SkyNews interview with BOE governor Mervyn King:
Mervyn King on global currency imbalances and quantitative easing. Compare his view on QE to the German view as voiced in Der Spiegel.
Bank of England Expands Quantitative Easing – WSJ.com
The Bank of England said Thursday it will buy £75 billion of government bonds in a fresh bout of quantitative easing aimed at stimulating the U.K.’s stagnant economy.
….The decision sent sterling sharply lower. The pound plummeted to a 15-month low against the dollar, trading at $1.5286 from $1.5459 before the decision. Prices for government bonds surged.
The Sceptical Inflationist | Steve Saville | Safehaven.com
The reason we are in the inflation camp is that the case for more inflation in the US doesn’t depend on private-sector credit expansion; it depends on the ability and willingness of the Fed to monetise sufficient debt to keep the total supply of money growing. A consistent theme in our commentaries over the past 10 years has been that the Fed could and would keep the inflation going after the private sector became saturated with debt.
Up until 2008 there was very little in the way of empirical evidence to support the view that the Fed COULD inflate in the face of a private sector credit contraction, but that’s no longer the situation. Thanks to what happened during 2008-2009, we can now be certain that the Fed has the ability to counteract the effects on the money supply of widespread private sector de-leveraging. The only question left open to debate is: will the Fed CHOOSE to do whatever it takes to keep the inflation going in the future?
via The Sceptical Inflationist | Steve Saville | Safehaven.com.
QE Can’t Save the Day… We’ve Done a Version of It For Over 10 Years | ZeroHedge
While most commentators proclaim that QE is a completely new phenomenon, we have in fact seen a version of it in the form of the Fed’s and Asia’s (especially China’s) purchases of US Treasuries/ currency pegs over the last decade or so.
Indeed, today, the Fed, China, and Japan collectively hold 61% of the $10 trillion of US debt held by “the public.” When you add in the additional $4.6 trillion in US debt held by “intragovernmental holdings” (basically the Federal Government buying Treasuries by raiding Social Security and other pension funds) you find that Asia and the Feds have monetized $10.7 trillion of the US’s total $14.6 debt (roughly 73%) over the last 20 years.
via QE Can’t Save the Day… We’ve Done a Version of It For Over 10 Years | ZeroHedge.
FRB: Press Release–Federal Reserve issues FOMC statement–September 21, 2011
The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets.
………The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.
via FRB: Press Release–Federal Reserve issues FOMC statement–September 21, 2011.
Fed Shifts Bond Portfolio – WSJ.com
The Fed is trying to ease financial conditions without taking the more controversial step of increasing the amount of money that it’s pumping into the financial system, since it will be using money already generated from other programs. A bond buying program the Fed completed in June was widely criticized internally and externally because it pumped $600 billion of newly printed money into the financial system, sparking fears of inflation……..
The more potent step of launching a new round of bond purchases that would further expand the Fed’s $2.867 trillion balance sheet remains a possibility, but inflation likely would need to slow much further to spur Fed officials to take that step……..
Economists aren’t so sure that the Fed’s latest gambit will do much to spur growth.
“The odds are ‘Operation Twist’ won’t work,” Anthony Sanders, a real-estate finance professor at George Mason University, said before the Fed action. The housing market has shown no reaction to interest rates that are already at record-low levels, he said. Freddie Mac’s latest survey finds the average rate on 30-year, fixed-rate mortgages at 4.09%, the lowest level in more than 50 years.
Gold finds support
A false break below $1800/ounce indicates buying support at the rising trendline. Breakout above $1900 would complete an ascending triangle with a target of $2100*. Reversal below Friday’s low would warn that the pattern has failed and correction to the long-term trendline (around $1500) is likely.
* Target calculation: 1900 + ( 1900 – 1700 ) = 2100
The long-term chart below gives a clearer picture of the current bull-trend. Spot prices spiked up 20% in a matter of days after the collapse of Lehman (LEH), but declined back to $700/ounce within a few weeks. The up-trend only started in November 2008, when the Fed announced that it would purchase mortgage-backed securities and Treasurys in an attempt to lower long-term interest rates (QE). The trend accelerated in 2011, several months after commencement of QE2. While collapse of Lehman was the underlying cause, the bull-trend is a reaction to the Fed response of quantitative easing. Further purchases of Treasurys or MBS would lift demand for gold. Hopefully Wednesday’s FOMC announcement will provide more clarity as to the Fed’s intentions.
GBP tests support
The Pound is testing support at $1.60/$1.59 against the greenback, dragged down by rising calls for another round of quantitative easing to assist the flagging UK economy. Failure of support would signal a primary down-trend with a target of $1.53*.
* Target calculation: 1.60 – ( 1.67 – 1.60 ) = 1.53
Dollar rallies
The Dollar Index rallied strongly but expect stubborn resistance between 76.00 and 76.50. Consolidation between 73.00 and 76.50 has continued for more than four months, but we are in a bear trend and downward breakout remains likely. Failure of support at 73.00 would offer a target of 70.00*. Any hint of quantitative easing in the next FOMC announcement, on September 21st, would accelerate the sell-off.
* Target calculation: 73 – ( 76 – 73 ) = 70
Crude oil divergence continues
The spread between Brent Crude and Nymex WTI Light Crude remains at $24/barrel. Brent is rallying to test the declining trendline, but retreat to medium-term support at $105 is likely. Resolution of the conflict in Libya should take some of the supply pressure off European refineries, easing Brent prices.
* Target calculation: 105 – ( 120 – 105 ) = 90
We then have to wait and see what Chairman Ben pulls out of his hat at the September 21st FOMC meeting. Further quantitative easing would cause an upward spike in commodity prices, including crude.