US Hit By $3 Trillion Bailout Estimate

The talented people at Zero Hedge makes a hard hitting analysis of the next phase of quantitative easing by the Federal Reserve. Their estimate for the whole so-called QE2 is stunningly 3 trillion dollar – almost the double of QE1 with a price tag of 1,7 trillion. Here’s some highlights, and link to the full report.

Perhaps at this point it is prudent to recall what the first definition of credit is:

1. Belief or confidence in the truth of something.

By that definition, America‘s “credit” has ran out.

Recently the debate over when QE2 will occur has taken a back seat over the question of what the implications of the FED’s latest intervention in monetary policy will be, as it is now certain that Bernanke will attempt a fresh round of monetary stimulus to prevent the recent deceleration in the economy from transforming into outright deflation.

Whether or not the FED will decide to engage in QE2 on its November 3 meeting, or as others have suggested December 14, and maybe even as far out as January 25, the actual event is now a certainty.

And while many have discussed this topic in big picture terms, most notably David Tepper, who on Friday stated that no matter what, stocks will benefit from QE2, few if any have actually considered what the impact of QE2 will be on the FED’s balance sheet, and how the change in composition in FED assets will impact all marketable asset classes.

We have conducted a rough analysis on how QE2 will reshape the FED’s balance sheet:

We were stunned to realize that over the next 6 months the FED may be the net buyer of nearly $3 trillion in Treasures, an action which will likely set off a chain of events which could result in rates dropping all the way to zero, stocks surging, and gold (and other precious metals) going from current price levels to well in the 5 digit range.

A Question of Size

One of the main open questions on QE2, is how large the FED’s next monetization episode will be.

This year’s most prescient economist, Jan Hatzius, has predicted that the minimum floor of Bernanke’s next intervention will be around $1 trillion, which of course means that he likely expects a materially greater final outcome from a FED that is known for “forceful” action.

Others, such as Bank of America‘s Priya Misra, have loftier expectations:

We expect the size of QE2 to be at least as much as QE1 in terms of duration demand.

As a reminder, QE1, when completed, resulted in the repurchase of roughly $1.7 trillion in Treasury and MBS/Agency securities.

It is thus safe to assume that the FED’s QE2 will likely amount to roughly $1.5 trillion in outright security purchases.

However, as we will demonstrate, this is far from the whole story, and the actual marginal purchasing impact will be substantially greater.

A Question of Composition

Probably the most important fact that economists and investors are ignoring is that QE2 will be accompanied by the prerogatives of QE Lite, namely the constant re-balancing the FED’s balance sheet for ongoing and accelerating prepayments of the MBS/Agency portfolio.

This is a critical fact, because once it becomes clear that the FED is indeed commencing on another round of monetization, rates will collapse even more beyond recent all time records (and if we are correct, could plunge all the way to zero).

What is very important to note, is that as Bank of America’s Jeffrey Rosenberg highlights, a material drop in rates, which is now practically inevitable, is certain to cause a surge in mortgage prepayments of agency securities:

“Our mortgage team highlights a 100 basis point decline in rates would raise the agency universe of mortgages refinanciability from currently about half to over 90%.”

Full report link.

Additional: BofA Securitization Weekly 9.17.pdf

Related by the Econotwist:

The US FED Launch The QE2 – Beta Version

Helicopter Ben; Cleared For Take Off

USA Could Be Forced Into Another Trillion Dollar Bank Rescue

James Bullard: The Future Of FED

US Economic growth slows to 1,6% – Does Quantitative Easing Really Matter?

Is Quantitative Easing An Attack On Your Freedom?

EUR Knocked Off Its Pedestal



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6 responses to “US Hit By $3 Trillion Bailout Estimate

  1. Pingback: Who The Fuck Is This Keynes-Guy? | EconoTwist's

  2. kenezen

    The QE2 is another inflationary methodology to be employed and follows Keynesian philosophy. Unfortunately it is once again “Top Down” as opposed to Bottom Up.

    The biggest worry is, however,the close to 17% increase in food and fuel costs each year on average for the past five years. Our lower middle and lower class represents our portion of two thirds of the world population in that category.
    These citizens pay for fuel and food, stupidly not represented in the most quoted inflationary figures. These citizens will quit buying hard goods, services and bills to purchase those necessities of life.

    This is what occurred in 2008 that triggered the derivative and Credit Default Swaps(CDS). This is a global problem most applicable to countries other than low population and heavy in natural resources countries. .

  3. yeah my dad will like this

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