Friday, October 17, 2014

The QE Will Continue Until Inflation Improves

Ambrose Evans-Pritchard has nailed this one, hit it out of the park.  I am not kidding.  He has written a piece entitled “World economy so damaged it may need permanent QE.” 

Combined tightening by the United States and China has done its worst. Global liquidity is evaporating.

What looked liked [sic] a gentle tap on the brakes by the two monetary superpowers has proved too much for a fragile world economy, still locked in "secular stagnation".

I don’t want to get into a debate about the concept of “tightening”; I accept that to people like AEP a slowing of monetary pumping is the same as tightening.

There is no growth; there is no recovery. 

If this growth scare presages the end of the cycle, the consequences will be hideous for France, Italy, Spain, Holland, Portugal, Greece, Bulgaria, and others already in deflation, or close to it.

Forward-looking credit swaps already suggest that the US Federal Reserve will not be able to raise interest rates next year, or the year after, or ever, one might say.

He is correct; other than a feeble attempt here or there, the Fed cannot.

Ambrose offers a point that would not be considered news to an Austrian:

It is starting to look as if the withdrawal of $85bn of bond purchases each month is already tantamount to a normal cycle of rate rises, enough in itself to trigger a downturn.

I believe it is consistent with Austrian theory about money and credit to suggest that even a slowdown in the rate of expansion will lead to the bust.  A stop or even a reversal is not necessary.  Perhaps instead of mocking Austrians, Ambrose might pay some attention.

Put another way, it is possible that the world economy is so damaged that it needs permanent QE just to keep the show on the road.

Ambrose is right, at least for the foreseeable future.  But it can’t last forever; just ask Mises:

Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.

Ambrose should also listen to another point by Mises:

Continued inflation inevitably leads to catastrophe.

What do I think will happen?  Take it from Ambrose’s piece:

Traders are taking bets on capitulation by the Fed as it tries to find new excuses to delay rate rises, this time by talking down the dollar. "Talk of 'QE4' and renewed bond buying is doing the rounds," said Kit Juckes from Societe Generale.

I see no reason for money printing to stop until consumer price increases become politically intolerable.  This is the “inflation” that the “people” in Mises’ statement are watching (I know it is not the “inflation” to which Mises refers).  Of course, they are watching the wrong walnut shell, but it is the one they are watching.

Central banks might try to slow it down or stop for a time, but I suspect they will reverse course when markets start to fall.

Eventually the Fed will have to stop, as eventually, I suspect, consumer price inflation will show signs of life.  But if consumer price inflation doesn’t show such signs, or for as long as it doesn’t, what would prompt the credit expansionists to quit their game?

But if they wait that long, will it be too late?  Will too many have lost faith in the inflated currency such that, as Mises suggests “Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed.”

My guess the pumping will continue until the Fed (and other major central banks) faces mass consumer price inflation – “mass” being subjectively defined as that level which is politically unpalatable.

The Fed will then take actions to end it – and a central bank will have the tools to end it, painful as the implementation of those tools might be to most of us.  If necessary, they will even tie the currency to gold (a phony standard, of course) to protect the currency – at a value not easily comprehended today, perhaps, but tie it they will (as a last resort).

This is when asset prices will finally find the level that they have been attempting to find since around 1982.

If the consequence is mass-inflation heading toward hyper-inflation, the central banks will protect their currency.  Asset prices (and the impact to those of us who live in the general economy) be damned.


  1. Ya know what really helps? to have the end in mind!

    I believe I have mentioned before that our monetary system has an expiration date. In fact, everywhere debt-money rules has an expiration date, meaning, a point in time where it fails. Ours failed in 2008, I don't think it was supposed to fail so soon as Asia was not ready to take on the mantle of prime borrower. Hence QE.

    I don't know what the financial oligarchs have in store for us, but I'm sure it ain't good; we are likely to used up and discarded like worn-out clothing. That QE is ending(or is it) means that "they" are ready to move their plan forward to live off the willing Asian middle class to borrow their way to a lifestyle to which the elites have become accustomed. Just to be clear, it's not the Asians to whom the riches flow but the Oligarchs who create the "money" and live off the interest, just as they've done for the last 100 years in which WE were the willing borrowers.

    Just a little forward thinking reveals what I've said to be true. Try it, you might like it.

    1. We all just get to guess...

      I think they thought they had the global warming thing far enough along - carbon taxes were going to drive the new currency. A few unfortunate email revelations later....

      As to the Asians, it all depends if the Chinese elite care to share some of the wealth with the Anglo elite. I am not fully settled either way, but I lean toward no.

      They have a 5000 year history, and look at the Anglo as a flash in the pan.

  2. [quote] it all depends if the Chinese elite care to share some of the wealth with the Anglo elite[/quote]

    Thats where Russia comes in. Russia and central Asia(the Caspian) have the energy which China needs for the future. Russia and Iran currently block access by the Anglos to the energy riches of central Asia

    If "regime change" (Putin replaced by a new Yeltsin) occurs in Russia, then the Anglos will quickly send troops into the Caspian and central Asia to secure the oil and gas fields. Then they will have their hands on China's throat.

    Regime change in Russia has become an urgent requirement

  3. I quite like your last paragraph, but can't quite figure out what you mean by the last sentence. There is no crystal ball or inside information here, but we can make an educated guess that a central bank plan exists to replace a rapidly-failing currency with a new, central bank controlled, also inflatable currency, perhaps with some appearance of greater stability. Although appearances may not even be necessary as the news media willl just read the central bank press release and the public will believe almost whatever is read. In such a scenario, owning a portfolio of real estate and commodities would be superior (I assume) to holding fiat currency, particularly dollars; are you suggesting something else?

    1. If stopping or reversing QE is necessary to maintain faith in the USD, I believe the Fed will do it. This will be destructive to many / all asset prices in dollar terms.

      The choice will then be which asset will suffer least; I suspect it will be the assets least dependent on artificial credit.

      Holding currency might, at that time, be the best bet - this assumes that the one thing the Fed / USG will defend at all costs is bank deposits.

    2. Thank you, I suppose that is the more accurate view. I have a hard time wrapping my head around the concept that these worthless fiat dollars will go up in value under any circumstances, although I understand how credit destruction reduces money supply.

    3. I only see this as a possibility after a good amount of price inflation - in other word, the dollars would go up in value only after going much further down in value.

  4. Mexico replaced the old peso with the new on January 1, 1993 at 1000 to one. There was a sell-off in Mexican securities in latter part of 1992 but the long-term effect on securities looks about nil. Presumably the average Mexican experienced some pretty severe price increases in consumer goods around that time. It seems safe to assume that the main effect the US of a currency replacement would be severe price increases in all imported goods and an accompanying recessionary or depressionary dislocation in the economy. Catalyst for Mexican currency replacement was default on external debt, would the U.S. follow a similar pattern?

    1. I think we can already consider bonds owned by the Fed as "in default." As long as the balance sheet doesn't shrink.

      Interest income is returned to the Treasury department, less a small handling fee.

      This could continue for some time, I imagine.

    2. True enough. And few seem to care about the default so who knows.