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.