Dual Issues of QE3

by Nigel Bolton-Shaw on September 21, 2012

CounterPunch has an interesting article about the Federal Reserve’s QE3 entitled “Bernanke’s Shooting Blanks – Why QE3 is Bound to Backfire.”

It is important for two reasons. First in its investigative tone, it makes a lot of points the Fed is not making about QE3. Secondly, it provides insight into who will actually benefit from QE3.

The first point is the most significant though the second point is obviously the actionable one.

The significance of articles like this has to do how with Fed actions are increasingly perceived by the alternative press. Yes, it has come to that now. There is the mainstream press that pretty much reports on events from the standpoint of mainstream institutions.

Then there are publications like ours that use the growing array of electronic research tools and information to winnow through information in search of nuggets of truth. As part of the alternative press’s growing influence, much that was taken for granted in the 20th Century has come under increased scrutiny – and the Fed is chief among them.

There is of course the growing movement in Congress to “audit” the Fed. And some in Congress want to shift the mandate of the Fed to a single focus on defeating inflation. Of course, the Fed is an inflation-creating machine, something its proponents fail to explain when describing the virtues of the Fed.

The Fed, like other central banks is in the business of printing money. The more money there is, the more inflation. Eventually all that inflation creates price inflation.

How to Navigate an Economy Weighed Down by Government Meddling and Cronyism

If you wanted to sum up the just-concluded Casey Research/Sprott Inc. Summit titledNavigating the Politicized Economy, you could say “The situation is hopeless but not serious.”

More than 20 speakers – many of them world-renowned financial experts and best-selling authors – gathered in Carlsbad, CA, from September 7 to 9 to ascertain exactly how hopeless, and what investors can do to protect themselves.

Casey Chief Economist Bud Conrad reconfirmed – with a blizzard of charts and graphs – that the ship of state is still heading for a fiscal iceberg… and that iceberg looms closer by the day.

The US national debt has far outpaced the government’s ability to pay it off. It’s unsustainable – and made continuously worse by the Federal Reserve, which pushes more and more debt onto its balance sheet, blowing up an ever-bigger bubble. And with the recent announcement of QE3 – read “money-printing without any limits” – Conrad thinks the resulting pop! will be one that will make the entire globe’s ears ring.

Eric Sprott, founder and CEO of Sprott Asset Management and one of the most highly regarded asset managers in Canada, reminded Summit attendees of the difference between “liquidation” and “bailout.” The last liquidation event on Wall Street was the collapse of Lehman Brothers; since then, bailouts have been the order of the day. That says as much about the health of the financial sector as it does about the banks’ friendly relations with Washington, D.C.

Read more…

The Fed has loaned out some US$15 trillion, starting in 2008 – an almost impossible amount, and there is a good deal of controversy over whether that money has been repaid. After this Fed officials started with “quantitative easings.”

(Who makes up these terms? It’s a fancy way of saying “money printing.”)

Anyway after some US$3 trillion in “easing” we get QE3. When is enough enough? Here’s something directly from the article:

You’d think that the Fed’s announcement of “unlimited monetary easing” would send stocks into the stratosphere, but that hasn’t been the case. Equities barely managed a 2-day rally before sliding back into the red on Monday and Tuesday.

Investors seem to know that Fed chairman Ben Bernanke is out of bullets and that pumping more reserves into a cratering banking system just isn’t going to work, in fact, it could make matters worse. As Dallas Fed boss William White opined recently in a paper titled  “Ultra Easy Monetary Policy and the Law of Unintended Consequences”:   “Reductions in real rates… might at some point be offset by falling inflationary expectations.”

That means that all this crazy bond buying could have the opposite effect than intended. It could lead to a loss in confidence that would slow consumer spending even more than present.  That’s why its important for policymakers to “get it right” and stop messing around with these goofy programs that have zero impact on the real economy. If activity continues to drop off and the economy goes back into the tank, it’s going to be a lot harder to dig out than it was in 2008 when the budget deficits were still manageable. 

Bottom line: This is the wrong time for wacko experimental policies that are likely to backfire. It’s time to roll out the fiscal stimulus and put the country back to work before it’s too late.

This article, despite its leftist tilt, encapsulates much of the reaction to the Fed these days. It’s in danger of becoming a discredited institution. And that’s big news.

We could end up back on a gold standard if central banks begin to be seen as supporters of banking and big business instead of defenders of rational money management.

On an individual investment note, QE3 by definition will contribute to inflation, but it is hard to see how it will generate jobs or rev up Western economies.

It may eventually boost the stock market and enrich the bottom line of big banks. But if it does so while generating bad press for the money business itself, what actually will be accomplished?

Larger Western markets do not need this kind of constant money stimulation. What we need is more free markets, not more managed ones.


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