Quoted Text

US Credit Rating Cut by Egan-Jones ... Again
Published: Friday, 14 Sep 2012 | 3:43 PM ET Text Size
By: CNBC.com With Reuters


Ratings firm Egan-Jones cut its credit rating on the U.S. government to "AA-" from "AA," citing its opinion that quantitative easing from the Federal Reserve would hurt the U.S. economy and the country's credit quality.

The Fed on Thursday said it would pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the weak jobs market. (Read more: Fed's 'QE Infinity' — Four Things That Could Go Wrong)

In its downgrade, the firm said that issuing more currency and depressing interest rates through purchasing mortgage-backed securities does little to raise the U.S.'s real gross domestic product, but reduces the value of the dollar.

In turn, this increases the cost of commodities, which will pressure the profitability of businesses and increase the costs of consumers thereby reducing consumer purchasing power, the firm said.

In April, Egan-Jones cuts the U.S. credit rating to "AA" from "AA+" with a negative watch, citing a lack of progress in cutting the mounting federal debt.

Moody's Investors Service [MCO  43.82     0.07  (+0.16%)        ] currently rates the United States Aaa, Fitch rates the country AAA, and Standard & Poor's rates the country AA-plus. All three of those ratings have a negative outlook.

Quoted from DemocraticVoiceOfReason

I suggest that everyone go out to buy a wheelbarrow because you will need it to carry your cash to the markets once the inflation kicks in because of the this insane policy of "quantitative easing" -- which is just a sugar-cated way of saying ----> running the government printing press to print money like crazy.

Quoted Text

QE3 sparks inflation concerns
Reuters – Global Times | 2012-9-16 21:50:05
By Agencies     
Share on twitter Share on facebook Share on sinaweibo Share on google_plusone More Sharing Services
0
  E-mail    Print
China's interest rate swaps (IRS) rose sharply Friday after the US Federal Reserve announced an aggressive new stimulus plan to drive job creation, provoking concerns that the move might aggravate domestic inflation.

The Fed announced Thursday it would pump $40 billion per month into the US economy until it sees a sustained upturn in employment.

"Because of the third round of quantitative easing (QE3), the pressure of China's inflation will increase, so long-term rates rose more sharply as they are more sensitive to inflation," said a dealer at an Asian bank in Shanghai.

However, QE3 in the US is unlikely to impact domestic monetary policies, said E Yongjian, a researcher at Bank of Communications.

"Inflation is the key concern for China. This is why the government is continuing to use the bond repurchase contracts to control liquidity, instead of cutting the reserve requirement ratio," he said.

He noted that QE3 is expected to put upward pressure on global commodity prices, which would increase inflationary pressure in China. Commodity futures prices in Shanghai spiked in morning trade Friday following the Fed's announcement.

Fan Jianping, director of the Economic Projection Department with the State Information Center, echoed E's views, adding that QE3 may increase the cost of economic recovery in the country.

Moreover, as QE3 will likely lead to the devaluation of the US dollar against the yuan, China's exporters are expected to feel the impact soon, experts pointed out. And the anticipated prospect that QE3 will boost the US economy and help Chinese exports in turn is still highly uncertain.

"Although the launch of QE3 will complicate China's monetary adjustment, domestic conditions remain the major factor determining the country's monetary policies," said an unnamed official from the People's Bank of China.

The benchmark five-year IRS jumped to an intraday high of 3.32 percent Friday, up 14 basis points from 3.18 percent at the close Thursday.

One-year IRS was at 3.13 percent, up from Thursday's close of 3.09 percent, while 10-year IRS rose to 3.40 percent from 3.23 percent Thursday.

In the money market, money rates fell slightly Friday, which dealers attributed to ample liquidity.

The 14-day repo rate fell to 3.2892 percent from 3.4360 percent, and the shortest overnight one-day repo rate fell to 2.6808 percent from 2.6878 percent.

Reuters - Global Times

Quoted Text

Like It Or Not The Fed Is Firing Up The Printing Press…Here Come QE3
September 13, 2012 / jennifer / No comments
QE3 Is Set And Ready To Be Employed
Thursday the Fed announced that due to the weak economic reports and the sluggish August job report that the Fed was ready to employ Quantitative Easing 3 or (QE3).  This project will entail the government purchasing $40 billion dollars in mortgage based securities each month.  The Fed will continue with these purchases until they feel the results are sufficient and the economy begins to respond.  The end date for this program has not yet been clearly defined.  The purchases are to commence Friday and even in the month of September 23 million in bonds will be purchased.

What Is The Purpose Behind Quantitative Easing Or QE3?
The entire purpose and goal of QE3 is to stimulate the economy by suppressing interest rates.  The official fed statement is:  QE3 “should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”  However, many are concerned that in spite of the positive intentions behind QE3, the practical implications are not so positive.  Most Economists feel that Quantitative Easing will not help the job market.  Additionally, interest rates are already near zero, and most banks aren’t even currently lending.  The banks are right now sitting on 1.6 trillion in excess funds that they have been unwilling to lend out since the financial crisis of 2008.  If the banks aren’t lending after the last two rounds of easing, what makes the fed so certain that one more round of QE3 will suddenly cause financial institutions to loosen their purse strings?

QE3 And Inflation
Overall, many feel that the actual benefits from quantitative easing are low, and the perceived risks are much higher and much more concerning.  Between QE3 and the current program “Operation Twist” the fed will be adding approximately 85 billion/month to their balance sheet.  That is 85 billion US dollars that will be added to the money supply every month.  The primary concern with adding to the money supply is inflation, and whether or not the government can suppress and keep the inflation under control.  With QE3, the US dollar is definitely at major risk for hyperinflation.

How Does QE3 Impact My Investments?
It is difficult to predict what will happen with QE3, but one thing is certain.  QE3 adds to the money supply, which ultimately devalues the dollar. The more the dollar and dollar based assets become devalued, the more value can be sought from other investments such as precious metals.  For more information on how you should allocate your portfolio given today’s economy visit greenmoneyupdate.com

Quoted Text

Why I'm Not Afraid Of QE3
September 13, 2012  | 118 comments  |  includes: GSPC
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Market watchers are all waiting to hear whether the U.S. Federal Reserve will announce a third round of quantitative easing at the conclusion of its two-day meeting today. The prospect of QE3 has brought the new "sound money" group out in full force. Given that the U.S. economy continues to stumble along despite two previous rounds of quantitative easing, perhaps it is unsurprising that many people distrust the Fed's quantitative easing program. That said, I do not think the factual record supports the sound money perspective.

There appear to be two general lines of argument made by proponents of sound money/opponents of Federal Reserve (and ECB) policy. The first is that further quantitative easing is destined to cause severe inflation: even hyperinflation. The second argument is that QE3, by increasing the money supply, will drive commodity prices up. This, in turn, acts as a hidden tax on consumers, and thus QE3 would hurt the economy on a net basis. However, neither of these arguments stands up to scrutiny.

The hyperinflation argument is found in a recent article called "Why QE3 Will Not Happen" posted here (it's the second one in this thread). The author asserts that a further round of quantitative easing will drive prices up universally, eventually leading to unstoppable hyperinflation. Ultimately, the author compares the U.S. position today to Weimar Germany back in the 1920s. However, this entire line of reasoning is built on a lack of understanding of what really drives inflation (particularly hyperinflation).

To put matters in the simplest form possible, severe inflation is the result of a money supply that is increasing much faster than the supply of assets. Essentially, too much money is chasing each asset, creating a bidding war of sorts, and driving prices higher. In the case of Weimar Germany, the hyperinflation of 1923 occurred primarily because the German government paid hundreds of thousands of workers to strike against France's occupation of the Ruhr district. Thus, the market was flooded with currency even as output was artificially choked off. With lots of money but very little available to buy, hyperinflation took off.

By contrast, there is no good reason to believe that easing the money supply today will spark rapid inflation. In addition to having official unemployment of over 8%, the U.S. has a massive stock of underemployed workers. The same is true in most other major economies. There is thus a huge amount of human capital (i.e. assets) sitting unused or underutilized today. So while adding to the money supply may have modest effects on prices throughout the economy, it will not create the "bidding war" that constitutes severe inflation. The current unemployment and underemployment rate implies that the U.S. could produce a lot more with its current asset base, if demand warranted.

The second argument is found in an article by Robert Lenzner at Forbes. Lenzner makes the following extraordinary claim: "rising oil prices due to QE1 and QE2 act like rising interest rates--and stall the economy into recession." He asserts that QE3 (if implemented) will have the same effect, thus hurting the U.S. economy. In response, it is first important to note that one of Lenzner's key contentions, "During QE1 in 2008 the price of crude oil soared to over $140 a barrel," is simply false. While QE1 began in 2008, it began in December 2008. In other words, oil's spike above $140 happened with no assistance from quantitative easing. By contrast, the subsequent fall below $50 came at the same time as QE1 was occurring.

This should not really be that surprising. During late 2008, the global economy was in turmoil and demand for oil was low. Thus, even with the Fed pumping lots of money into the economy, oil prices fell. By contrast, earlier in 2008, many people thought that $100 oil might be compatible with continued economic growth. With higher expected demand at that time, the price rose. In other words, fundamentals are ultimately the key to commodity prices (and stock prices). The herd effect of the market may give monetary policy some effect on short-term pricing, but ultimately supply and demand keep prices in check.

It may seem natural to conclude that "easy money" causes commodity price spikes when you look at the five-year chart for oil (specifically, Brent crude).

click to enlarge images



(Courtesy of YCharts)

Prices have been on an uptrend ever since bottoming out in late 2008, around the same time that the first round of quantitative easing began. The chart thus suggests a direct correlation between the rising money supply and commodity prices. But what if you look at this chart instead?



(Courtesy of InfoMine)

Somehow an inflated money supply did not manage to prevent a collapse in natural gas prices which began in 2008 but has continued to date. This is all the more odd for believers in the "commodity price spike" argument, because whereas oil is globally traded, U.S. natural gas cannot be effectively shipped outside North America. (Therefore U.S. natural gas prices should be more closely tied to the U.S. money supply.) If the money supply were really the primary determinant of prices, rather than the fundamentals of individual markets, natural gas prices would be five or ten times their current level.

As it turns out, the fundamentals of the oil market look pretty bearish today. The "hard landing" in China has removed that country as a major source of oil demand growth. Meanwhile, U.S. petroleum product imports have reliably been declining year over year. Indeed, with the busy summer travel season having just ended, oil demand is likely to tail off dramatically, even while U.S. crude oil stocks remain "above the upper limit of the average range for this time of year." Obviously, a flare-up in the Middle East could quickly change the supply picture, but barring that, oil prices look to have downside of 20% or more this fall.

To conclude, in the short run, QE3 might give a little boost to asset prices, such as S&P 500 (GSPC) stocks and commodities. I'm sure owners of stocks will not complain about that. On the other hand, arguments about the dramatic and dire effects of QE3 on inflation and commodity prices are nothing more than hot air. At worst, QE3 will have minimal effect; at best, it might keep the economy from falling back into recession.