Tuesday, October 26, 2010

It's Looks Like It will Be Around $500 Billion in Federal Reserve QE

"The central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis. The announcement is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday," writes WSJ's Jon Hilsenrath and Jonathan Cheng.

This report is likely the real thing. Hilsenrath and Cheng are as wired in as you get. Their report may very well be coming from Helicopter Ben, himself.

BTW, I do not consider $500 billion a measured approach. M2 money supply is currently at $8.654 trillion. Keep in mind that a trillion plus of the earlier money printing is sitting as excess reserves, not impacting the economy. What's coming out now, will hit the economy, it's not going directly to the elite bankers (which put the money in excess reserves). The bond sellers will be a mix of pension funds, individuals and, yes, some banks, and for the most part they will have plans for the money once they get it from the Fed. It ain't going into excess reserves. 

Another $500 billion is an increase of  5.8%. If it is done over six months (that is if "several months" means six months)  that will be an annualized money growth rate of 11.6%. On top of this, the money supply is already climbing at 5% annualized rate, as a result of the reinvestment of cash flow from MBS securities held by the Fed. Thus, you could have annualized money growth of approximately 17%.

That's serious money printing. It will boost the stock market and cause a phony boom, but the inflation is going to be huge. But there's more. What the Fed creates is supermoney. $500 billion pumped in could mean a multiple of that, when it is done impacting the economy. Thus, I would not be surprised at us hitting an annualized rate of 25%, at some point over the next six months. And that will mean serious inflation squared.



  1. Bob,
    Doesn't high price inflation measured by the CPI eventually depress stock prices even if initially stock prices move higher? When does this occur after the money printing? Isn't the 70s an example of this? Wouldn't companies begin making malinvestments that fail and depress their stock prices even as commodity prices continue shooting higher?

  2. Bob, if QE2 is to end after six months, why did you annualize it to 11.6%, instead of 2.9%?

  3. Because what Bernanke is doing is saying, "I am going to put $500 billion in the first six months." Left unsaid is what he is going to do in the following six, which is add another $500B. He's playing mind games with traders.