"When God desires to destroy a thing, he entrusts its destruction to the thing itself. Every bad institution of this world ends by suicide." -Victor Hugo
I don't know about you, but I am fired up about the Fed's next round of money-printing, also known as "Quantitative Easing", or QE-3 for short. Investors are already anticipating it:
U.S. Index Futures Climb on Speculation Bernanke to Signal Third QE Round
Aug. 22 (Bloomberg) -- U.S. stock futures rose, signaling the Standard & Poor’s 500 Index will rebound from its biggest four-week drop since 2009, amid speculation the Federal Reserve will unveil further measures to support the economy…
“The market is expecting another round of asset purchases and it will come,” said Matthias Jasper, head of equities at WGZ Bank AG in Dusseldorf.
But I jest. We are coming up on the one year anniversary of "QE-2". Ben Bernanke is scheduled to speak Friday at the annual Jackson Hole event, and mention of another round of quantitative easing is being hoped for by the Fed's Wall Street allies. For those promoting QE-3 -- you must assume that interest rates being too high are the key impediment to economic growth? That's the story you are going with? That interest rates are too high? Okee-dokee. The 10-year Treasury is very close to 2.0% and mortgage rates are dropping to fresh all-time lows. And the Fed's answer is to implement a policy designed to further lower interest rates? That's quite the theory.
John Hussman did a nice job last week of summarizing just how "successful" QE-2 has been, and maybe provide a glimpse of what's to come with the next round (and the next, and the next...):
Without question, one of the notions buoying Wall Street optimism here is the hope that the Fed will pull another rabbit out of its hat by initiating QE3. That's a nice sentiment, but it does overlook one minor detail. QE2 didn't work.
Actually, that's not quite fair.
-The Federal Reserve was indeed successful at provoking a speculative frenzy in the financial markets, which has now been completely wiped out.
-The Fed was also successful in leveraging its balance sheet by more than 55-to-1 (more than Bear Stearns, Lehman, Fannie Mae, Freddie Mac, or even Long-Term Capital Management ever achieved), and driving the monetary base to more than 18 cents for every dollar of GDP - a level that requires short-term interest rates to remain below about 3 basis points in order to maintain price stability ( see Charles Plosser and the 50% Contraction in the Fed's Balance Sheet ).
-The Fed was indeed successful in provoking a wave of commodity hoarding that affected global supplies and injured the poorest of the poor - particularly in developing countries.
-The Fed was successful in setting off a very predictable decline in the value of the U.S. dollar.
-The Fed was successful in punishing savers and the risk averse, and driving investors to reach for yield in risky investments that they would normally avoid were it not for the absence of yield.
-The Fed was successful in provoking those with strong balance sheets to pay down existing higher interest-rate debt, and in creating an incentive for those with weak balance sheets to issue more of it at low rates, resulting in a simultaneous deterioration of credit quality and compensation for risk in the financial system.
-The Fed was successful at boosting the trading profits of the banks that serve as primary dealers, by announcing precisely which securities it would be buying prior to Treasury auctions, and buying them on the open market a few days later from the dealers that acquired them. -
-The Fed was successful in creating a portfolio of low yielding securities that will be almost impossible to disgorge without capital losses unless the Fed holds them to maturity.
On proper reflection, the list of the Fed's successes from QE2 is nothing short of stunning.
It is beyond comprehension why anyone would wish for more of this recklessness.
Since the Fed enacted QE-2, GDP growth has been less than 1.5% annually, and the official unemployment rate has risen. Quantitative easing is economically baseless, but in reading the bullet points above one can see why Wall Street and their media allies are such big fans. It also exposes the rank hypocrisy of many of those who espouse "free markets" and "capitalism". Many of them are nothing but welfare queens themselves.
well-written, as usual.
as i believe we've talked, we live in capitalist society - if you're middle class.
if you're rich, you live in a socialist country.
must be nice.
Posted by: A Facebook User | September 01, 2011 at 10:01 PM