Unwinding QE will be “More Disruptive than People Think”

“We act like we know exactly how it’s going to happen, and we don’t.”

“We’ve never had QE like this before, and we’ve never had unwinding like this before,” said JPMorgan CEO Jamie Dimon at the Europlace finance conference in Paris. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”

He was referring to the Fed’s plan to unwind QE, shedding Treasury securities and mortgage-backed securities on its balance sheet. The Fed will likely announce the kick-off this year, possibly at its September meeting.

According to its plan, there will be a phase-in period. It will unload $10 billion the first month and raise that to $50 billion over the next 12 months. Then it will continue at that pace to achieve its “balance sheet normalization.” Just like the Fed “created” this money during QE to buy these assets, it will “destroy” this money at a rate of $50 billion a month, or $600 billion a year. It’s the reverse of QE, with reverse effects.

Other central banks are in a similar boat. The Fed, the Bank of Japan, and the ECB together have loaded up their balance sheets with $14 trillion in assets. Unwinding this is going to have some impact – likely reversing some of the asset price inflation in stocks, bonds, real estate, and other markets that these gigantic bouts of asset buying have caused.

The Bank of Japan has been quietly tapering its asset purchases for a while to where it buys only enough to keep the 10-year yield barely above zero. And the ECB has tapered its monthly purchases by €20 billion earlier this year and is preparing the markets for more tapering. Once central banks stop buying assets, the phase starts when central banks try to unload some of those assets. The Fed is at the threshold of this phase.

Dimon was less concerned about the Fed’s rate hikes. People are too focused on rate hikes, he said, according to a Bloomberg recording of the conference. If the economy is strong, economic growth itself overcomes the issues posed by higher rates, he said. The economy has been through rate hikes many times before. They’re a known quantity.

But “when selling securities in the market place starts,” that’s when it gets serious.

“When that happens of size or substance, it could be a little more disruptive than people think,” he said. Whatever it will do, no one knows what it will do – because “it never happened before.”

“We act like we know exactly how it’s going to happen, and we don’t,” he said. Central banks “would like to provide all of you with certainty, but you cannot make things certain that are uncertain.”

“We don’t know how that is going to play out,” he added.

All the main buyers of sovereign debt over the past decade – central banks, financial institutions, foreign exchange managers – will become net sellers now, he said according to Bloomberg. “That is a very different world you have to operate in, that’s a big change in the tide.”

In other words, no one knows how this is going to work out. It’s part of the great journey into experimental monetary policy.

QE had the intended effect: inflating asset prices – stocks, bonds, real estate, classic cars, art… which made it much harder for people who have to rely on labor for their income to buy these assets – or to rent them, such as housing. Unwinding QE, once it starts in earnest, is likely to pull asset prices in the opposite direction. But given of how leveraged assets are, and to the enormous extent they have been used as collateral, Dimon – the banker who is concerned about collateral values – hit the nail on the head. It’ll be “a very different world.”

The Fed has been tightening by raising rates and it has announced a plan to unwind QE, and financial conditions should be tightening in response, and the Fed wants them to tighten. But the opposite has happened. Markets have blown off the Fed. Read…  Stock and Bond Markets Blow Off Fed, Fed Gets Frustrated

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  116 comments for “Unwinding QE will be “More Disruptive than People Think”

  1. mvojy says:

    At some point you run out of buyers for your sovereign debt. Then what?

    • Chris says:

      CB’s will buy it back again and guarantee a continued economic malaise until they identify and creatively inflate the next bubble.

    • RD Blakeslee says:

      As I understand it. There will be no “buyers” – The Fed will just stop replacing maturing paper and the money supply will shrink by a corresponding amount. I’m sure wolf will correct that if its not right.

      • Maximus Minimus says:

        That might not be possible. Operation Sprint was launched to replace short term notes with long term treasuries. Might need to wait a long time till they mature.

        • noone says:

          Last I saw (only a few weeks ago, but I am having trouble finding it now) the Fed had a published plan where all of its balance sheet normalization was accounted for by just letting a certain amount of bonds expire without re-buying them. It is true they have some very very long term bonds including a non-trivial amount that won’t mature until something like 2047, but those long dated bonds still only represent a fraction of the total balance sheet and they have accounted for this in their plan. The Fed has over $4 trillion on their balance sheet they, and they are letting things mature off of it at rates starting at $10 billion a month and eventually moving to $50 billion chunks. A $10 billion chunk is a mere 0.25% of their total balance sheet, and their current plan isn’t to run their balance sheet to zero, but rather to something like $1 or 2 trillion (I forget which) and that post QT leftover easily accounts for all the long dated bonds that will be left un-matured at the end of the currently planed QT cycle.

          In short, the QE unwind may end up being a poorly planned disaster for any number of other reasons, but at least as far as the unwind-the-ballance-sheet without selling bonds but instead just limiting repurchasing – well that math all works out fine and is not something to worry about. That aspect of QT is perfectly possible and reasonable even if QT itself is not.

        • Wolf Richter says:

          Here is where I explain how the Fed will “normalize” the balance sheet — the mechanics, the phase-in period, the amounts…


          It includes the link to the Fed’s “Addendum” where it laid out the plan.

      • JB says:

        The big question is what will happen when the treasury issues a replacement bond to cover what it retired with the fed. Any reduction in the feds balance sheet will have have to be funded by the private sector or other governments. Why ? our the national debt keeps going up. So the feds are reducing their balance sheet while government debt obligations keep increasing. The BoJ has to keeps interest rates low . Its national debt is so high that any interest rate increase will take a larger chunk of it’s budget . We may face the same issue . If our government was smart it would at least take some steps to reduce it’s deficits . Mnuchin wants to issue 50 to 100 year bonds to lock in interest rate.


        • Bill Shortell says:

          Most of the Fed’s portfolio is in US sovereign debt. When the Fed says to the Treasury, “We are not rolling these over, pay up,” the cash (which the Fed will burn) has to come from fresh debt from somewhere else, increased taxes, or spare cash from cutting the budget.

          Now Trump plans to cut the budget and LOWER taxes, to the degree that those cancel out, the Treasury will need to increase the deficit. Add to this the problem that the SS Trust Fund is at the same point as the Fed, cashing out instead of cashing in to the General Fund. Now we are looking at a significant increase in Federal debt.

          How are all those deficit-hawk Republicans going to react? How much social dislocation can we expect from the slashing of social programs?

        • Adam Price says:

          Bill, the US Treasuries markets are a $13 trillion a year market with more than $7 trillion in new US Treasuries issued each year. Around $6 trillion of that goes to pay off maturing US Treasuries in full. There are approximately 3 bids for every new US Treasury sold which is why the yields (interest rates) on US Treasuries are so so. US Treasury yields (interest rates) are inverse to prices and the higher the prices bid for US Treasuries the lower the yields (interest rates).

      • Mike says:

        The unwinding of QE holdings will have the opposite effect that QE caused, which will be a return to more realistic valuations for securities. E.g. Stocks with high PE ratios will have to compete with treasuries believed to be more safe but with higher rates of return– which they are going to try to keep within the US government’s very limited budget: so it can pay the interest required.

        Naturally, riskier, high PE ratios stocks will decline in value because of the reduction in demand when prospective buyers can get the same yield in believed “safer” treasuries. I think that they may be starting a economic avalanche when they start to sell their trillions of dollars in treasuries.

    • fajensen says:

      Then Robots will buy it all, of course. Automation is taking away our jobs and reasons for existing -> borrow, consume, borrow more :).

      The thing I don’t get is that the insiders, who fake the numbers, nudge the statistics and game the KPI’s seem to believe in their own bullshit and acts on it as if it was real when it hits the news. It’s like they actually cant really hold many different realities in their heads at the same time after all.

    • buyers = sellers says:

      you don’t run out of buyers – when the buyers are the same idiots issuing the paper and selling it. one word for the 21st century “RIGGED”. no shortage of idiots and trolls spewing lies and spinning misinformation.

      • Ambrose Bierce says:

        as long as those bond buys are fungible, that is they can be bought on margin and the money used for something else, like buying stock. the key to everything is how much effective leverage is there? if i buy a bond on 10% and i now borrow against the collateral how much can i borrow, and what can i buy with that borrowed money, that is the question.

        • blueponey@poneyexpress.com says:

          Ambrose, and when it all goes to crap – just create a derivative or backdoor. then when public gets privy – well create another derivative or backdoor. Rinse and repeat until middle class is eliminated and all wealth is papered over in tyrannically based economy with bought off shills who cheer lead and party like it is 1984.

        • Ambrose Bierce says:

          Yes that’s the point, when leverage is no longer extended, then the system begins to feed on itself. Your broker will give you a line of credit, equal to about 3/4s of your portfolio. Mind these guys play by much stricter rules than online brokers, they won’t take cash, (although I could deposit the cash at the conjoined bank affiliate and transfer it in, probably) they actually borrow the shares in order to make a short sale. These guys are legit, and they will open a credit line for you, and while you cannot turn around and buy more stock with them, you can write a check and go online to your other broker.
          Now this very legit guy tells me, personally, that if the value of my portfolio falls I will not get a margin call, or in this case a reduction in my line of credit because the value of those assets has dropped. They are promising me a line of credit on the asset value of my stocks, pinned at today’s value. Of course that sort of promise is not absolute, but it will take more than a 10 or even 20% drop in the market to move that number. You see, the fix is in, this is what Yellen is saying. It’s not just the fat cats who can play with the casinos money its guys like you and me. Its the 1920s all over again but we figured it out. They fixed the banks!!! They showed they can raise rates to keep the animal spirits in line. Gold is or will be nearly worthless except to exchange it for money and buy stocks. All central bankers have all other central bankers on speed dial. The question is not the viability of credit, its the growth of credit, or leverage, the shark has to keep swimming. When no one wants treasury bonds on 10% margin or they can no longer leverage that collateral, the game is over. Its not complicated, there is an efficient market, you and I can play. When new bond issues go under subscribed widows and orphans buy 30yr TIPS at 20% off face value and Uncle pays you to take his paper, Bernanke can cluck his tongue, and Trump can swear he will take it back!!!
          The truth being that the so called Deep State (and god) has DJT, and America, in his hip pocket (or her hip pocket). Enjoy the ride, no one takes the punch bowl away, ever, but they do run out of punch, sooner or later.

  2. pete says:

    Interesting & foreboding. Will Jamie be new fed head?…PJS

  3. tony says:

    I love how all these crooks i’m sorry co’s give their opinion on state of the economy and wall st when they are the one’s who create it.I am so sick of all the opinions from these guys. I love when crook’s of crook’s from goldman sach’s give their opinion on anything.

  4. Steve says:

    Does anyone seriously believe the Feds will sell anything other than maybe $50 worth of anything before they actually start buying more? Lucy and the football. These clowns in the Eccles building will tell you with a straight face that inflation is barely 2%. Incredible. We will see a FFR of 0% before we ever see 3%, if ever. They walked down the path from which there is no return. Debt levels in this country are through the roof. But hey, go drive for Uber.

    • Old Engineer says:

      I think that you are right. That they will actually have the courage and persistence to sell $600 billion in a year does strain credulity a bit. And since almost all the money created has ended up concentrated in the accounts of the “one percent” it is hard to see what difference it will make to the general economy regardless of what they do. It sure doesn’t seem like much of it is in circulation.

      • economicminor says:

        “And since almost all the money created has ended up concentrated in the accounts of the “one percent” it is hard to see what difference it will make to the general economy”

        That isn’t all it did. It drove up the imputed values of stocks, bonds, houses, commercial real estate and allowed inventories of lots of things like steel, oil and vehicles to build. These are the collateral for trillion$ worth of loans. Increasing the quantity of money drove up the values. Reducing the quantity of money is going to drive down the value of these same assets leaving trillion$ in stranded or underwater loans.

        This is what they don’t seem to know? Or they do and they really don’t know how in hell they are going to do what needs to be done without causing a real Doozie of a Calamity.

        • Niko says:

          I agree.

          “QE had the intended effect: inflating asset prices – stocks, bonds, real estate, classic cars, art”

          Wait, this isn’t what the last administration promised!

    • Adam Price says:

      The Federal Reserve will be reducing their balance sheet by around 50% between now and the end of 2018 from around $4.4 trillion to around $2.2 trillion as they have very clearly stated. The only 3 interest rates set by the Federal Reserve have little to nothing to do with the US economy as all interest rates that do matter are keyed off the yields (interest rates) established in the $13 trillion a year US Treasuries markets.

      As to the Federal Funds Rate (FFR) at which banks borrow from each other strictly for liquidity purposes to clear overnight transactions on a fully collateralized basis, that is practically never even used anymore as banks are away in vast excess liquidity created by QE. In fact, member banks of the Federal Reserve now have more than $3.8 trillion of liquid reserves inside the Federal Reserve with more than $1.3 trillion in their primary reserves accounts and more than $2.5 trillion in the excess reserves accounts. As to the Federal Discount Rate that rate is for direct borrowing by banks from the Federal Reserve under the same guidelines and rules as the FFR and it is NEVER used anymore and has always carried a stigma with the Federal Reserve being the lender of last resort.

      Banks may NEVER use the FFR or FDR to borrow money from each other or the Federal Reserve respectively for any purposes other than overnight liquidity and may NEVER do any borrowing to loan out funds or speculate in anything.

      The only other interest rate set by the Federal Reserve is the IOER (Interest On Excess Reserves) which is the rate which the Federal Reserve payments member banks on their $2.5+ trillion of excess reserves deposits inside the Federal Reserve.

      • Wolf Richter says:

        Correct, but it seems you’re hung up on the word “set.”

        The Fed doesn’t “set” the federal funds rate. It “sets” a target range for the federal funds rate. The recent hikes were hikes of that target range. The federal funds rate is a market rate that the Fed manipulates, if you will, into its target range by jawboning and by market interventions (“open market operations” … buying and selling).

        This is NOT a secret. The Fed itself explains it:

        “Open market operations (OMOs)–the purchase and sale of securities in the open market by a central bank–are a key tool used by the Federal Reserve in the implementation of monetary policy.”


        So it doesn’t “set” the federal funds rate. It sets the target range and uses potentially unlimited buying and selling to put the fed funds rate into its target range.

        On Friday, this fed funds rate was 1.16%, right in the middle of the Fed’s target range for the fed funds rate of 1%-1.25%.

  5. Hkan says:

    How will centralbanks pull this off.
    Sky rocketing rigged gold/silver price the solution?

    • Dave B. says:

      Gold $10,000 oz ?

    • Adam Price says:

      Gold has nothing whatsoever to do with this issue nor does silver and they are both just little niche fungible commodities with total global annual markets less than half of the retail sales of Walmart.

  6. Maximus Minimus says:

    These dudes have no idea how disruptive this already was, and will be for the majority. The fact that they float their concern and only in the hypothetical confirms that these people get their information only from the dear media.

  7. TJ Martin says:

    Trying to understand this insane economy and how and when it’ll unwind reminds me of an old joke…. replacing the original word ‘ women ‘ with economy ;

    A man walking down a beach at sunrise trips over an elaborately decorated bottle half buried in the sand . After wiping and rubbing it a bit .. the top pops open and out comes one seriously PO’d Genie with an attitude … saying ;

    ” I’m so sick of this whole routine .. three thousand years of granting three wishes to you pathetic little humans and then getting shoved back in that miserable bottle ! Well here’s the deal buckaroo … you get one wish … and one wish only .. so make it good pal cause thats all you’re gonna get ”

    After much thought and consideration the man exclaims … ” I’ve got it .. the perfect wish ! ”

    .. with the Genie replying .. ” Yeah right .. lets hear it ”

    The man then says .. ” Look .. I’ve always wanted to go to Hawaii but I’m afraid of boats and planes … I desperately want to be popular with women .. and of course I want to be rich ”

    With the Genie replying .. ” Hang on there pal … thats three wishes and I was perfectly clear … One Only damn it ! ”

    The man then explaining .. ” No … one wish will do it . What I want is for you to make me a toll bridge from San Francisco to Hawaii complete with gas stations and services along the way . That way I can go anytime I want … the tolls and gas/service stations along the way will make me fabulously wealthy … and being rich women will fawn over me left and right ”

    The Genie completely losing his cool then screams … ” Do you have any freaking clue how much materials time , manpower and effort that would take ? Not to mention all the permissions etc ??? No way Jose .. aint gonna happen .. come up with another wish cause there’s no way I’m granting that one ”

    After further deliberation the man says…. ” OK .. I want to be able to understand and fully comprehend this economy we’re in ”

    With the Genie replying … ” How many lanes did you want on that bridge ? ”


    • walter map says:

      All anybody really needs to know about the economy is that it’s rigged to enrich them by screwing you. That’s all Dimon really knows and he’s happy with that.

      His victims should simply distance themselves from it as much as possible to minimize their misery when they finally do get around to crashing it.

      • RD Blakeslee says:

        Agree with you, except I think one AVOIDS victimhood and misery in proportion to how much he has distanced himself.

        Avoidance of as much as one can of the financial system (as it goes up down and sideways) has been effective for years.

        • TJ Martin says:

          To quote the bard ( Jim Morrison )

          ” No one here gets out alive ” … or in this case at the very least .. unscathed .

          ” This is the end , my only friend , the end – Of everything that stands , the end – No safety or surprise , the end “

      • TJ Martin says:

        Errr … thats taking a blatant victim stance in the vain attempt to mitigate one’s own personal responsibility and culpability … not to mention you are severely over generalizing what is an extremely complex situation . Fact is … everyone is to blame … from the top on down regardless . Oh some may elicit more blame than others … with the American consumer deserving a good share of it all .

        As for over generalization .. that is the most egregious of sins/ills in my opinion.. and the weakest argument imaginable

        FYI ; One avoids victimhood by accepting one’s own personal responsibility and culpability and dealing with it .. not by distance … distance only offers the perception of avoidance when in reality you’re setting yourself up for a fall about to come out of nowhere

        • walter map says:

          “One avoids victimhood by accepting one’s own personal responsibility and culpability and dealing with it.”

          So far as I am aware, I have never been the cause of a national financial collapse.

          Most people aren’t. There are specialists for that sort of thing.

        • Lee says:

          What a crock.

          I’m sure that all those people with no power will surely accept that they lost their job because they were at fault as a result of companies making bad decisions for them.

          I’m also sure that all those people that lost money in those commodity accounts that were co-mingled and drained will accept that they were at fault by having an account there. I’m sure that the person responsible has been dealt with and is in jail. What, he isn’t?

          And I could go on and on – next we’ll hear that old story about how the banks get robbed because its their fault that they have money……….

        • RD Blakeslee says:


          Please explain to me how taking personal responsibility is inconsistent with distancing oneself from the financial system?
          Isn’t avoidance of debt a form of “personal responsibility”?
          Or, Choosing a relatively tranquil and safe location to raise a family?

          How will the “fall from out of nowhere” come to my farm? Tell me what your notion of “personal responsibility” would be, to prevent it?

    • Jim Graham says:

      Best read I have had all week!

      Maybe all month.

  8. Jim Graham says:

    WHO will buy these “assets” and how will they pay for them?

    “Knowing” the value of the “unwound” “asset” is going to go down \/ down \/ down \/ down \/ and down \/ even more as the “great unwind” (a crash controlled??? by the powers that be – read as lackeys to the rich and powerful) continues who is going to buy these “assets” and at what “value” in relation to their “face value”? What manner of tender will be used to pay for these “assets”? Bit Coins??

    How long before all the unencumbered money is locked into this “Great Unwind” and there is no more loose cash to invest? IF there is any loose cash out there..

    Will buyers have to go to the bank and borrow money to buy more of their “excess assets” that are being “unwound”?


    Will the very rich with “safe” reserves – cash? LOL – or otherwise – and the few of us that have zero debt, be the only ones to have uncumbered ownership of our possessions?

    Seems to me that only the very rich and the poor poor poor folks that exist in the hunter-gatherer societies will be among the few to survive this debacle without .?.?.?. Only God knows…. And maybe the devil.

    Off my soapbox..

    • Petunia says:

      The effect might be that the US dollar finally gets kicked to the curb around the world. If they start to take cash out of the economy the people at the bottom will get more squeezed than before, and that’s not good for anybody. It seems those crypto currencies Wolf wrote about in the previous article will be roaring back, along with any other currency you can trade.

      • Meme Imfurst says:

        “The effect might be that the US dollar finally gets kicked to the curb around the world.”

        The only way that could possibly happen is if all the US military bases close and all service personnel are brought home. The US payroll overseas is what keeps make countries flags waving.

    • RD Blakeslee says:

      “…the few of us that have zero debt…”

      There you go!

  9. Flying Monkey says:

    The genie is out of the bottle. They got their “high” but do not want to suffer the consequences. I don’t they have the fortitude to stuff the genie back in the bottle. The QE will become a permanent part of the money supply now.

  10. Davebee says:

    What QE unwinding? That ol’ Fed washer woman aint unwinding a thing and the casino just loves to hear that tune. Watch those greenies shooting up and up.
    How this Alice In Wonderland/David Copperfield, Funny Money madhouse keeps on going is what I find both scary and mystifying at the same time.
    I seem to recall that Bernie Madoff did this sort of thing just before they put him in the pokey for 2 million years or so!

    • IdahoPotato says:

      “ol’ Fed washer woman” ????

      I don’t ever recall Bernanke or Greenspan referred to this way. Misogyny is never okay.

      • akiddy111 says:

        Greenspan and Bernanke have been called worse, believe me. Davebee may just be a female of advanced years.

        Have you read the book, “The Washerwoman’s Dream” ?

        Now she was a lady with class imho.

        Some of us are dead tired of the globalist elite infused political correctness. That is why the embarrassment of a clown, DJT is our President.

        I am an Irish man who loves a good Irish joke at the expense of me and my fellow country folk. Sadly, i think i have heard them all more than once.

        • Raymond C. Rogers says:

          I think it might have to do with running against a crook, one whose husband gave a $500,000 speech to Russia, and who got the Bloomberg article abut it, squashed.

      • R2D2 says:

        Could we please not bring your Misogyny issues in the discussions here? Bernanke and Greenspan were called names far worse than this. 90% of public figures have been called names far worse than this.

        • Wolf Richter says:

          Yes, but I probably didn’t allow that here :-]

        • IdahoPotato says:

          Name-calling, racism and misogyny are fine is some sites (like ZeroHedge), but that’s why I come to WolfStreet.

        • Bee says:

          In light of Perpetually Offended’s (IdahoPotato) note, I refer Wolf 3 comments above to find such comments Wolf said don’t exist here. “the embarrassment of a clown, DJT our President”. Again these harassments are allowed, perhaps even encouraged? Afraid I see through the colors of “no politics” here.

        • Wolf Richter says:

          Look Bee, I didn’t block “washerwoman” either. There is a fine line somewhere. I hardly ever find it. I just try to keep the discourse as civil as possible. Still, a lot of things pass.

      • David G LA says:

        The Irish Washerwoman is a traditional Irish jig whose melody is familiar to many people in Ireland, the British Isles, and North America. It repeats its refrain several times, sometimes by gradually increasing in tempo until being played very fast before coming to a sudden stop.


        • IdahoPotato says:


          As a woman, I found it offensive. I also found the mansplaining about how it is not offensive quite interesting. I wonder if I would be labelled “Perpetually Offended” if it was racism I was responding to. Probably not.

          Somehow, casual sexism seems to be okay. I have seen Yellen (who I don’t particularly care for) been referred to again and again in most derogatory ways, often referencing her appearance. In this forum. I know Wolf may not approve of it, but it’s not fair to expect him to edit and police hundred plus comments in every post.

        • Bee says:

          IdahoPotato—you’re showing your preconceived bias. I actually assumed you were a male. I don’t know R2D2’s gender, so not quite sure you do either, yet you call it mansplaining?? I don’t care about a person’s gender, age, race, sexual identity, etc. ~ so you see, I don’t have these notions constantly going through my head to be offended by. Maybe some others could try to grasp this concept and we could move the f//ck forward for a change!!! Bye—I’m not further engaging here.

      • nick kelly says:

        Stockman often refers to her as a school marm and I’ve told him he is out of line.
        And so is the vitriol directed at her personally and for that matter her predecessor.

        When the Fed stared over the cliff in 2007 it saw it had to avoid its great mistake in the 30’s when it did nothing.

        But it could only use the tools it had.
        The Fed can’t rationalize the US medical system, one sixth of the economy.
        (When a WR piece said prescription drugs were 12 % of all sales I queried it as a misprint but he confirmed it.)

        Not can it cut military spending, the size of the next 6 countries combined, and notorious for waste ( see F 35 etc. )
        It can’t authorize an infra-structure program, or tax reform.

        When Timothy McVeigh blew up the Federal Building, he thought he was acting as a true patriot.
        When I read some of these rants about the Fed being an axis of evil I wonder how many other true patriots are out there, not to mention the mental cases.

        I realize that the vast majority of Fed critics aren’t either of these, but most of those who knew McVeigh and vented with him were shocked that he took their expressions literally.

        • Marty says:

          The FED did nothing in the 30s? Really?

        • nick kelly says:

          Really. This was pre-Keynes. The idea that the government could create liquidity was anathema, akin to counterfeiting.

          Ironically the US had most of the world’s gold and could have expanded the money supply without becoming heretics but it didn’t happen.

          Both left and right agreed the best way to fight the downturn in tax income was for the government to slash spending. So the downturn got worse, so the government cut more.

          As the Depression deepened the administration of President Hoover became unhappy with the Fed, famously calling it ‘a weak reed to lean on in times of trouble’
          The House passed several bills telling the Fed to fight deflation but could not enough Senate support to overturn its independence.
          Ben Bernanke’s whole academic life was fixated on the Depression and the lack of Fed action.

          Right or wrong he decided that whatever the Fed would be criticized for, it wouldn’t be that.

  11. GSH says:

    There will be no actual selling. The Fed will simply let the bonds mature instead of replacing them as they do now. For treasuries, this means that the Treasury will sell new bonds to replace the maturing ones – standard operating procedure. But overall there will be less purchase “pressure” on treasuries, so long term interest rates should ooze up. That is their goal.

    • R2D2 says:

      “The Fed will simply let the bonds mature instead of replacing them as they do now.”

      That means paying for the maturing bonds with money? Who is gonna provide the money? Does Yellen go to a computer terminal and types a figure, and poof a huge pile of money appears to pay for the maturing bonds?

      • Wolf Richter says:

        It works like this:

        When securities are redeemed at maturity, whoever holds them gets the money from the issuer of those bonds. The securities become void and disappear. This is what the Fed will be doing: When the Treasuries it holds mature, the US Treasury Department redeems them, that is it exchanges money for those securities that then become void and disappear. The Fed gets the money. If it doesn’t buy anything else with it, that money disappears too. Now both the Treasuries and the money have disappeared.

        Since the Treasury Dept doesn’t have the money to pay off maturing bonds (the US government runs a big deficit), it raises this money in advance by selling new bonds. So the market gives the Treasury Department the money to redeem the old bonds. By redeeming the bonds that the Fed holds, the Treasury Dept gives this money to the Fed. At the Fed, this money disappears. In this manner, the Fed drains liquidity (money) from the market.

        This is the reverse of what happened during QE.

        And in essence, it has the same effect as when the Fed were selling bonds outright.

        • R2D2 says:

          Thanks for lesson Wolf.

        • jest says:

          yea, thanks, that’s the question i had for a long time ..now i get it!
          So the money the Fed gets is now out of circulation.,,do they burn it or destroy it someway? or do they store it in a building? I saw when they were doing QE they had skids of money in semi trailors! And who is watching over all that paper? Janet or who? and who would know if they take a skid home with them?
          Or they say yea we destroyed it and its sitting in someones home!

        • Wolf Richter says:

          Just like the Fed “created” money out of nothing to buy these bonds under QE, it now reverses the same process and “destroys” this money. This is not physical currency. These are electronic entries. So the “money” just disappears.

        • What happens if Treasury is not able to raise the money by new bond selling? How it will be happened. FED and Treasury may be different entities but in the end they are all the same!!!

        • Wolf Richter says:

          The Fed’s number one priority is to serve as lender of last resort to the US government. If the market no longer wants US Treasuries, the Fed will buy them.

          While much of the Fed is a private enterprise, the Board of Governors (Yellen is one of the 7 members) is a government entity and the board members are government employees.

          In other words, whatever problems the US might have someday, it will always be able to sell its Treasuries.

      • Mel says:

        I would imagine that actors who are not banks can borrow money from banks and buy Treasuries. As long as the Treasuries pay more interest than the banks take, this will work. The drain on the banks’ reserve accounts will depend on how the Treasury spends the money it borrowed, but if enough banks make these kinds of loans, it should all balance out in clearing. That’s what I imagine.

        • Mel says:

          What I imagine is probably not right. Any check to Treasury, for bonds, tax payment, or anything else, decrements the reserve account of the bank it’s drawn against and increments Treasury’s account at the Fed. No special magic here.

        • Ambrose Bierce says:

          A Citi analyst said that might come to pass, some years ago. Everything is on the table, and the markets have complete faith in coordinated central bank policy. The efficacy of their policy all comes down to how fungible is a Treasury bond bought on margin. The OCC report shows that aggregate derivatives are again pretty large, but they are mostly interest rate, (no surprises there) and fx, which is a tickler. What if the major currencies all devalued simultaneously? Then if you are non US buying US treasuries to lever up on US stocks it could get awkward. Almost none of the fx derivatives in the OCC report are registered, by the way.

  12. Some Guy says:

    “The economy has been through rate hikes many times before.”

    Last time was 2006-2008. Dimon thinks that QE unwind will be worse than this?

  13. wratfink says:

    The paper will disappear into the ether… same place the QE came from to purchase the MBS.

    They will mutter and frown and the CNBC personalities will furrow their brows and speculate on which way the wind blows until Janet announces the “Reverse Twist Operation” or some such name and all will once again be good in Ivory Tower Land.

    The “Street” will ooh and aah at the smoke and mirrors called MMT.

  14. Meme Imfurst says:

    I am sure there must be some incentive for CNN, MSNBC, NBC, CBS, FOX, NPR and all the rest to NOT discuss these ongoing crimes, and it must be substantial. But that idea makes me a tin-hat jerk. I mean gossip is more valuable for their brand anyway.

    The fact that Americans have done nothing substantial to stop these crimes is even worse than those who have done it .

    Invest with these guys, be part of the action, is normal cocktail party chat. These ‘people’ have knowingly raped Americans and Americans have let them do it. No kiss required.

    Anyone got a cigarette?

    • Dan Romig says:

      I have done something to to stop these crimes!

      I have commented on the New York Times’s essays by Paul Krugman. I have commented here on WolfStreet. I have exchanged emails with Pam Martens of WallStreetOnParade thanking her and her husband Russ, and suggesting topics for them to report on. But most of all, I have refused to vote for the two-party duopoly.

      Jamie Dimon is a serial felon! His firm, JPMorgan Chase has committed crime after crime after crime with him at the helm and in control. Under President Obama’s Attorney Generals, Mr. Holder and Ms. Lynch, these crimes have brought fines paid for by the shareholders, but no criminal indictments have been issued.

      “The fact that Americans have done nothing substantial to stop these crimes is even worse than this who have done it.” simply doesn’t wash. However, if you voted for Bill Clinton who repealed Glass-Steagall, or if you voted for George W. Bush who along with Congress pushed the debt to equity ratio for Wall Street through the roof, or if you voted for Barack Obama who aided and abetted Wall Street’s crimes, then you are an American who has done something substantial to help commit these crimes. We shall see how our current President curtails or enables “these crimes”, but he certainly has stacked the deck with Wall Street insiders.

      The pen is mightier than the sword somebody wisely remarked, but the Powers That Be have a lot of swords.

      • Dan Romig says:

        Wolf, my comment on Obama aiding and abetting may be harsh, but if one looks at Lynch’s history, one can tell what her mission was as Obama put her in the Top Cop role. Plus, he did oversee the fraud that went on while he was in office; making sure no criminal charges were brought.

        I will try to be non-political, but history has been influenced by politicians, eh?

        Thank you for having an open forum and reporting on economic and business news as it happens.

        • Raymond C. Rogers says:

          I think that is a good list. I would add that Clinton also forced the banks to lend to people who could not afford to pay the money back.

          It also should be noted that Bush spent more money for domestic increases than he did for the wars.

          I didn’t particularly care for this last spending measure by Trump. This new health care plan will still be a massive spending tumor. And despite continous construction, both parties are giddy about a trillion dollar infastructure plan. That included more crony money for private solar ventures, and future generations that will be left with a bill.

        • Done & Tired says:

          You shouldn’t have apologize for speaking the truth. Both parties are inept and corrupt and you called them out. Great Job!

        • gert7to3 says:

          Mr. Rogers, (I couldn’t resist)
          Bush II did indeed spend more domestically, however he financed the wars. This impacted our country going forward.

      • DH says:

        Lets make sure to give credit where credit is due. The Gramm-Leach-Bliley Act, which essentially repealed Glass-Steagall, was a Republican bill authored and pushed by Republicans in Congress. Sure, it seemed odd that Clinton signed it into law after the Democrats largely opposed it, but a veto would have been overridden, anyways.

        I wish Clinton would have vetoed the bill, politically, but, practically, it wouldn’t have mattered.

        • Dan Romig says:

          Again, Clinton did veto the initial bill from the Senate which passed 54 to 44 in May of 1999. That vote was very party divided with 53 Republicans voting for and none voting against. The Democrats voted 44 to 1 against.

          But Clinton had it rewritten, and as Raymond commented, one of the features in the final bill was, “Directs the Treasury, in consultation with bank regulators, to study the extent to which adequate services are being provided as intended by the CRA (Community Reinvestment Act).”


          The final votes before being signed into law:

          The House voted 362 for, 57 against and 15 no-votes. Breaking it down by party: Democrats voted 155 for, 51 against and 5 no-votes. Republicans voted 207 for, 5 against and 10 no-votes.

          The Senate voted 90 to 8 for, and 7 of the 8 against were Democrats, but 38 Democrat Senators voted for the repeal of Glass-Steagall.

        • Niko says:

          Dan Romig,

          Thank you for setting the record straight!

    • berger says:

      mouth pieces of the modern day mob.

  15. Si says:

    What do I know – but I am going to guess they will create some ‘entity’, like a CB version of a bad bank, to buy what they are selling so they don’t have to take the hit and to prevent the market from collapsing. Perhaps the IMF will come to the rescue given it the only one without an impared balance sheet.

    What they have to create are the optics of a normal balance sheet, not actually HAVE a normal balance sheet.

  16. Jon says:

    The real value does not matter
    The asset price ( real estate and stocks ) are all time high and going UP n UP.. No stopping here

    If the real economy is really bad, if the economic state of people are really bad.. then how come things are going up n up..
    Mind it, USA economy is driven 70% by consumer spending…

    • Petunia says:

      This week I was in the post office, in and out, no waiting. Went to repair the blinker on my car with no appointment, in and out in 30 minutes, no waiting. Maybe everybody is vacationing in Europe this week, except me.

      • walter map says:

        You might think you’re missing out, but mostly you’re avoiding the crowds.

  17. walter map says:

    Dimon has a well-earned reputation for corruption and criminality, so the only thing I want to hear from him is a detailed confession with a guilty plea.

    The problem is that the banksters did their best to preserve their wealth back when by disconnecting the financial markets from the real economy with cheap proprietary credit, thereby enabling Wall St. to cannibalize Main St. and making the equity markets soar. That worked for a while but could not work indefinitely, shoring up their racket temporarily at the cost of making the reckoning that much worse in the future on the back of a chewed-up economy and bloated debt. And the future has caught up with them.

    Their proper course should have been to take their paper losses and move to restore the real economy. But they did the opposite and doubled down. And now that they have to unwind QE to avoid disaster they find that they can’t because that will also be disastrous.

    Dimon isn’t stupid enough not to know this. That’s why he’s wringing his hands and feigning ignorance, in the hope he’ll be let off the hook because he supposedly didn’t know what he and his culpable cronies were doing. In his own backhanded, conniving, self-serving way he’s announcing that The Correction is coming and it’s going to be ugly.

    “Guilty! Guilty! My evil self is at that door, and I have no power to stop it!”

    Forbidden Planet

    Help I’m steppin’ into the twilight zone
    The place is a madhouse
    Feels like being cloned
    My beacon’s been moved
    Under moon and star
    Where am I to go
    Now that I’ve gone too far?
    Soon you will come to know
    When the bullet hits the bone.

    Twilight Zone

    • Dan Romig says:

      Well stated Walter. Nice reference to Golden Earring’s ‘Cut’ track two on side two.

  18. Mad Max says:

    They flip side of this coin is how to unwind excess bank reserves, which the Fed also must do because in a rising rate environment the Fed is paying banks increasing 10s of billions per year on reserves to do nothing. Conceivably the Fed can sell their assets back to banks who can use their excess reserves to buy them. Problem is there is abut $2 trillion shortfall


  19. RangerOne says:

    Sounds like potential for a slow-motion shit show starting in the fall. I asked for the popcorn but odds are its negative impacts will hurt people I know if not me…

    • JZ says:

      I think the shit show will NOT start until they have got my money. And I have been in cash for a long time.
      My suspicion is that the market will take off, double, triple, quadruple until we all scratch our head and transfer funds from checking to brokers. Then the shit show will start.
      I am smart enough to know i would either be cut in half by one shot or 3% a year bleed to death. With coercive central banks and the power they serve, I can only be screwed.
      What ever i think the rate hike will do, it will hurt transfer my wealth one way or another.

  20. George McDuffee says:

    In many ways a worldview which posits the socioeconomy is controlled by a elitist plutocratic cabal is more comforting and acceptable that a worldview which posits that there is no one in charge and the direction of the socioeconomy is controlled by random exogenous and endogenous factors, most of which are selectively ignored/denied by not only the majority of people, but also the politicians.

    Because of the rapid and accelerating changes in the financial services industry and their products, e. g. “derivatives” and ETFs, as well as the size of the accumulated debt of all sectors, as Dimon observes “things are different this time.” Additionally we have systemic changes in the socioeconomy in which the financial services must operate, namely automation/robots, artificial intelligence, and the explosive growth of supranational corporations. and many other man-made disruptions.


    • JZ says:

      I thought US of A is the land of the free and home of the brave. 300. million guns out there ready to take down elites any time they try to sabotage liberty. Since when US if A becomes a comfortable place with social economic being controlled by elites and every citizen feels more comrtable with this than taking responsibility for their own lives?

  21. Chris Wagner says:

    yellen and her shameless “double talk”? Aarrgghh. The Fed has been manipulating markets with their comments, far too long. They should get sued and get gag orders. Look at today’s cause and effect!

    Totally dishonest elitists who pretend to aid the government and to answer to Congress. Ha! The Fed is way mightier and a vicious banking cartell.

    Words vs deeds, these scoundrels will keep misleading the markets. And trigger new bubbles by not keeping their promises. Like a fatso talking all day about “future dieting”.

    • Frederick says:

      Get sued? That would never work now would it? Do you actually believe our uber corrupt justice system would entertain a lawsuit against the FED Pleeeeze

    • Wolf Richter says:

      When Congress created the Federal Reserve System, it included language that gave officials in the system impunity. So it’s going to be tough to sue them, or indict them.

      They have official impunity. It contrasts with unofficial impunity, which is what the top managers at the largest banks enjoy, as we have seen after the Financial Crisis.

  22. IdahoPotato says:


    The party is ending. The Fed knows it. That’s why Yellen made some noises today about going slow on future hikes. What she didn’t mention is that shrinking the balance sheet will have a similar effect to hiking.

  23. flyingkiwi says:

    Has anyone noticed the European and US markets are on fire. oil is surging everything is good and solid, no problems in the world of finance and commerce!!!!!!! So much money to be made. This could never end.
    Just a thought. Does anyone realise the long term implications of the Great Financial Experiment. Yellan, Draghi, Koda etc believe they have found the magic formula to tame the financial system.

    Do you think any of them will let the system now collapse. Does anyone think these people want to go into the history books as failures. NO. They will now do all they can to prevent any collapse.

    Who wants their name to be mentioned in universities lectures, 100 years from now, as the people who failed to tame the business cycle causing a massive collapse of the financial system.

    Just a thought but one worth considering.

    • walter map says:

      “They will now do all they can to prevent any collapse.”

      Unless they’re engineering one so they can get bailed out again.

      You have to admit, it would tend to explain a few things.

  24. Wilbur58 says:

    (Laughing) yeah, right… as if he doesn’t know exactly how the unwind is going to go. He’s one of the few that basically run the Fed.

    What a farce. What a misdirection.

  25. michael says:


    While I think your right that will do everything in their power to prevent a collapse I do not necessarily believe they are in total control. At some junctures the illusion of control will not be sufficient.

  26. Thomas says:

    Doesn’t this mean that the value of the US dollar will increase dramatically since they need to pull out 4.5 trillion out of the economy?

    • JB says:

      you would think so , currently the dollar seems to be weakening which is counter intuitive to me given the feds proposed tightening schedule . the Canadians increased rates today ( the first time in seven years) and the loonie spiked.

      • R2D2 says:

        Canadian Central Bank is funny:

        “The central bank raised its overnight lending rate by a quarter-percentage-point Wednesday, to 0.75 per cent from 0.5 per cent, citing “bolstered” confidence that the Canadian economy has emerged from years of sputtering growth.”

        Their only growth was in real estate prices :).

    • Old Engineer says:

      As I understand Wolf’s explanation, above, this means the $4.5 trillion will appear as an increase in indebtedness on the Treasury dept. books (I will admit I don’t understand on whose books it is carried now.) And, as Wolf points out, it will be borrowed (not funded through taxes), and at the increasing interest rates caused by issuing it. And it will not be deficit used to fund anything that will return a benefit. If the existing federal debt is about $20 trillion, that is roughly an increase 25% in the federal debt. And it is debt that will not “fund” any service, improvement, or benefit.
      So I would think the increase in the value of the dollar is not a given if you add the effects of pulling $4.5 trillion out of the economy to the jump in the U.S. federal debt and an increase in interest payments due to higher interest rates the dollar might be perceived as riskier.
      In fact it appears to me that a positive feedback loop might be established in which the government has to issue more debt above the $4.5 trillion to cover the increasing payments on the debt, so interest rates will go up and the government will have to issue more debt…..well you get the picture.

      • Wolf Richter says:

        The Treasury doesn’t care whether the Fed or Pimco holds those maturing bonds. As far as the Treasury is concerned, there is no difference. It has to borrow new money to pay off those bonds, regardless of who holds them.

        The difference is at the Fed versus what Pimco would do with the money. At Pimco, the money would sit around as “cash” until it is invested, or it might be used to pay down leverage. At the Fed, the money disappears.

  27. Gen Z says:

    The notion that unwinding QE will be distruptive is nonsense. Jamie Diamond is like Goldman Sachs, just do or think the opposite of anything they propose.

    The FED has shown by action (these are facts not speculative fancy), that it will not allow the markets or real estate to undergo any real harm.

    If QE unwinds do harm, they will be reinstated.

    Global hard assets will continue to inflate. It’s about ten years since the onset of the financial crisis and if you’re waiting for the FED to instigate a finanical collapse, I think you’re going to be waiting at least another decade or so.

    Actions speak louder than words.

    Plenty of easy opportunities to make money until then. Why people need to over-complicate thngs is difficult to comprehend.

    Invest in stocks -sell stocks — make money- end of story.

    • JZ says:

      I hope everybody thinks like you. That way, I know for sure the top is in. This time, due to social media, everybody gets smart and talks about interest rates, QE and VIX. there appear to be still a big wall of worry.

  28. “All the main buyers of sovereign debt over the past decade – central banks, financial institutions, foreign exchange managers – will become net sellers now”

    Will anyone buy these toxic assets?

  29. Fat tail says:

    Read the below article from Nouriel Roubini on what’s ahead for use from our friends at the central banks. He outlines four possible Central Bank policy actions that may be implemented in the future. It supports my belief that there will never be interest rate normalization.

    You’ll see none of his predictions include raising interest rates to collapse the markets. All include more money printing on a massive scale.

    My favorite option from the article is –

    “Third, central banks could change their target rate of inflation from 2% to, say, 4%. The Fed and other central banks are informally exploring this option now, because it could increase the equilibrium interest rate to 5-6%, and reduce the risk of hitting the zero lower bound in another recession. “

    Not inflationary at all!


  30. JimTan says:

    I have a question. What will the Fed do with cash proceeds after these assets are sold? Will it remit $4.5 trillion in proceeds to the U.S. Treasury as it currently does with the interest earned by these assets, or will it zero out their balances to reverse the way it created them when QE began?

  31. Ambrose Bierce says:

    Fed head Fisher put forward the notion a year ago that 1/3 of their balance sheet could be trimmed without affecting interest rates. With the Fed now firmly behind the curve it’s hard to see what the problem might be. Trim assets rates rise on their own. The real issue is how to keep liquidity going, AG did this, raised rates and opened the REPO window, but those are old tools. The Fed needs the power to buy a “broader range of assets”. should the stock market falter, the Fed would buy stocks – see BOJ. Congress has the keys, if the sound money people get control you will have a crash, if the Keynesians maintain control, you will have a buying opportunity.

  32. Unwinding QE is easy, though I doubt central banks know how to do it. Proceed as follows.

    Print money and spend it into the economy. That will tend to cause excess inflation. Step 2: counter that inflation by raising interest rates, i.e. converting base money to government bonds.

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