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Thread: 'We've Voted - What's Next for the Economy ?' - Quantitative Easing 2

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    Default 'We've Voted - What's Next for the Economy ?' - Quantitative Easing 2

    With the two chambers of Congress split between Democrats and Republicans, the conventional wisdom likely to be repeated over the next few weeks is that political gridlock is good for the economy. While often true, that is not the case today.

    Such thinking is based on the view that political gridlock inhibits or paralyzes economically unproductive government actions. With government out of the way, it follows that the private sector can allocate capital to the most productive uses.

    But this view is most applicable to a private sector that is in good shape - businesses and households with robust balance sheets, positive cash flow and access to credit. In such a world, the path of least resistance translates into higher economic growth and jobs.

    Today, many large companies and rich households are in a good position to move forward. They have the means to spend and hire. Yet they lack the willingness to do either, as illustrated by massive cash holdings and widespread efforts to reduce risk in balance sheets and investment portfolios.

    Many of these companies and households explain the divergence between their will and their wallet by pointing to regulatory and tax uncertainty, the absence of a clear macroeconomic vision, and the notion that the Obama administration is "anti-business." They have a point in complaining about what economists call unhelpful "regime uncertainty." Moreover, many believe that political gridlock is preferable to what they perceive as misguided government activism of the past two years. Yet this ignores a glaring reality.

    For too many segments of our society, the ability to spend and hire is constrained not by questions of willingness but, rather, by stubbornly high unemployment, annihilative debts and, in some cases, concerns about losing one's home. As a whole, the United States is still overcoming the legacy of years of over-leverage and misplaced confidence that consumption can be financed by borrowing rather than earnings. The resulting debt overhangs act as strong headwinds to growth and employment generation.

    This world speaks to a different characterization of private-sector activity - rather than able and willing to move forward unhindered if the government simply gets out of the way, this is a private sector that faces too many headwinds. In these circumstances, high economic growth and job creation require not only that the private sector moves forward but also that it attains critical mass, or what Larry Summers, the departing head of the National Economic Council, called "escape velocity."

    While certain sectors of the economy are in control of their destinies, the private sector as a whole is not in a position to do this. It needs help to overcome the consequences of the "great age" of leverage, debt and credit entitlement, and the related surge in structural unemployment. The urgency to do so increases in the rapidly evolving global economy, as United States sheds a bit more of its economic and political edge to other countries daily.

    Simply put, these realities make it necessary for Washington to resist two years of gridlock and policy paralysis. Democrats and Republicans must meet in the middle to implement policies to deal with debt overhangs and structural rigidities. The economy needs political courage that transcends expediency in favor of long-term solutions on issues including housing reform, medium-term budget rules, pro-growth tax reforms, investments in physical and technological infrastructure, job retraining, greater support for education and scientific research, and better nets to protect the most vulnerable segments of society.

    Success requires an element of policy experimentation as well as confidence that mid-course policy corrections will be identified and undertaken on a timely basis. And such efforts must be wrapped in an encompassing economic vision that acts as a magnet of conversion nationally, counters growing international frictions and facilitates much-needed global economic coordination."(snip)

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    Default Re: 'We've Voted - What's Next for the [US] Economy ?' - Quantitative Easing 2

    with these related comments from his partner Bill Gross ...

    (snip)""I think a 20 percent decline in the dollar is possible," Gross said, adding the pace of the currency's decline was also an important consideration for investors.

    "When a central bank prints trillions of dollars of checks, which is not necessarily what (a second round of quantitative easing) will do in terms of the amount, but if it gets into that territory—that is a debasement of the dollar in terms of the supply of dollars on a global basis," Gross told Reuters in an interview at his PIMCO headquarters.

    The Fed will probably begin a new round of monetary easing this week by announcing a plan to buy at least $500 billion of long-term securities, what investors and traders refer to as QE II, according to a Reuters poll of primary dealers.

    "QEII not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices," Gross added.

    To a certain extent, that is what the Treasury Department and Fed "in combination" want, said Gross, who runs the $252 billion Total Return Fund and oversees more than $1.1 trillion as co-chief investment officer.

    "The fundamental problem here is that our labor and developed economy labor relative to developing economy labor is so mismatched—China can do it so much more cheaply," he said.

    Many Americans believe that the Chinese government is manipulating its currency and in effect stealing away American jobs and throwing the U.S. in an ever-deepening trade deficit.

    But Gross said this is a byproduct of a globalized economy.

    "It is a globalized economy of our own doing for the past 20-30 years. We encouraged all of this, but it is coming back to haunt us. To the extent that Chinese labor, Vietnamese labor, Brazilian labor, Mexican labor, wherever it is coming from that labor is outcompeting us and holding down our economy," he said.

    Gross added: "One of the ways to get even, so to speak, or to get the balance, is to debase your currency faster than anybody else can. It's a shock because the dollar is the reserve currency. But to the extent that that is a necessary condition for rebalancing the global economy over time, then that is where we are headed."

    "Other countries and citizens are willing to work for less and willing to work harder—and we forgot the magic formula somewhere along the way," Gross said."(snip)

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    Default Re: 'We've Voted - What's Next for the [US] Economy ?' - Quantitative Easing 2

    with follow-up commentary from CNBC ...

    (snip)"The New Austerity: be careful what you wish for.

    Trading desks talking about a piece Pimco's Mohamed El-Erian wrote in the Washington Post this morning...Paul Ryan notwithstanding, it will be a tough time for austerity buffs. It's easy to argue against cap and trade. You can cast symbolic votes to get rid of healthcare reform, but trying to starve the beast by eliminating funding for different parts of it will be a grueling, exhausting slog.

    El-Erian notes: "The economy needs political courage that transcends expediency in favor of long-term solutions on issues including housing reform, medium-term budget rules, pro-growth tax reforms, investments in physical and technological infrastructure, job retraining, greater support for education and scientific research, and better nets to protect the most vulnerable segments of society."

    Does that sound like The New Austerity to you? Sounds like the New New Deal to me.

    The New Austerity makes the Fed the stimulus of last resort. Gridlock puts more pressure on the Fed to do something...it means potentially MORE QE2 if the economy continues to underperform and the Congress does nothing.

    Right now, the market is just gaming the Fed on QE2...combine that with a seasonally strong period and the fact that the markets historically rise after midterm elections, and the likely trend for stocks is sideways to up in the next couple months."(snip)

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    right on cue, the FED's anticipated announcement of another round of Quantitative Easing ... i.e printing hundreds of billions of new US dollars out of nowhere, and in turn using the FED Member ( big wall st ) Banks as a conduit for the FED to de-facto purchase existing US Treasury bonds with those freshly printed dollars ... and as a consequence devaluing the US dollar ( by 20% per Pimco's other brainchild Bill Gross ) while increasing US dollar denominated prices for all commodities ( by at least 20% ) ... is expected later today.

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    Default Re: 'We've Voted - What's Next for the [US] Economy ?' - Quantitative Easing 2

    of course other countries are, shall we say, MORE than a bit upset at the prospects ...

    (snip)QE2 risks currency wars and the end of dollar hegemony

    As the US Federal Reserve meets today to decide whether its next blast of quantitative easing should be $1 trillion or a more cautious $500bn, it does so knowing that China and the emerging world view the policy as an attempt to drive down the dollar.

    The Fed's "QE2" risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal "bancor" along lines proposed by John Maynard Keynes in the 1940s.

    China's commerce ministry fired an irate broadside against Washington on Monday. "The continued and drastic US dollar depreciation recently has led countries including Japan, South Korea, and Thailand to intervene in the currency market, intensifying a 'currency war'. In the mid-term, the US dollar will continue to weaken and gaming between major currencies will escalate," it said.

    David Bloom, currency chief at HSBC, said the root problem is lack of underlying demand in the global economy, leaving Western economies trapped near stalling speed. "There are no policy levers left. Countries are having to tighten fiscal policy, and interest rates are already near zero. The last resort is a weaker currency, so everybody is trying to do it," he said."(snip)

    (snip)" For the 40-odd countries pegged to the dollar or closely linked by a "dirty float", the Fed's lax policy is causing havoc. They are importing a monetary policy that is far too loose for the needs of fast-growing economies. What was intended to be an anchor of stability has become a danger.

    Hong Kong's dollar peg, dating back to the 1960s, makes it almost impossible to check a wild credit boom. House prices have risen 50pc since January 2009, despite draconian curbs on mortgages. Barclays Capital said Hong Kong may switch to a yuan peg within two years.

    Mr Bloom said these countries are under mounting pressure to break free from the dollar. "They are all asking themselves whether these pegs are a relic of the past," he said.

    China faces a variant of the problem with its mixed currency basket, a sort of "crawling peg". Commerce minister Chen Deming said last week that US dollar issuance is "out of control". It is causing a surge of imported inflation in China.

    Critics in the US Congress say China could solve that particular problem very quickly by letting the yuan rise enough to bring the country's $180bn trade surplus into balance.

    They say the strategy of holding down the yuan to underpin China's export-led model is the real source of galloping wage and price inflation on China's eastern seaboard. The central bank has accumulated $2.5 trillion of foreign bonds but lacks the sophisticated instruments to "sterilise" these purchases and stem inflationary "blow-back".

    But whatever the rights and wrongs of the argument, the reality is that a chorus of Chinese officials and advisers is demanding that China switch reserves into gold or forms of oil. As this anti-dollar revolt gathers momentum worldwide, the US risks losing its "exorbitant privilege" of currency hegemony – to use the term of Charles de Gaulle.

    The innocent bystanders caught in the crossfire of Fed policy are poor countries such as India, where primary goods make up 60pc of the price index and food inflation is now running at 14pc. It is hard to gauge the impact of a falling dollar on commodities, but the pattern in mid-2008 was that it led to oil, metal, and grain price rises with multiple leverage. The core victims were the poorest food-importing countries in Africa and South Asia. Tell them that QE2 brings good news.

    So the question that Ben Bernanke and his colleagues should ask themselves is whether they have thought through the global ramifications of their actions, and how the strategic consequences might rebound against America itself."(snip)

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    Default Re: 'We've Voted - What's Next for the Economy ?' - Quantitative Easing 2

    If we want jobs and exports, we got to weaken the dollar to the lowest valued money in the world. I say Zimbabwe.

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    Default Re: 'We've Voted - What's Next for the Economy ?' - Quantitative Easing 2

    ^^^ the larger point being made by the various authors seems to be that, with a probable roadblock to the direct passage of any sort of additional US stimulus / gov't spending legislation now in place as a result of the election, future implementation of policy is going to have to come by indirect means. In this case that indirect means is the US FED. However, the FED is unable to 'target' its policy the way that direct legislation could ( i.e. homebuyer tax credits, cash for clunkers etc.) and instead must 'paint with a broad brush'.

    Obviously that 'broad brush' now means painting green onto new rectangular pieces of paper, then putting those freshly printed dollars into the hands of the big wall st banks ( who will use them to purchase US stocks and newly printed US gov't bonds ). This in turn will force up US stock market indexes and force down interest rates. But as an unavoidable consequence it will also force down the US dollar's exchange rate.

    As you point out, forcing down the US dollar's exchange rate is good for all US based corporations that compete globally i.e. it makes the 'local' price of a CAT bulldozer or John Deere tractor or Boeing aircraft go down in terms of Indian Rupees or Brazilian Reals or Japanese Yen, while the 'local' prices of a Sumitomo bulldozer or Mahindra tractor or Airbus aircraft essentially remain unchanged. This will lead to increased sales / profits by those US companies ... although there is no specific guarantee that this will also directly translate into increased US production and/or increased US jobs.

    But the flip side is huge. First, a lower US dollar exchange rate makes 'hard' US assets more attractive to foreign investors ( did you see China's bid to outright purchase a share of Texas oil fields yesterday ? ). But 'soft' US assets ( like stock shares ) become less valuable to foreign investors. Next it increases US dollar denominated prices of every world market commodity from gasoline to grain to gold, with both immediate and delayed negative effects on the US cost of living / standard of living.

    It also creates a 'lose-lose' situation for ( small time ) US investors, where the 'purchasing power' of their US dollar denominated investment declines while the interest / divident rates earned hover near zero. But the flip side of this situation is that it benefits those Americans who are heavily in debt by inflating the value of their collateral and decreasing the equivalent purchasing power cost of repaying their debts with inflated US dollars.

    But the likely most important point made by the authors is that deliberate FED policy to significantly devalue the US dollar will absolutely cause major strains re Japan, EuroLand, smaller Asian and South American countries etc. on the basis of relative currency values affecting their export businesses. It will also cause major strains re Japan and China as US dollar devaluation erases billions in 'purchasing power' from the US trade surplus dollars they are sitting on.

    And while the FED has significant leverage over EuroLand ( thanks to bailout currency swaps ), it has essentially no such leverage over Japan or China. This carries the possibility of future ugliness ... on multiple levels !


    If we want jobs and exports, we got to weaken the dollar to the lowest valued money in the world
    Taken to the extreme, the result of FED QE could be that the US$7.50 per hour minimum wage becomes competitive versus present value US$3.00 per hour wage rates in Asia. Of course this would also mean that the $7.50 an hour US minimum wage worker would be paying $10 a gallon for gasoline to drive to work, $10 for a Big Mac at lunch, and $10 for a beer after work ! Perhaps more importantly to gov't deficits, it would mean that those living on social security, disability, welfare checks etc. would face similar situations of their US dollar check sizes staying nearly the same while the prices of everything they 'need' increases greatly.

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