Posts by "macrosam"

Ashraf does not understand what QE is. Ashraf, if the price per barrell of crude decreases in USD terms, that means USD are more difficult to obtain for the non-US private sector.

catnip, always impressed at your broad knowledge base.

jacek, I have no interest in shorting the following: CHF, JPY, and USD.

I anticipate a continued USD rally due to derisking. What QE did, and I traded along with it (Keynes' quote on irrationality and insolvency applies) was mislead the markets into believing there was a USD surplus when in fact there is a USD shortage. Pensions, college endowment funds, asset managers alike were scared into short-USD trades which is why the trendlines and correlations are almost mirror-like. The price appreciation driven by the speculative bid in anything short versus the USD then cajoled suppliers to increase output (unless natural supply disruptions such was weather, and unnatural supply disruptions such as export quotas persist) to mee the perceived increase in demand at that price leve, presumably the point of indifference. However, the demand is not all real, a degree if it is speculative ponzi driven by QE dollar flood fears. Unfortunately, the elephants all must evacuate at the same time through a small door.

QE is not printing money per se, rather it is a redefinition of the term structure of government liabilities. Functionally QE is no different than what the Fed does for Fed Funds targeting with the exception that QE involves longer maturity securities and does not involve non-discretionary purchasing (due to the explicitly stated $600bn amount + balance sheet reinvestment from MBS securities winding down). Fed Funds targeting involves indiscriminatory buying/selling where QE, presumably due to political concerns, involves a discriminatory amount. Otherwise, QE and Fed Funds targeting is functionally the same procedure, just involving different maturities.

What QE does do is the following: 1) it essentially negates US Treasury issuance from the Treasury, net on net resulting in a comparable effect as if the Treasury never issued those securities (eventually bought by the Fed), and 2) it decreases coupon interest income that the private sector otherwise would have received (from the vertical component). The "profits" the Fed distributes back to the Treasury that are reported on an annual basis is no more than the net coupon interest income that otherwise would have gone into the private sector.

As a result, rather than being inflationary (QE is no more than an asset swap involving funds and securities that are confined to the inter-banking system rather than the incorrectly reported "flood of US Dollars"), QE is deflationary because it reduces US Treasury supply (less supply can drive a lower rate environment) and it removes coupon interest income that otherwise would have gone to the private sector.

The financial markets, including Ashraf, have completely misinterpreted the operational reality of QE even though QE has been performed a number of times in history (US Fed Chairman Marriner Eccles essentially executed QE in 1948 after Pearl Harbor, and Japan). QE is not a flood of US Dollars; it is not resulting in a surplus of US Dollars. Rather it is reducing coupon interest income that otherwise would have been paid to the private sector AND it is reducing available US Treasury supply.

Shane, the subset of participants in forex markets to do so purely for speculative profit motives is actually very small.

Money has no utility or economic value except to serve as a medium of exchange. Currencies trade consistent with this, not with the beliefs of speculators.