Thursday, November 4, 2010

QE2: $600 Billion

The Federal Reserve cannot solve all the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector.

-Ben S. Bernanke, chairman of the Federal Reserve Board of Governors

This is what life after “QE2” looks like:
  • Record gold prices
  • Stocks back at pre-Lehman levels
  • And a dollar cruising toward its 2008 lows.

Everything is rallying…in terms of depreciating dollars. Mission accomplished. Ben Bernanke needs George W. Bush’s ol’ “shock and awe” flak jacket.

In case mainstream media coverage made you glaze over, here’s the quick and dirty of the Federal Reserve’s fateful decision…

  • The Fed will buy $600 billion in Treasuries over the next 8 months
  • The mortgage securities the Fed bought during QE1 now reaching maturity will continue to be rolled over into Treasuries, as they have been since August. That’s another $275 billion, give or take
  • There was also the caveat that more of this could be in the works if unemployment stays high and inflation (as defined by core CPI) stays low.

Hmmn… If the federal budget deficit is supposed to run $1.2 trillion during fiscal 2011 (that’s the consensus guess)…and the Fed will purchase $875 billion in Treasuries over the next eight months (that’s two-thirds of a year)…

This is yet another reason we don’t expect the House Republicans to convert to the gospel of fiscal responsibility any more than they did last time they were in the majority: They can indulge in demon spending unto oblivion…and the Fed will have their back...


Bill Bonner writes:

The Fed announced a $600 billion purchase program, from here until June. Even in dollars, that’s a lot of money to throw into a market. The stated purpose is to lower interest rates even further…trying to coax business into hiring and consumers into spending.

Will it work? Will it create real prosperity…growth…and wealth? Ha. Ha. Nope. No chance.

How can we be so sure? Well, theory and practice. In theory, it makes no sense. Real jobs require real investment by real investors, entrepreneurs and businesspeople. It takes time. Skill. Luck. Giving the banks more money (which is what happens with QE) merely destabilizes serious producers. They don’t know what to expect. Cheap money forever? Will inflation increase? What should interest rates be? They don’t know. So, they wait…and watch…and the slump gets worse. Besides, the economy is correcting for a reason. Any interference is bound to be a mistake.

The lessons from experience are even more damning. There is no instance in all of history when printing press money actually turned around a correction. And if you really could make people better off by printing money, Zimbabweans would be the world’s richest and most prosperous citizens. Followed by the Argentines; they’ve got 25% inflation right now.

Nope; it isn’t going to work. And even if it seems to be working…it will actually be making people worse off.


Bill Gross writes:

The dollar is in danger of losing 20% of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world's largest mutual fund, said on Monday.


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