This is a continuation of my earlier post on the Fed buying Treasuries.
You might hear the term "quantitative easing" being thrown around by media pundits (as if they have a clue what it really means). So, what does it mean?
Quantitative easing is a term used to describe the fiscal and monetary policies of central banks in a zero or near zero short term interest rate environment. It was first applied by Japan during the 1990s. After Japan's equity markets imploded in the late 1980s, the BOJ repeatedly cut interest rates to nearly 0 percent. When these actions failed to stop the tide of poor economic data from affecting the markets, the authorities started buying its own longer term debt and then the debt of its banks. Their intent was to encourage less spending and more consumption by the consumer sector. The results were disappointing to say the least.
The overall effect was to keep Japan's banks on life support. Critics derided Japan's financial sector as "zombie banks". Notable critics included Greenspan, Bernanke, and other luminaries from the US who flew to Japan and lectured their authorities on what bad boys they had been.
Well. Fast forward 8 or 9 years to the present. The hypocrisy is astounding.
We now have the Fed buying Treasuries from the Treasury. But the Fed has scaled operations up significantly. Instead of just buying government debt, they have also taken on mortgage backed loans, credit cards, student loans, auto financing, and other commercial paper junk that will never see the light of full (model) valuation again.
When will it stop? No one knows exactly but the government looks prepared to bail out the Detroit 3 automakers and their staggering legacy costs.
Moreover, the situation is worse than any comparisons to 1990s era Japan. The Japanese economy is overwhelmingly geared towards exports while the US economy is geared towards consumer consumption. A staggering 65-70% of US GDP derives from consumer spending...the vast majority of which was built on the credit bubble.
The Japanese consumer is also more responsible than his or her US counterpart. Nowhere else in history have people been able to buy 5 or 6 houses w/no money down and w/no job. Nowhere else in the world are people able to buy cars and then trade them 2 or 3 years later for a newer model. And nowhere else in the world are people able to buy tvs, computers, and furniture w/zero percent financing for 18 months and no payments for 2 years. The worst part is that this culture of profligacy is still continuing during the holiday season.
So, can the US borrow its way out of a deficit?
I don't know but there is over 3% left on 30 year Treasuries left to go! After that the government might get the bright idea of issuing 100 year notes or even perpetuals. Don't laugh. The UK is still paying off World War I war bonds or perpetual gilts. But who would be dumb enough to buy government paper that has 0 inflationary protection, is callable, and is thinly traded?
Even China can't be that dumb. . .
Wednesday, December 3, 2008
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