US Federal Reserve’s Latest Bubble Scam (QE2) Threatens Mayhem
November 2, 2010: Jeremy Warner / London Telegraph – November 2, 2010
The prospect of more quantitative easing (QE) is driving government bond yields to levels that price in a depression.
What happens, as seems more likely, if there isn’t one?
The answer is that an awful lot of people are going to lose an awful lot of money. We heard the first rumbles of trouble from these freshly gathering storm clouds last week when unexpectedly strong UK third-quarter growth caused a minor correction to gilt prices. Yet this was fast forgotten. The latest purchasing managers’ index figures, indicating rising confidence in the UK manufacturing sector, were completely ignored.
Bond investors continue to look forward with growing certainty to a slow or nil-growth future, where interest rates and inflation remain subdued for years to come. It’s happened before – very low inflation and bond yields have persisted for decades in the past – so why not again?
Yet it’s not just prospects for a Japanese-style lost decade that are driving bond yields towards record lows. Anticipation of further QE – whereby central banks flood the economy with cash by buying up government debt – is creating a self-feeding spiral of ever-falling rates. This is an accident waiting to happen.
Yet policymakers seem determined to push ahead with QE2. On Wednesday, the US Federal Reserve is expected to sanction a further $500bn (£312bn) of bond purchases. And despite vocal objections from at least four members of the Open Markets Committee, Ben Bernanke, the chairman, has indicated a willingness to keep pumping money into the economy on a more or less indefinite basis until core inflation is unambiguously rising again and unemployment is falling.
It seems rather less probable that the Bank of England will do the same, but you never know. One member of the MPC, Adam Posen, is on record as demanding another £50bn of asset purchases, while Mervyn King, the Bank’s Governor, has expressed concern about subdued money growth, and a majority of the MPC seems slowly to be coming round to the idea. If not this month, then maybe next.
There are essentially three reasons for worrying about this latest outbreak of voodoo monetarism; it seems neither to be necessary, nor is it likely to be effective, and it carries significant risks. If QE fails all these tests, then policymakers shouldn’t be doing it.
That it is already a done deal in the US tells you as much about the country’s growing state of political paralysis – likely to become worse still after today’s expected drubbing for the Democrats in mid-term elections – than it does about the policy’s underlying economic merits.
Denied the political leadership necessary to pull the economy out of the mire, the Fed is resorting to the only thing left in the tool box to kick-start private-sector job creation – even lower interest rates. It’s hard to see why – with real interest rates already in negative territory – an additional slight reduction would make any difference.
If it were possible for householders and smaller businesses to access these very low rates, and relieve themselves of their debt burdens by doing so, then there might be some economic benefit. But of course they can’t. In the real economy, usury remains the order of the day. It is only governments and larger companies that can take advantage.
But what QE very definitely does do is create a powerful incentive for everyone to pile aboard the bond-buying bandwagon. If the Fed is about to acquire half next year’s expected issuance of Treasury paper, it represents something of a one way bet, regardless of the long-term outlook for inflation and rates.
The purpose of QE is – by driving interest rates ever lower – to create a disincentive to save in the hope that companies and households might consume more or invest in higher risk assets. Paradoxically, the very reverse may be happening.
Funds are still flowing into government bonds in record quantities, for if you know central bankers are going to continue supporting the price, then there is every incentive to buy. Consumption and private sector investment is correspondingly harmed. The phenomenon has also spawned a renewed “search for yield”, which creates yet further anomalies. For instance, corporate bond prices have been a major beneficiary of the dash for government debt.
One positive effect has been to enable larger companies to refinance themselves at very low interest rates, which in turn helps banks in deleveraging. This is how QE is meant to work. Yet if these very low rates point to a depression, then you would expect corporate defaults to rise anew once the present growth spurt had run its course. Many corporate bonds are therefore being mispriced.
Similarly, if the Fed succeeds in generating inflation through QE, then logically these very low rates shouldn’t exist at all. The Fed seems to want it both ways – lower bond yields and higher inflation. Only in Alice in Wonderland would this be possible.
There is always the possibility that contrariwise, bond markets have got it right – that there is going to be further contraction in the economy and that the price of goods, services and other assets will soon be deflating. But that only adds to the suggestion that far from helping the situation, more QE will only make it worse.
In any case there is little evidence of the deflationary bogey here in the UK, and even in the US, the problem may be one of mis-diagnosis. High structural unemployment, which the US is most unused to, is not the same thing as deflation.
As for the UK, it is becoming ever harder to justify more QE. Nominal GDP growth is back to where it should be, manufacturing has picked up again after the summer soft patch, velocity of money is recovering fast, and inflationary expectations are rising.
It takes quite a leap to think this relatively encouraging position will be completely reversed over the next year or two by the coming fiscal squeeze. Certainly the Bank of England will struggle to convince if that’s what next week’s Inflation Report says. To engage in more QE would be to overreact to a still unquantifiable risk to growth.
The dangers, on the other hand, of further inflating a bond market already disengaged from underlying fundamentals are all too apparent.
Assuming no default, government bonds will never entirely destroy capital, in the same way as sometimes occurs with equity. But inflation can seriously impair it, and once markets suspect the inflation genie is out of the bottle, the damage is always swift and devastating.
QE2: Return Of The Printing Presses
The Tonka Report Editor’s Note: Then in the aftermath of implementing QE2 and to celebrate their 100th anniversary of treason and looting, the Federal Reserve criminals will return to the place of their inception on Jeckyll Island, off the coast of Georgia back in November 1910, for a grand reunion this week… Unlike Yemen, does UPS actually fly there? How about Fed Ex? Earl’s Bi-Plane Air Mail Service? Anybody?! – SJH
The Fed At Jeckyll Island: 100 Years Later… They’re Baaack!
Link to original article below…
Written by Steven John Hibbs
November 2, 2010 at 1:26 pm
Posted in Big Brother, Britain, Civil Rights, Communism, Conspiracy, Corruption, Deception, Disinformation, Economy, Education, Fascism, Federal Reserve, Freedom, Geo-Politics, Global Banking, Government, History, Law and Justice, Media, New World Order, Obama, Obama Regime, Orwellian, Police State, Propaganda, Psyops, Slavery, Socialism, Sovereignty, U.S. Constitution, U.S. News, Video, World Bank, World Disasters, World Government, World News
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