventional” monetary policy strategy of asset purchases or quantitative easing is not very likely to work any time soon.

The problem with government intervention into the economy is it always requires even more government intervention to correct past mistakes.

Both fiscal and monetary policy are generating massive uncertainty and a lack of confidence by consumers and businesses results in the deferral of consumption and investment expenditures and the hiring of new employees.

Bernanke understands this for he wrote in his Ph.D. dissertation at M.I.T.:

“…increase uncertainty provides an incentive to defer investments in order to wait for new information.”

Massive increases in the size and scope of the Federal government has resulted in huge budgetary deficits and proposed tax increase during a “jobless recovery”.

These deficits must be financed and the Federal Reserve will make sure that Treasury debt in the form of bills, notes and bonds will be purchased by printing more money as needed.

The Federal Reserve “nonconventional” monetary policy of printing more money is essentially government intervention into the economy to accommodate the U.S. Government’s Department of the Treasury need in financing massive government deficits

The Federal Open Market Committee will purchase Treasuries, mostly short-term Treasury bills but some notes and bonds in exchange for Federal Reserve Notes or money.

While the Fed’s cover story may be that this is needed to reduce unemployment, the real objective is financing massive Federal government spending and deficits. This is similar to what was done from 1942 to 1951 where Treasury long-term government bond yields were fixed at very low levels to finance World War II.

In fact, the Federal Reserve will be debasing the U.S. dollar by reducing the purchasing power of the dollar.

End the Fed | Ron Paul

This is a hidden tax paid by all the American people.

The cost of exports will rise as the U.S. dollar depreciates relative to other foreign currencies.

The price of petroleum will significantly rise and Americans will be paying over $3 a gallon in 2011 and over $4 a gallon in 2012.

The increases in petroleum and gasoline prices will in turn impact food prices.

The Federal Reserve uses a core personal consumption expenditure (PCE) price index approach in measuring and setting inflation targets, which excludes food and energy. The core personal consumption is a less volatile inflation or price measure than a change in total personal consumption expenditures which includes energy and food.

However, the American people need to eat and use gasoline to power their cars and heating oil to warm their homes.

The American people do not tolerate fools, even educated fools of the ruling class, for very long when they are losing their jobs, homes, health care and retirement plans and their children and grandchildren cannot find jobs or complete their college education.

The Second American Revolution has started.

On Tuesday November 2, 2010, election day, a shot will be heard around the world that even the world’s central bankers will be able to hear, if not fully comprehend.

During which the Federal Open Market Committee or FOMC will meet to decide when and how much quantitative easing or credit easing is needed to create jobs, avoid another recession and finance the U.S. government massive deficits.

The U.S. economy is in a liquidity trap where conventional monetary policy is ineffective and “nonconventional” monetary policy cannot work effectively until the appropriate fiscal policies are a reality and working.

The U.S. economy is slowly drowning in a flood of government intervention that has simply failed in generating jobs and high rates of economic growth and wealth creation.

The American people are paying the price for our ruling class’s continuing failures.

After quantitative easing or “operation pawn shop” fails and the value of the U.S. dollars is further debased, a period of inflation will follow and the Obama Depression will become an inflationary depression–a black swan.

“To be told that the Fed did what it could isn’t much comfort to a family who loses its house to foreclosure, a businessman forced into bankruptcy, a sixty-five-year-old whose retirement fund is devastated, a would-be borrower turned away by a beleaguered bank, a new college grad who can’t find a job, any job. For those victims and all the others, a final verdict on the Fed’s response to the Great Panic must await the health of the U.S. economy in 2010 and 2011 and beyond.”

~David Wessle, In Fed We Trust, Ben Bernanke’s War On the Great Panic, page 266.

“It is indeed one of the principal drawbacks of every kind of interventionism that it is so difficult to reverse the process.”

“Economics does not say that isolated government interference with the prices of only one commodity or a few commodities is unfair, bad, or unfeasible. It says that such interference produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference.”

~Ludwig von Mises

Roubini: U.S. Running Out of Options to Stimulate Economy

Roubini On Double Dip

Nassim Nicholas Taleb – What is a “Black Swan?”

Background Articles and Videos

Peter Schiff “We Should Save ‘Person Of The Year’ For People Who Do Good!

Ron Paul: Allow The Free Market, Not The Fed, To Set Interest Rates

Maynard Keynes Inventor of Quantitative Easing

The Financial Crisis and the Death of Macroeconomics | Joseph T. Salerno

Government’s Response to the Crisis: A Fantastic Success, for Government | Robert Higgs

Why You’ve Never Heard of the Great Depression of 1920 | Thomas E. Woods, Jr.

Keynesian Predictions vs. American History | Thomas E. Woods, Jr.

Our Wise Overlords Are Just Here to Serve Us | Thomas E. Woods. Jr.

Nassim Nicholas Taleb Angry

16. The Evolution and Perfection of Monetary Policy

Crisis and Capitalism

Understanding the Financial Crisis

The Psychology of the Financial Crisis

Money, Banking and the Federal Reserve

How to Abolish the Federal Reserve

Speech

Chairman Ben S. Bernanke

At the Revisiting Monetary Policy in a Low-Inflation Environment Conference, Federal Reserve Bank of Boston, Boston, Massachusetts

October 15, 2010

Monetary Policy Objectives and Tools in a Low-Inflation Environment”…

“…However, possible costs must be weighed against the potential benefits of nonconventional policies. One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public. These factors have dictated that the FOMC proceed with some caution in deciding whether to engage in further purchases of longer-term securities.

Another concern associated with additional securities purchases is that substantial further expansion of the balance sheet could reduce public confidence in the Fed’s ability to execute a smooth exit from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations, to a level above the Committee’s inflation objective. To address such concerns and to ensure that it can withdraw monetary accommodation smoothly at the appropriate time, the Federal Reserve has developed an array of new tools.⁷ With these tools in hand, I am confident that the FOMC will be able to tighten monetary conditions when warranted, even if the balance sheet remains considerably larger than normal at that time.

Central bank communication provides additional means of increasing the degree of policy accommodation when short-term nominal interest rates are near zero. For example, FOMC postmeeting statements have included forward policy guidance since December 2008, and the most recent statements have reflected the FOMC’s anticipation that exceptionally low levels of the federal funds rate are likely to be warranted “for an extended period,” contingent on economic conditions. A step the Committee could consider, if conditions called for it, would be to modify the language of the statement in some way that indicates that the Committee expects to keep the target for the federal funds rate low for longer than markets expect. Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations. A potential drawback of using the FOMC’s statement in this way is that, at least without a more comprehensive framework in place, it may be difficult to convey the Committee’s policy intentions with sufficient precision and conditionality. The Committee will continue to actively review its communications strategy with the goal of providing as much clarity as possible about its outlook, policy objectives, and policy strategies.

Conclusion
In short, there are clearly many challenges in communicating and conducting monetary policy in a low-inflation environment, including the uncertainties associated with the use of nonconventional policy tools. Despite these challenges, the Federal Reserve remains committed to pursuing policies that promote our dual objectives of maximum employment and price stability. In particular, the FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate. Of course, in considering possible further actions, the FOMC will take account of the potential costs and risks of nonconventional policies, and, as always, the Committee’s actions are contingent on incoming information about the economic outlook and financial conditions. ..”

Bernanke sees case for more Federal Reserve easing

“… Federal Reserve Chairman Ben Bernanke on Friday offered his most explicit signal yet that the U.S. central bank was set to ease monetary policy further, but provided no details on how aggressively it might act.

Bernanke warned a prolonged period of high unemployment could choke off the U.S. recovery and that the low level of inflation presented an uncomfortable risk of deflation, a dangerous downward slide in prices.

“There would appear — all else being equal — to be a case for further action,” Bernanke said at a conference sponsored by the Boston Federal Reserve Bank.

With overnight interest rates already close to zero, many economists expect the Fed to launch a fresh round of bond purchases, perhaps on the order of $500 billion, to push borrowing costs lower at its next policy meeting on November 2-3.

Prices for longer-dated U.S. government debt fell after Bernanke’s remarks as investors bet the Fed would be successful in generating more inflation. Stocks were mixed while the dollar briefly hit an eight-month low against the euro.

Bernanke said the central bank could bolster its economy and inflation-lifting efforts by indicating a willingness to hold interest rates low for longer than currently expected.

The Fed pushed overnight rates to zero in December 2008 and then bought $1.7 trillion in U.S. government and mortgage-linked bonds to offer more support for the economy.

Officials have said further asset buying, or quantitative easing, would be the course they would most likely pursue to spur a stronger recovery.

Bernanke indicated Fed policymakers were still weighing how aggressive they should be, leaving markets to guess as to the details of any operation. …”

http://finance.yahoo.com/news/Bernanke-says-sees-case-for-rb-4235164349.html?x=0&.v=3

Personal consumption expenditures price index

“…he PCE price index (PCEPI) (or PCE deflator, PCE price deflator, Implicit Price Deflator for Personal Consumption Expenditures (IPD for PCE) (by the BEA), Chain-type Price Index for Personal Consumption Expenditures (CTPIPCE) (by the FOMC )) is a United States-wide indicator of the average increase in prices for all domestic personal consumption. It is indexed to a base of 100 in 2005. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of the Gross Domestic Product in the BEA’s National Income and Product Accounts, personal consumption expenditures.

The less volatile measure of the PCE price index is the core PCE price index which excludes the more volatile and seasonal food and energy prices.

In comparison to the headline United States Consumer Price Index, which uses one set of expenditure weights for several years, this index uses a Fisher Price Index, which uses expenditure data from both the current period and the preceding period. Also, the PCEPI uses a chained index which compares one quarter’s price to the last quarter’s instead of choosing a fixed base. This price index method assumes that the consumer has made allowances for changes in relative prices. That is to say, they have substituted from goods whose prices are rising to goods whose prices are stable or falling.

The PCE rises about one-third percent less than the CPI, a trend that dates back to 1992. This may be due to the failure of CPI to take into account substitution. Alternatively, an unpublished report on this difference by the BLS suggests that most of it is from different ways of calculating hospital expenses and airfares.^{[1] …”}

http://en.wikipedia.org/wiki/Personal_consumption_expenditures_price_index

Black Swan Theory

“…The Black Swan Theory or “Theory of Black Swan Events” was developed by Nassim Nicholas Taleb to explain: 1) the disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology, 2) the non-computability of the probability of the consequential rare events using scientific methods (owing to their very nature of small probabilities) and 3) the psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs. Unlike the earlier philosophical “black swan problem”, the “Black Swan Theory” (capitalized) refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences.

Black Swan Events were characterized by Nassim Nicholas Taleb in his 2007 book (revised and completed in 2010), The Black Swan. Taleb regards almost all major scientific discoveries, historical events, and artistic accomplishments as “black swans” — undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War I, and the September 11 attacks as examples of Black Swan Events.

The term black swan was a Latin expression — its oldest known reference comes from the poet Juvenal’s characterization of something being “rara avis in terris nigroque simillima cygno” (6.165).^[1] In English, this Latin phrase means “a rare bird in the lands, and very like a black swan.” When the phrase was coined, the black swan was presumed not to exist. The importance of the simile lies in its analogy to the fragility of any system of thought. A set of conclusions is potentially undone once any of its fundamental postulates is disproven. In this case, the observation of a single black swan would be the undoing of the phrase’s underlying logic, as well as any reasoning that followed from that underlying logic.

Juvenal’s phrase was a common expression in 16th century London as a statement of impossibility. The London expression derives from the Old World presumption that all swans must be white because all historical records of swans reported that they had white feathers.^[2] In that context, a black swan was impossible or at least nonexistent. After a Dutch expedition led by explorer Willem de Vlamingh on the Swan River in 1697, discovered black swans in Western Australia^[3], the term metamorphosed to connote that a perceived impossibility might later be disproven. Taleb notes that in the 19th century John Stuart Mill used the black swan logical fallacy as a new term to identify falsification.

Specifically, Taleb asserts^[4] in the New York Times:

What we call here a Black Swan (and capitalize it) is an event with the following three attributes.

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explains almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.

Coping with black swan events

The main idea in Taleb’s book is not to attempt to predict Black Swan Events, but to build robustness against negative ones that occur and being able to exploit positive ones. Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan Events and are exposed to losses beyond that predicted by their defective models.

Taleb states that a Black Swan Event depends on the observer—using a simple example, what may be a Black Swan surprise for a turkey is not a Black Swan surprise for its butcher—hence the objective should be to “avoid being the turkey” by identifying areas of vulnerability in order to “turn the Black Swans white”.

Identifying a black swan event

Based on the author’s criteria:

1. The event is a surprise (to the observer).
2. The event has a major impact.
3. After the fact, the event is rationalized by hindsight, as if it had been expected.

Taleb’s ten principles for a black swan robust world

Taleb enumerates ten principles for building systems that are robust to Black Swan Events:^[10]

1. What is fragile should break early while it is still small. Nothing should ever become Too Big to Fail.
2. No socialisation of losses and privatisation of gains.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.
5. Counter-balance complexity with simplicity.
6. Do not give children sticks of dynamite, even if they come with a warning.
7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.
8. Do not give an addict more drugs if he has withdrawal pains.
9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.
10. Make an omelette with the broken eggs.

In addition to these ten principles, Taleb also recommends employing both physical and functional redundancy in the design of systems. These two steps can be found in the principles of resilience architecting. (Reference: Jackson, S. Architecting Resilient Systems: John Wiley & Sons. Hoboken, NJ: 2010.)

http://en.wikipedia.org/wiki/Black_swan_theory

Federal Reserve System: Purposes and Functions

http://www.federalreserve.gov/pf/pdf/pf_complete.pdf

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