# Some of the Money Folks are starting to speak out



## Marcus (May 13, 2012)

http://www.thestreet.com/story/11861248/1/gundlach-on-why-quantitative-easing-will-end-badly.html

Instinctively, anyone with a passing knowledge of Economics knows what will happen. Likewise, anyone with a some knowledge of History knows too.


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## Immolatus (Feb 20, 2011)

At this point QE (and LTRO in the EU) and the more general idea that the F3D is propping up the banks both here and abroad is the only thing keeping the big banks solvent. If they stopped its game over and most everyone knows it. I guess theoretically if the F3D buys all the toxic crap all over the world, it could just retire (burn) all of it and everyone (BOA, JPM, GS, etc) could start over.

*Top Bankers: Too Much Central Bank Easing Is Becoming Dangerous*
*As I jump over to ZH, this is the first article I find. Backs up the OP.*


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## CulexPipiens (Nov 17, 2010)

They're all doing it to keep the shell game going while they position themselves to deal with the impending crash. By deal with, I don't mean take care of the situation, I mean make sure they survive it and screw everyone else. Countries calling back and continuing to build their gold is one sign. Throwing money at hopeless situations is another. This isn't being done to help us, it's like last call at the bar... they're all filling their glasses one last time before the leave. The only question, are we talking weeks, months or years.


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## BlueShoe (Aug 7, 2010)

It seems most people I hear (value) are saying yrs.


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## majmill (Jun 6, 2012)

Marcus said:


> http://www.thestreet.com/story/11861248/1/gundlach-on-why-quantitative-easing-will-end-badly.html
> 
> Instinctively, anyone with a passing knowledge of Economics knows what will happen. Likewise, anyone with a some knowledge of History knows too.


OK, so I don't have a "passing knowledge of Economics" that's why I read you guys to explain what's happening.


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## majmill (Jun 6, 2012)

Immolatus said:


> At this point QE (and LTRO in the EU) and the more general idea that the F3D is propping up the banks both here and abroad is the only thing keeping the big banks solvent. If they stopped its game over and most everyone knows it. I guess theoretically if the F3D buys all the toxic crap all over the world, it could just retire (burn) all of it and everyone (BOA, JPM, GS, etc) could start over.
> 
> *Top Bankers: Too Much Central Bank Easing Is Becoming Dangerous*
> *As I jump over to ZH, this is the first article I find. Backs up the OP.*


In order to understand, and I do want to, I need more than LTRO, F3D, BOA, JMP, GS, etc.

Thank you for your explanations.


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## Marcus (May 13, 2012)

F3D= Fed or the Federal Reserve
GS is the stock symbol for Goldman Sachs
BOA is an acronym for Bank of America (BAC is the stock symbol)
JMP is probably suppose to be JPM or the stock symbol for JP Morgan Chase, a large bank.
LTRO is an acronym for Long Term Refinancing Operation which is a process run by the European Central Bank (ECB) to provide a liquidity cushion to eurozone banks.


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## Marcus (May 13, 2012)

majmill,

The ECB and the Fed threw huge sums of money (almost $3 Trillion to date by the Fed alone) at banks is order for the banks to survive the real estate bubble back in 2008. These banks are known as the TBTF (too big to fail) banks and only survived that crisis due to the intervention *since these banks were heavily invested in mortgages and mortgage derivatives.* All of those foreclosed houses (the so-called shadow inventory) are very, very slowly being worked off. In order to do this, the banking rules were changed to allow banks to hold these properties longer than 6 months. Ain't political power nice? Last I saw, the shadow inventory was about 2.5 years of home sales. In other words, we have 2.5 years of inventory still to be worked off before things can start to get back to normal in the housing industry. That's down from about 3 years inventory in 2008.

The US banks, which are holding the vast majority of that $3 Trillion as excess reserves, are being paid more interest of those excess reserves by the Fed than the Fed is charging them for borrowing it. In other words, the banks can't lose money on their excess reserves. Again, ain't political power nice?

At issue is what happens when the Fed decides to slow or stop QE. Almost all economists understand that stopping/slowing QE will also slow the US economy. There are a number of other issues besides just the state of the US economy though.

Since China has cut back on their purchases of US Treasuries due to all of the money printing, the Fed has picked up the slack. How much slack? In 2011, the Fed bought something over *60%* of all US Treasuries issued that year. If the Fed slows down their purchases, they run the risk of a failed Treasury auction. If that should happen, then most banks (due to mark to market provisions in the law) will be insolvent overnight (since banks are one of the major purchasers of US Treasuries.) So you're looking at a collapse of the US banking system which, due to ties among banking in overseas, will almost certainly lead to a world-wide depression *at a minimum.*

Furthermore, there is a substantial risk to the bond markets (which are actually several times the size of the stock markets.) First, the bond markets could collapse or become illiquid (see mark to market) which could collapse the banking industry. Or, interest rates rise which then leads to a huge loss for holders of US Treasuries (capital risk) since interest rates are at historical lows. Since bonds are used by state and local entities to finance projects, any problems in the bond markets would lead to fewer and more costly projects.

The main issue is the Fed hasn't ever indicated how they intend to orderly reduce all of the capital they have injected into the economy to keep it hobbling along. If they start selling some of their bond holdings, they risk a failed auction. If they raise interest rates on the money the banks have borrowed, they risk bank failures. Strong (financially at least) banks could start lending out their excess reserves to customers which lights the inflation/hyperinflation fuse. There is no way for the Fed to act that doesn't risk a recesson or worse.

It's interesting to note that banks used to keep *no excess reserves* up until 2008. The reason was it cost the banks money by having the money not invested.

If you look at where we are, there's only bad choices and worse choices. Meanwhile they put off the day of reckoning by kicking the can down the road which only makes the final result even worse.


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## invision (Aug 14, 2012)

Standing up and applauding you... great post! I couldn't have said it better..... :beercheer


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## cqp33 (Apr 2, 2012)

tenOC said:


> It seems most people I hear (value) are saying yrs.


I would say 2-5 years from what I see and what others I trust around me are saying as well! It won't be the US dollar that brings it all down, it will be others not accepting US dollars that causes the big one! Stock market will soar as long as QE is going, the crash will just be harder the longer that goes on! my $.02


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## Immolatus (Feb 20, 2011)

Yes, well done Marcus.
Much better than my long winded crap in another thread.
Comments on this guys?

One other thing that needs explanation:
*Definition of 'Mark To Market - MTM'*

1. A measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark to market aims to provide a realistic appraisal of an institution's or company's current financial situation.

Its an accounting concept. The banks have been allowed to keep an asset on the books valued at what they paid for it, regardless of its actual value.
Think of it like this.
You own your home outright that you bought for $100k. Therefore you have a $100k asset.
If the value falls to $50k, your asset has fallen to $50k.
This type of loss has happened to all of the big banks all over the world, here and in Europe specifically. Instead of having to revalue their assets down (which would crash them and the whole system) they have been not only allowed to keep the value on their books at the original value ($100k in the above example) when its only worth half that (its actually waaaay worse, but lets leave it at that)...
They are being bailed out by the F3D and the ECB (The European version of the F3D- the *E*uropean *C*entral *B*ank) by being paid the original $100k for their asset thats only worth $50k. They are doing that the only way they can, by printing money. So the banks are being made whole again by the central banks, while everyone else is left out in the cold.


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## invision (Aug 14, 2012)

Immolatus said:


> Yes, well done Marcus.
> Much better than my long winded crap in another thread.
> Comments on this guys?
> 
> ...


Well it seems they are making up the rules as they go along IMO - looks like Ben B is thinking about keeping the assets of QE3 so they "stay off the books" http://www.foxbusiness.com/economy/...-may-do-u-turn-on-asset-sale/?intcmp=trending


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## Marcus (May 13, 2012)

invision said:


> Well it seems they are making up the rules as they go along IMO ...


That's been my opinion too since this all started.

The other issue that affects their actions I didn't go into at all. And that issue is the National Debt and the deficits.

Right now, we're borrowing 40+% of our 'budget' (though we haven't actually had a real budget since 2009.)

A few interesting factoids:
1. Our national debt is nearly $17 Trillion. That roughly equal to the US GDP.
2. In order to achieve a 'balanced budget' without massive cuts, taxes have to rise almost 100% (or double what they are now.)
3. Unfunded liabilities such as Social Security and Medicare add tens of Trillions to future government costs.
4. About a third of US Treasuries are sold with short maturities (3-5 years.)

Because of #4 if interest rates rise back to more normal levels (say 6%), the *entire federal budget* will be consumed just servicing our debt within a few years. That means either taxes will skyrocket or programs will be cut. Right now, the federal government consumes about 20% of the GDP. Looking at #2, you see we'll (the taxpayers) either have to get by on significantly less or government will have to stop growing for many years. I doubt either option is politically viable.

If government takes more through taxes, the living standard in the US will fall to a level roughly equal to Haiti or Yemen. If government spending is cut, there will be short term issues with massive unemployment and reduced economic activity until the market adjusts. The likeliest option (besides default) will be a combination of a freeze on future spending growth by government (ala the Sequester) and inflating away the debt.

What that means to the average citizen is that any savings you have accumulated for retirement will be wiped out *unless it is in asset classes that continue to hold value.* Precious metals & other commodities (including food) and to a lesser extent land are examples of asset classes that will hold up well. The stock market will plunge as economic activity is curtailed and bonds will lose substantial portions of their value (capital risk) as the value of low interest rate bonds are adjusted downward to reflect the new reality of higher interest rates. I strongly suspect that there will be significant civil unrest in those areas that are dependent on government subsidies.

When you add #3 on top of what we're already facing, it almost becomes moot trying to figure a way out of the mess.

I could be wrong and we could see a large sustained economic revival lasting for years; but given the economic policies of the present administration and Congress, I rather doubt we'll see something similar to the development of the Internet. And it'll take something like that or more to get us out of this mess.

I wish I could paint a rosy picture of the future, but if you're familiar at all with biblical prophesy, you'll know what's coming given the abandonment of God by this country especially since the 60s.

So how long do we have? I've read economists who mention 2013-2016.


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## majmill (Jun 6, 2012)

Thanks Marcus, and others.

I knew the economy was in trouble but now I have a better understanding. I guess it would be better for me if I took those few shares I have and use the money to take my family on a trip to Disneyworld. LOL


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## invision (Aug 14, 2012)

majmill said:


> Thanks Marcus, and others.
> 
> I knew the economy was in trouble but now I have a better understanding. I guess it would be better for me if I took those few shares I have and use the money to take my family on a trip to Disneyworld. LOL


I wouldn't cash them if they are in a 401K type plan or in anything that would cause a tax liability... If your needing preps, or want to have PMs on hand, then borrow against, since in fact you are paying yourself back... If they are actual stocks, then you might want to ride out a few more months if they have been upward trending... that way you have a little more money for your trip! :wave:


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