Monday, October 11, 2010

Bernanke's QE2 Heading for the Shoals

Quantitative Easing 2 will fail, for the economy has been desensitized to liquidity and cheap credit.


When the financial media refers to QE2 (quantitative Easing 2), I think of a grand ship (QE2 the luxury liner Queen Elizabeth II) foundering on the shoals. For Bernanke's QE2, currently the single reed supporting the equity market's continued ascent, is doomed for intrinsic, structural reasons.


An analogy which sheds light on why this is so also contains a "2"-- type 2 diabetes, in which the body has become desensitized to insulin--that is, the body's cells do not respond appropriately when insulin is present.


In a process like type 2 diabetes, the U.S. economy has become desensitized to the Federal Reserve's flood of liquidity and cheap credit. In a healthy economy, such lowering credit costs and easing of credit availability encourages businesses and households to borrow and spend: to expand their business, to buy new capital goods, and so on.


But as many commentators have been pointing out for over a year, the "problem" in the U.S. economy is not a lack of credit or high costs of credit: the problem is too much debt and the fact that there is no market demand which requires expanding business. Indeed, everyone already has everything, and replacement of existing goods in a bloated consumer economy cannot generate GDP growth of 3-5% a year. Rather, replacement instead of expansion means the GDP will contract by 3-5% each year--a fact that is already visible if you removed the 12% of the economy that is Federal spending generated by the $1.6 trillion annual Federal deficit.


So the Fed is pouring "easy money" into an economy which has no need or desire for it, except to gamble with in the equity, bond and commodities markets.


Bernanke's QE and ZIRP (zero-interestrate policy) has effectively destroyed the incomes once generated by savings and low-risk fixed investments, and as a result the flood of "hot money" has gushed into stocks, bonds and commodities, all of which are in bubble territory as a deirect result of QE and ZIRP.


If you can't make money with cash in savings, then the incentives are weighted in favor of taking on risk: seeking a return in stocks, commodities or other gambles.


Equally perniciously, Bernanke's policies have fostered the belief that the Fed and Treasury will backstop any losses suffered by the big players. Moral hazard has been destroyed along with interest earned by cash. If the big banks suffer losses due to gambling, they know the Fed will rescue them by buying the toxic assets from them, all in the name of "quantitative easing."


Bernanke's QE ship is thus sailing directly for the shoals, and we can predict it will run aground and sink in the months ahead.


The consequences will be dire for all the asset bubbles and for the Fed itself. Having sailed the ship onto the rocks, the Fed's treasured independence will start being questioned, and it will become politically popular to call for its dismantling.


All of Bernanke's QE funds have flowed into risky assets, inflating concurrent bubbles in all asset classes. Gold is up, equities are up, bonds are up, commodities are up--and all can fall (disinflate) together as the failure of QE triggers a rejection of the policy.


The bond market could destroy ZIRP in a week. Once there is political pressure on the Fed not to "monetize" new Federal debt by buying Treasuries either directly or through proxies, then the bond market may choke on the trillions of dollars being issued in new debt.


Net result: interest rates would rise, regardless of Bernanke's ZIRP.


QE2 will fail spectacularly, because it offers a "solution" to a "problem" which doesn't exist. Please see Look Out Below (I've got a bad feeling about this) for a look at what this might mean for stocks.



If you would like to post a comment where others can read it, please go toDailyJava.net, (registering only takes a moment), select Of Two Minds-Charles Smith, and then go to The daily topic. To see other readers recent comments, go to New Posts.





Order Survival+: Structuring Prosperity for Yourself and the Nation and/or Survival+ The Primer from your local bookseller or from amazon.com or in ebook and Kindle formats.A 20% discount is available from the publisher.


Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle



Thank you, Robert P. ($10), for your most generous contribution to this site-- I am honored by your support and readership. Thank you, J. Deveraux M. ($50), for your profoundly generous contribution to this site-- I am honored by your support and readership.


Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act
This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Limit the Use of My Sensitive Personal Information.


Regarding Cookies:


This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP