Is it QE4 Yet? …

by Nigel Bolton-Shaw on October 5, 2012

The alternative media site, King World News, is convinced that the Fed has unofficially announced QE4 – another monetary easing – and several days ago wrote an article about it.

The gist of the article is that a well-known financial analyst, Michael Pento (when interviewed by King), made the observation that the Fed was conducting “unsterilized” monetary easing.

From Pento’s point of view this constitutes yet another ratcheting up of Fed money printing, as previously the Fed has tried to take some money OUT of circulation, while placing funds INTO circulation.

Here’s how King describes Pento’s points:

[Pento] stunned King World when he said, “… the Fed doubled down on QE3 … and unofficially announced QE4.” Pento believes the mainstream media does not understand what just happened, but he said it will have massive implications for the markets, including gold and silver.

Pento has been incredibly accurate regarding his predictions of central bank moves. Pento noted, “… he (Chicago Fed President Charles Evans) did not indicate that these new and additional purchases, which will start in January, would be sterilized.”

Here is what Pento had to say: “The mainstream media has it all wrong once again. I noticed that gold and energy, commodities in general, turned around right after Charles Evans, who is the Chicago Fed President, spoke (earlier today). The media pretty much ignored it.”

Michael Pento continues:

“They (mainstream media) are crediting this huge rally … in energy, commodities, and even in the nominal averages, because of a strong ISM Manufacturing Index that came out. It has nothing to do with the fundamental weakness or strength in the global economy. It has everything to do with the fact that the Fed doubled down on QE3 this morning …

“(They did this) even when the echoes of QE3 are still reverberating around the room from Bernankeʼs mouth. Let me go into details (for your readers). Chicago Fed President Charles Evans is Bernankeʼs right hand man, and the ʻChief Architectʼ of QE3. This was QE3ʼs plan, to buy $40 billion of mortgage-backed securities every month, until the unemployment rate magically declines.

He (Charles Evans) said that the Fed should continue buying at least $45 billion more of long-term Treasuries, even after Operation Twist ends in January. (Remember), Charles Evans will be a voting member in the FOMC next year. Here is the most salient point, he did not indicate that these new and additional purchases, which will start in January, would be sterilized.

Now, QE3, the $40 billion (each month), is not sterilized, but the $45 billion in Operation Twist is sterilized. By sterilized I mean they are buying long-date Treasuries, and selling debt, paper from the government thatʼs less than 3 years. Thatʼs sterilized today. But the reason why Evans said that these new purchases would not be sterilized is because they will not.

The truth is the Fed doesnʼt have many short-term Treasuries left to sell. Evans said the $45 billion a month should last at least a year. Thatʼs $540 billion worth of what he indicated would be a combination of mortgage-backed securities and Treasuries.

Well, you cannot sterilize $540 billion, in addition to the $480 billion dollars that you are already doing, when the Fedʼs balance sheet shows that they are almost out of short-term Treasuries. So this will be an unsterilized, open-ended, double-down version of QE3, and thatʼs why you are seeing gold and commodities soar.

For King World, this is huge news, and actually they have a point. If the Fed is not withdrawing funds while adding funds, then presumably, there will be more circulating money – funds perhaps raising the velocity of money in the economy.

On the other hand …

We tend to doubt the efficacy of all these programs anyway. Despite the Fed’s attempts to make monetary policy sound scientific, it is really a very messy business. This is because the power of money is NOT dependent on its printing but its circulation. And no one can be sure how much money is being circulated at what speed.

Even money placed into circulation via long-term bond purchases is not guaranteed to circulate and stimulate the economy. It could still end up sitting on bank shelves with all the rest of the money that the Fed is paying banks NOT to circulate (@0.2 percent).

According to free-market monetary theory (which is not monetarist or Keynesian) what the Fed needs to do to get the economy moving again is to resolve financial uncertainty.

There are many failing businesses around that the Fed and other central banks have propped up via tremendous funding. The Fed alone has provided tens of TRILLIONS to financial firms in short term loans, many of which have not been repaid.

Only when these firms are allowed to stand independently, so as to resolve the issue of whether they are solvent or not, will real entrepreneurial activity return to the economy. This is in fact, why previous easings are not working so well. You can’t “push on a string,” as the saying goes.

In a central banking economy, printing money is indeed a way to get the economy moving again. But bankruptcies and consolidation have to be allowed as well.

The observations about QE4 are astute and well-taken and, yes, it is significant news. But on a larger level, the Fed and other central banks need to resolve economic efficiencies not just monetary policy.

Monetary velocity is a result of consumer demand, not just supply.


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