Thursday, November 28, 2013

QE Without End, Amen

Word is getting out.  Central banks won’t end QE and will have little reason to end QE anytime soon.

The message is sinking in - economies of the rich world face super-easy money far into the future and central banks are now convinced it's the least of all policy evils.

The Austrians have been clear about this for a century or more – intervention begets intervention.  Once the intervention ends the mother of all busts will appear.  So the monetary inflation will continue until brought to either a conscious (by central bank decision) or forced stop (due to the market).

That's not to say money managers are all cheer leading this. Many who spoke at Reuters Investment Outlook summit last week doubted its long-term efficacy and feared its social and political fallout even as waves of cheap cash continue to push stock markets to new records.

If financial asset owners benefit more from 'quantitative easing' than the jobless or low wage earners, they insist, then monetary pumping merely exaggerates already disturbing wealth and earnings inequality in the United States, Britain and beyond - injects unforseen and incalculable political tension.

“Social and political fallout”; “unforseen and incalculable political tension.”  This may be what stops the interventions – or perhaps changes the form (which I will come to shortly).  The battle between price inflation (due to monetary inflation) and price deflation (due to lack of demand) allows the Fed to continuously intervene and inflate – consumer prices are seen as relatively benign, and so the popular uproar is kept, for now, to a minimum.

But more and more assets are being diverted to non-productive uses: the state, and the bankers / financial players.  This is seen in the stagnant standard of living for the middle-class – stagnant at a time of almost unprecedented technological progress and unprecedented increase in goods from lower cost jurisdictions.

The benefits of productivity have been virtually entirely skimmed by the politically-connected class thanks to the monetary and fiscal interventions into the market.

Even the Austrian view of allowing the bust do its cleansing work is getting a mainstream mention:

For some, such as Carmignac Gestion's Didier Saint-Georges, this may leave us all in a "QE trap" - paying back over many more years the price of preventing economic catastrophe five years ago.

The artificial lowering of interest rates via QE clearly prevented a deeper economic bust in 2008/2009, he reckons. But the net result of depressed rates has been to slow and elongate any recovery as each pop in economic activity leads to minor but unsustainable interest rate rebounds that choke the upturn.

Yes.  Too bad Bernanke wasn’t an expert in the crash of 1920, instead of a pseudo expert in the Great Depression.

What of the possibility of a changed form of the interventions?

[Philip] Saunders reckons some wage inflation has to be allowed to come through after "five years with the clamps on" and this may help offset some of QE distortions.

I have previously suggested that Yellen might chart a different course, one that looks to get the money to the masses:

What new trick does Yellen have up her sleeve?  About all that is left is real helicopter money – not just over lower Manhattan but over fly-over country.  Might there be a coast-to-coast fly-over trip in Yellen’s future, dropping bundles of cash along the way?

Such a move could provide short term relief to the middle-class, but will certainly risk higher price inflation.

In any case, we will likely see this stagnant economy and continued interventions for a long time to come.  There is no reason for these interventions to come to an end absent significant price inflation or overwhelming strife to the middle-class due to economic stagnation. 

One or the other will manifest – it just may take much longer than many Austrian-influenced voices have believed.


  1. "The Fed Must Inflate (...) The Fed is busy doing everything in its considerable power to get credit (that is, debt) growing again so that we can get back to what it considers to be “normal.” (...) For the Fed to achieve anything even close to the historical rate of credit growth, the dollar will have to lose a lot of value. This may in fact be the Fed’s grand plan, and it’s entirely about keeping the financial system primed with sufficient new credit to prevent it from imploding."