Fed Exit Plan May Be Redrawn as Assets Near $3 Trillion

A decision by the Federal Reserve to expand its bond buying next week is likely to prompt policy makers to rewrite their 18-month-old blueprint for an exit from record monetary stimulus.

Under the exit strategy, the Fed would start selling bonds in mid-2015 in a bid to return its holdings to pre-crisis proportions in two to three years. An accelerated buildup of assets would also mean a faster pace of sales when the time comes to exit -- increasing the risk that a jump in interest rates would crush the economic recovery.

The U.S. Federal Reserve building in Washington. Photographer: Andrew Harrer/Bloomberg

“There is certainly an issue about unwinding the balance sheet” in a way that “is effective and continues to support the recovery without creating inflation,” St. Louis Fed Bank President James Bullard said in an interview in October. The central bank might have to “revisit” the 2011 strategy, he added.

The Fed is already buying $40 billion a month in mortgage- backed securities to boost the economy, and policy makers meeting Dec. 11-12 will consider whether to purchase more assets. John Williams, president of the San Francisco Fed, has proposed adding $45 billion of Treasury securities a month.

The bigger the balance sheet, “the riskier the exit becomes,” Richmond Fed President Jeffrey Lacker said during a Nov. 20 speech in New York. “That is something we need to think carefully about.”

Krishna Memani, director of fixed income at OppenheimerFunds Inc., said a too-rapid sale of assets risks disrupting the $5.2 trillion market for agency mortgage debt.
Finding Ways

“They have to find ways of unwinding the balance sheet without dumping all of it in the marketplace,” said Memani, who oversees a bond portfolio of about $70 billion, including about $6 billion of mortgage-backed securities.

The central bank has been extending the maturities of its assets with Operation Twist, a program to replace $667 billion of short-term debt with the same amount of longer-term bonds that expires this month.

A decision to expand purchases could push the total assets to $4 trillion by the end of 2013, saidMichael Hanson, a senior U.S. economist at Bank of America Corp. Total assets stand at $2.86 trillion, up from $869 billion at the end of June 2007.

“The more they add to the balance sheet, the longer it will take to normalize,” said Hanson, who worked on designing tools that will be used in the Fed’s exit strategy as an economist in the monetary affairs division at the Board of Governors in 2009.
Holdings Expand

The central bank’s holdings expanded during the financial crisis as the Fed created several emergency loan programs. Chairman Ben S. Bernanke in November 2008 ordered the purchase of debt issued by housing agencies and mortgage-backed securities in a strategy that he called credit easing.

After the benchmark lending rate was cut almost to zero in December 2008, the Fed continued buying bonds as its primary easing tool. The Fed announced its third round of purchases in September without specifying a total quantity or end date.

Those central bank initiatives have helped push yields on Treasury and housing debt to record lows. The average fixed rate on a 30-year mortgage fell to 3.31 percent last month, according to a Freddie Mac index.

The yield on the 10-year Treasury note reached 1.39 percent on July 24 and, at 10:24 a.m. in New York, rose 0.03 percentage point to 1.62 percent after a report showed U.S. payrolls expanded last month more than forecast. U.S. Labor Department figures showed the U.S. added 146,000 jobs in November and the unemployment rate fell to 7.7 percent.
Transparency Push

The Fed announced the exit strategy in June 2011 as it sought to assure investors that it had the means to avoid igniting inflation once job growth, wages, and demand started moving up. The plan was part of Bernanke’s push for greater transparency and predictability.

The goal is to return the balance sheet to a pre-crisis size in two to three years and eliminate holdings of housing debt “over a period of three to five years.”

First, the Fed would allow assets to mature without being replaced, a process that will be slower now that the Fed has extended the average duration of its holdings. It would then modify its guidance on how long it plans to keep the federal funds rate near zero and begin temporary operations to drain excess bank reserves.

The Fed would next raise the federal funds rate, and finally, it would start selling securities.

The balance sheet averaged about 6.3 percent of nominal gross domestic product during the decade before the financial crisis. Today, a balance sheet of that size would be around $995 billion rather than $2.86 trillion.
Long Exit

“The exit is going to take a long time,” said Stephen Oliner, a resident scholar at the American Enterprise Institute in Washington and former Fed Board senior adviser. He estimates the Fed’s holdings could rise to more than $4 trillion.

If the Fed were to start bringing its holdings back to their pre-crisis level today, it would have to sell almost $2 trillion over a period of two to three years under its current exit plan. Assuming holdings grow to $4 trillion, asset sales could come to $3 trillion over the same period.

Fed officials haven’t publicly discussed an alternative plan for shrinking the balance sheet. One possibility, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, would be to enlist the help of the U.S. Treasury.
One-time Swap

The Fed could ask to swap longer-term Treasury debt for short-term bills and notes, thus reducing the maturity of its portfolio to accelerate the runoff. The Fed and Treasury could do this partly in a one-time swap, and partly by allowing the Fed to bid on new issues and pay with its holdings of long-term Treasuries, Crandall said.

Because the Fed would have less debt to sell to return its portfolio to a normal size, it could be “more aggressive in the liquidation” of housing-agency securities, he said, which was a priority for Fed officials when they announced the exit strategy.

Asset purchases have made it harder to change the federal funds rate when the time comes to raise borrowing costs.

In the five years before the crisis, excess bank reserves averaged $1.7 billion, so the Fed could alter interest rates by buying or selling comparatively small amounts of short-term debt in open-market operations.

Those reserves are now more than 800 times larger at $1.4 trillion. To move the fed funds rate, the central bank will have to drain or lock up the supply of excess reserves.
Current Plan

Under the current exit plan, the Fed would soak up reserves by using reverse repurchase agreements or offering term deposits.

“I’m not sure we’ll really know, until they undertake a real program, what the effectiveness is” of such measures, said Bank of America’s Hanson. “The amount of reserves could be so large that the draining doesn’t do a whole lot.”

The central bank could lose credibility if its policy actions don’t move the federal funds rate, saidMarvin Goodfriend, a former adviser at the Richmond Fed.

“The Fed needs to delicately acquire inflation credibility in the exit,” said Goodfriend, a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh. “We are used to tightly managed short-term interest rates.”

The Fed’s other tool is to extinguish reserves by selling bonds back to dealers. Even a fully-explained plan could push up home borrowing costs as traders account for hundreds of billions of dollars of new supply flowing back into the market.

“We are deep into experimentation at this point,” Oliner said. “It’s understandable that people are worried.”

Source

All Of This Whining About The Fiscal Cliff Is Pathetic

The fiscal cliff is coming! Run for the hills! There have been endless stories in the mainstream media about the "fiscal cliff" that our country is facing if the Democrats and the Republicans can't come to some sort of an agreement. If there is no agreement, taxes will go up and government spending will be reduced by a very small amount. And yes, that would likely push the U.S. economy into another recession, although there are many that would argue that we are already in a recession right now. 

In any event, there is a tremendous amount of distress out there about the fact that something might interrupt the debt-fueled prosperity that we have all been enjoying. You can almost hear them now: "No! Please don't cut government spending! Please don't raise taxes! Please keep stealing more than 100 million dollars from our children and our grandchildren every single hour of every single day so that we can continue this economic illusion that feels so very good." 

 The American people want the government to give everything to everybody, but they definitely do not want to pay for it. They want a big government that showers them with government checks and government benefits, but they don't want to cough up the ridiculous amount of money that it would take to fund such a government. So we just keep ripping off our kids and our grandkids. 

What we are doing to future generations is not just immoral, it is criminal. If they get the chance, someday they will look back and curse us for destroying their futures and destroying their country. So why do we continue to do this to them? Because we are greedy and selfish and we are absolutely desperate to maintain the massively overinflated standard of living that we have been enjoying. We have lived way above our means for so long that we don't even know what "normal" is supposed to be anymore.

But nobody can spend far more money than they bring in forever. At some point an adjustment comes, and our adjustment is going to be exceedingly painful.

Right now, the overwhelming consensus in the United States seems to be that we should put off any economic pain for as long as possible. The American people don't want significant cuts to government spending and they don't want taxes to be raised to pay for the spending that we are already doing.

But if the Republicans and the Democrats don't agree to a deal soon, we are going to see taxes raised substantially and government spending cut by a little bit. A recent CBS News articledid a good job of describing exactly what this "fiscal cliff" that we are facing actually is...


There are two parts to the so-called fiscal cliff. The first is the scheduled expiration of the tax cuts enacted in 2001 and 2003 under President George W. Bush, the payroll tax holiday enacted under President Obama, and a host of other tax breaks. The second is $1.2 trillion in automatic spending cuts to defense and domestic programs that are looming due to a 2011 deal that resulted from House Republicans' reluctance to raise the debt limit.

Now, it's true that if lawmakers fail to work out any sort of deal, there will be severe long-term consequences for the economy: According to the Tax Policy Center, going off the "cliff" would affect 88 percent of U.S. taxpayers, with their taxes rising by an average of $3,500 a year. Many economists, as well as the nonpartisan Congressional Budget Office, say the combination of spending cuts and tax hikes that are set to take effect would tip the economy into a new recession.

Please keep in mind that the "$1.2 trillion in automatic spending cuts" is not for a single year. When you break it down, the cuts to spending would be somewhere around 100 billion dollars a year. And a lot of those "cuts" are actually spending increases that would be cancelled. So those spending cuts would not really put much of a dent in our yearly budget deficits at all.

The tax increases would be more significant. Middle class families would be paying thousands of dollars more per year in taxes. These tax increases would raise some more revenue for the federal government, but they would also do significant damage to the economy in the short-term.

Do you know what they call a combination of government spending cuts and tax increases over in Europe?

They call it "austerity".

Nations like Greece and Spain have tried this. They cut spending and raised taxes in an attempt to reduce government budget deficits. What happens is that the spending cuts and the tax increases cause a significant economic slowdown and this causes tax revenues to come in much lower than projected. So then more spending cuts and tax hikes are necessary in order to try to get closer to balancing the budget. But then tax revenues fall even more.

In the end, both Greece and Spain still have large budget deficits and yet the economies of both nations are suffering through depression-like conditions. The unemployment rate in both nations is now over 25 percent. Just check out this chart right here to see how nightmarish austerity has been for the economies of both Greece and Spain.

So that is why everybody is freaking out about the fiscal cliff. They don't want to go down the same road of austerity. They want to keep living in an economic fantasy land where we can borrow our way to "prosperity".

But it is all a lie. The lines at the Apple stores, the crazed consumers on Black Friday, the restaurants teeming full with people and the government that thinks that it can take care of everyone from the cradle to the grave and yet keep taxes low. It is all a giant lie.

And no, please do not think that I am in favor of raising taxes. I most definitely am not. I believe that the government brings in more than enough money already.

Personally, I believe that we could have a system that completely eliminates income taxes and that funds the government through tariffs and various other forms of taxation. It was good enough for the Founding Fathers and it should be good enough for us. But that is a subject for another article.

Our current system has allowed us to live way beyond our means for an extended period of time, but it is only a matter of time until it all comes crashing down.

In fact, the game is already over. We have already destroyed the future. At this point it is only a matter of how long we can keep kicking the can down the road and putting off the pain.

Sadly, what we have done on a national level is simply a reflection of our "buy now, pay later" society. We have become a nation that is constantly willing to sacrifice the future in order to make the present more pleasant.

Just check out this video. We have become addicted to a prosperity that we cannot possibly pay for. But as long as someone will keep lending us the money we will continue to enjoy it.

As I have mentioned previously, the government has spent about 11 dollars for every 7 dollars of revenue that it has actually brought in while Barack Obama has been president.

We print, borrow and spend without giving any thought to what we are doing to the future of this country. We are shredding confidence in our currency and we are wrecking the greatest economic machine that the world has ever seen.

And all of our politicians and all of our "leaders" prance about as if they are the smartest generation of Americans ever, and they think that they are an "example" for the rest of the world, but if our Founding Fathers were around today they would be absolutely horrified about what they have done to the country that they built.

If you think that the economy is bad now, you just wait.

We are still in the "economic fantasy land" phase where we are enjoying a massively inflated standard of living constructed on a mountain of borrowed fiat currency. Our economy is being held up by trillions of borrowed dollars, and all of that money makes the U.S. economy appear to be far more prosperous than it actually should be.

When we have to start living closer to what our real standard of living should be things are going to get really bad.

Most Americans simply don't understand that if the federal government went to a balanced budget tomorrow it would instantly plunge the U.S. economy into a depression.

Just look at Greece and Spain. The same thing is going to happen to us one way or another.

So enjoy this false prosperity while you still can. This is about as good as things are going to get, and from here on out it is downhill for America.

Source

2013 Silver Price Forecast: Silver Will Perform Like Gold on Steroids

BY PETER KRAUTH, Global Resources Specialist, Money Morning

This past March, I asked a highly successful investment advisor what he thought about gold. Since he deals almost exclusively with very high net-worth individuals, his point of view was especially intriguing.

He confided to me that many of his clients had been asking for gold and gold-related investments over the past few years. I can't say that I was surprised.

But what he told me next simply shocked me.

"Gold's much too volatile, it's too risky", he said. "Sure it's up, but I try to discourage my clients from investing in it."

It simply floored me that he thought gold was too volatile. Gold is only up 580% since it bottomed in 2001, without a single losing year to date.

That's not something you can say about the stock market or any other type of investment.

I can hardly imagine what he must think of silver, as silver prices are up by 725% since 2001.

Today, silver is trading around $34, but our 2013 silver price forecast now has the shiny metal going much, much higher.

What will power that rise?

Since it's slaved to its richer cousin, all the fundamentals for higher gold would apply.

I wrote about them yesterday in my 2013 gold price forecast.

As history has shown, silver moves almost in sync with gold, but exaggerates its movements, both on the up anddown sides. That's why I like to think of silver as "gold on steroids".



2013 Silver Price Forecast

For 2013 I think silver, like gold, will set a new all-time nominal price record, likely reaching as high as $54 an ounce.

Despite silver's dependency on gold, it does have some distinct fundamentals, too.

In fact, here are my key drivers for silver prices in 2013:

The Gold/Silver Ratio: Before the financial crisis, the gold/silver ratio was around 50 (meaning an ounce of gold would buy you 50 ounces of silver) and trending downward. In late April last year silver exploded higher, pushing the ratio down below 30.

That was short-lived, as silver's dramatic rise was unsustainable. I had said so at the time. The ratio recently returned to a high level near 60. In 2013, look for the ratio to head back down again, meaning silver will rise faster than gold.

On a long-term basis, I think we'll see this ratio move down closer to 20. So right now, silver is looking rather undervalued relative to gold.

Four More Years of Obama: The President has been very good for silver prices. In fact, he was so good, he helped make silver the best-performing major financial asset during his first term.

Now that Obama has earned another four years, and Federal Reserve Chairman Ben Bernanke's still in place and relying heavily on the printing press, I'm fully expecting a repeat performance. Thanks, guys, for more of the same.


Higher Investment Demand: Physical silver investment demand is growing. Despite a number of existing silver ETFs, the Royal Canadian Mint is launching its own. That has suddenly removed 3 million ounces from the physical market.

The Sprott Physical Silver Trust (NYSE: PSLV) is expanding its size as well, likely having bought 7.5 million ounces of silver to accomplish this. That's over 10 million ounces in a single month. Meanwhile, the U.S. Mint has sold more silver coins versus gold coins so far this year than in any since the coin program started.

Higher Industrial Demand: Solar panel demand is exploding and silver is used to make them, of which the average panel requires about two thirds of an ounce. Since 2000 the adoption of solar panel technology has meant a 50% annual increase in silver usage each year, going from 1 million ounces in 2002 to 60 million ounces last year, representing nearly 11% of all industrial demand. Adding fuel to the fire, Japan has recently offered to pay utilities three times the price for electricity generated from solar versus conventional methods.

Unlike gold, silver has a wide range of industrial uses. There's currently growing demand from an increasing number of industrial applications, including lighting, electronics, hygiene and medicine, food packaging, and water purification, to name but a few. That's bullish for silver.

So for these reasons, as well as silver's historical role as an inflation hedge/monetary asset, look for silver prices to keep rising in the years ahead.

That being said, 2013 is likely to be pivotal for the more affordable precious metal. Now that gold has set and surpassed its own all-time highs, look for silver to be next.

It now looks like $54 is the next price target in silver's relentless and historic climb.

Source

SILVER SUPPRESSION EXPLAINED, Plus a Semi-Numi Must Have!