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« Weighing the Week Ahead: Economic Transition from Stimulus? | Main | The Two Front War on Unemployment »

June 01, 2011


Steel Phoenix

There's something here that I'm missing I think. I'm no expert on the matter, so maybe you guys can help me out.

The article covers things from the standpoint of the Fed, but what about the Treasury? In the short term, if the government wants to pay its bills, won't it either have to sell assets, print money, or sell treasuries? With the Fed out of the picture, won't they have to raise the interest on treasuries in order to attract buyers?


kharris -- Sorry to get your argument wrong, and thanks for clarifying. I agree with you. We will find it just as difficult to measure the effect of the "end" of QE II as we have in measuring the effects so far.

As to the "quibbling over words," that originally caused you to write -- You have stated your point clearly, and I think we all get it. My contention is that the terminology that nearly everyone is using is misleading, since it focuses on the (unimportant) buying and ignores the (very important) balance sheet.

This is an important substantive point which hardly anyone understands. Happily, most people seem to have grasped the significance of the argument and are untroubled by the dramatic nature of my chosen title.

BTW, James Altucher did me one better tonight on Kudlow. He stated that QE II has not even started!!

Thanks again for joining in.




Just right on the risk of the Treasury curtailing issuance. Our host seems not to have understood that point when I made it.

The quality swap point you make is also correct. I'm not sure your point about maturity is. While Fed purchases relative to market flow are small, they have had a much larger impact on the stock of outstanding Treasuries and the maturity.



Your argument is based on insistence on your own definition. "The QE II program will...end when the assets are sold." This is the claim you make to argue that QEII isn't ending in June. This is pure question-begging, nothing more than you saying that the "end" is when the assets are sold rather than when purchases stop.

Your argument is based on a claim about how the language should be used. In such an argument, you can reasonably go three ways. You can rely on historical usage, but there is not much established history because "QEII" is a neologism. You can rely on common usage. You have provided the right answer in terms of common usage: "I am sure that your perspective is shared by most." If so, then according to common usage, your view is wrong. The third way to go is to pretend that one is the Queen of Hearts and that words mean what you want them to mean. So far, you seem to be taking the Queen of Hearts approach.

As to this: "I do not think that the end of these purchases will have any effect at all on the size of Treasury auctions. We will not have long to wait to discover which of us is right about that one!"

-- you have misconstrued what I wrote. I did not claim that the end of Fed purchases would change the size of Treasury issuance. I wrote: "By coincidence, the Treasury will very soon have to limit the sale of new Treasury debt..." The word "coincidence" in no way implies a causal relationship. I'm not sure how you concluded that it did. My point, which I hope I made clear, is that the possible near coincidence of the Fed ending its purchases and Treasury curtailing sales will make it difficult to tell how much impact the end of Fed purchases has on market pricing. You would be quite mistaken to claim to be "right about that one" unless, in the case that Treasury does have to curtain issuance, you can show that there is no confusion about the impact of the end of Fed purchases on market prices.

If you want people to take your writing seriously, you need to show that you take their writing seriously as well. I don't think I write so badly that what I wrote could reasonably be construed to mean what you have taken it to mean.


To put a different spin on all this, isn't the govt. simply doing a quality swap; upgrading portfolio by selling Maiden Lane securities, AIG, and other assorted detritus, and buying Treasuries? And the dollar amount of QE2 relative to the daily volume of Treasuries is not very large. The whole thing's a non-issue.

More ironic is that forward Treasury issuance will be rather small if there is no agreement on the debt limit extension. It's hard to have a bear market in a security where the issuer is constrained from issuing!


It would be more accurate if you would switch that to a log scale. Once you do that, the growth rate is contant, which is what I was saying. The average growth rate since the 1960s is 6.9% and for each decades 1960 - 7, 1970 - 9.5, 1980 - 8, 1990 - 4, 2000 - 6.5. 2010 - 2.7. So the current growth is not even at average.

I feel like I shouldn't be commenting because 95% of message boards seem to be from doom and gloomers. Yes, a broken clock is right twice a day.


Mike -- Thanks for the kind words. As to your quibble -- Margin rates are not a function of Fed purchases. They are based upon exchange rules concerning volatility and risk.

I do agree that the program kept interest rates slightly lower than we would have experienced in the intermediate part of the yield curve.

The direct impact on asset purchases is too small to measure. They psychological impact? Maybe....another topic.

Thanks for joining in.



kharris -- The QE II program will reach its maximum size during the next month. It will end when the assets are sold. As BB has made clear, there is not even a time frame for ending the program.

My principal point, which most people do not understand, is that the effect comes through the impact on the money supply (which continues) rather than from the asset purchases.

I do not think that the end of these purchases will have any effect at all on the size of Treasury auctions. We will not have long to wait to discover which of us is right about that one!

Thanks for taking the time to write. I am sure that your perspective is shared by most. It certainly has gotten the most attention in the last few weeks.



Exactly. Accounts which hold Treasuries will, in some cases, not hold commodities. They will, however, hold other financial securities such as stocks and corporate bonds and foreign debt. It is easy to say that accounts "could" use Treasuries as collateral for commodities, but we care about what they do, more than what the could do.



My error was to make use of standard Treasury market slang for an audience, at least as you represent it, that is unfamiliar with that slang. In standard industry lingo, "coupons" are coupon-bearing securities, as distinct from bills or discount notes ("discos" for those of you who dance). Glad to have been able to clear that up for you, and sorry to rob you of your chuckle.


Great stuff here! I do quibble with the "not" part of the article.

"People think that the dollars from the Fed buying of Treasuries somehow finds its way into stocks and commodities "

Do you not think FED purchases have kept margin rates low? Lower funding costs from dealers has always tempted investors to leverage up and chase yield/risk


kharris has it right. Old Prof's post does not explain how "QE2 is not ending!" If anything, I am now more convinced that it is indeed ending.

As kharris correctly points out: 'Your argument, though, only shows that the Fed will not end "quantitative easiness". It certainly will stop "easing", taking active steps to increase accommodation. The Fed will be "easy"' but not "easing", and the "E" in "QE" is "easing".'

John Forman

kharris - Can't help but chuckle at the irony of you arguing about terminology when you've made a blatant error of your own. :-)

The Fed isn't buying Treasury "coupons". Those are the individual periodic interest payments. The Fed is buy Treasury securities - Notes and Bonds.

Philip George

Why do you even bother to look at M1 or M2? A monetary aggregate that rises even more sharply during a recession than otherwise (see is obviously worthless.

Look at my graph and note how accurately it tracks the period before the Great Recession and the Great Recession itself.

It shows that Corrected Money Supply at the end of February was at a level dangerously close to its peak at the beginning of 2006, indicating that a financial crash is almost certainly imminent.


The money supply has been rising, but not nearly at the same pace as the monetary base. Since the third quarter of 2009, money supply (M2) is up 5.4% and is up 6.1% (non annualized) since March of 2009. The monetary base (Fed's balance sheet) is up 39% and 52% over the same period, respectivly. This has resulted in the money multiplier dropping to a record low of 3.7 compared to its long term average of 9.4. In other words, the money the Fed is "printing" is not making its way into the economy because banks are not lending at the pace they have historically.

Getting back to the growth in money supply, what we are having now is actually lower than the historical average 1-year growth rate of 6.9%.

Said another way, this is not inflationary unless banks step up their lending to historical norms.


This wonderful insight you offer strikes me more as quibbling over what words are permissible than an actual contribution to understanding. There may be some folks - those who aren't really following Fed actions anyway - who don't know that the Fed intends to stop buying large chunks of Treasury coupons or don't know they do not yet intend to sell large chunks of Treasury coupons. Among those who are watching, those simple facts are understood.

First off, I think you argument is wrong linguistically, and since I also think you are quibbling over words, getting the words wrong means you are utterly wrong. All you have done is told us that you think we should no call this and "end" to quantitative easing, which is what "QE" is generally taken to mean. Your argument, though, only shows that the Fed will not end "quantitative easiness". It certainly will stop "easing", taking active steps to increase accommodation. The Fed will be "easy"' but not "easing", and the "E" in "QE" is "easing".

When it comes to substance instead of language, it's hard to tell whether you have your story right, because your story ignores a good bit of the substance. The Fed's analysis finds that the greatest impact from asset purchases is through the reduction in the stock of Treasuries held in private hands. Whatever model one may use to describe the workings of asset purchases, that is what the Fed's empirical research has uncovered. The Fed will no longer be doing what it has determined to be the most powerful thing it can do once short end rates reach zero. You've left that entirely out of your story.

By coincidence, the Treasury will very soon have to limit the sale of new Treasury debt soon after the Fed stops buying it. Treasury is taking over on the supply side the job that the Fed is leaving off on the demand side. That is going to muddle the result of the Fed leaving off.

Philip George

You say:
The money creation effect -- and this is the "printing money" you hear so much about -- is the reciprocal of the reserve requirement, currently ten percent in the US. This means that $600 billion in QE II buying has created the potential for $6 trillion in new money. This potential has not been realized.

How do you know the potential has not been realized? On what parameter are you basing your conclusion?

My calculations show that money supply has been rising constantly since the third quarter of 2009.

The graph can be seen at

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