Will June 30th Be the End of the World?

Since none of us are talented enough to be able to jump into a time machine and go back to late 2008 to study a world without QE 1 and 2, it's difficult to analyze the what if of not pursuing the easy money policies of the last three years. Would unemployment be higher? Would there be more bank failures? Would there have been another Bear Stearns-esque firesale of a major investment house?

My guess is that unemployment would be about the same (a bit lower, perhaps, for scare purposes), as would consumer credit, manufacturing, retail sales, housing starts, etc etc.

In my view, the only impact QE 2 has had is in equities and commodities. This market should have turned ugly in March of 2009 and instead has continued to surge despite overwhelming evidence that contradicts all those pretty green up-up-up numbers. Or, in other words, "this market is more reluctant to go down than a Sofitel Hotel Maid."

The point of QE 2 was never to create jobs. It was never to put deserving families in homes they can barely afford. It was not to get more money on Main Street as that would be inflationary, duh.

The entire point, at least as far as I've figured it out, was to keep the money laundering machine going (in absence of big Treasury buyers) and to make our banks appear solvent. That's pretty much it, and if you think it had anything to do with getting Americans back to work or out of debt.

It isn't correct to call it quantitative easing, in the traditional sense, which is why I mostly stick to calling it money laundering, easy money whoring or, the easiest explanation, money printing. Money laundering is the closest thing to the truth, as the Fed is basically loaning money at zero to the banks, who buy Treasurys only to sell them to the Fed. Sure, it's not technically money printing (more like blip creation) but hey, sometimes you have to keep things simple.

Said the Pragmatic Capitalist in November of 2010: "All of my work regarding QE has me wondering why the Fed would implement such a policy when the evidence appears to point to little to no gain in economic growth? The only logical answer is that QE2 is really just another case of the Federal Reserve proving that this is a country centered around the bankers, by the bankers and for the bankers."

Even Fedheads admit the net effect of QE 1, 2, 7, 12 or 163 is really, well, nothing, unless you count moving risk around and some strange psychological comfort for easy money whores as an effect. Check out October 2010 comments from Minnesota Fed's Narayana Kocherlakota:

What is the ultimate impact on the overall economy of this shift in risk? In the baseline models used by central banks, all bondholders are taxpayers. In these models, QE is essentially shifting risk from one pocket to another. As a result, the increase in tax risk (what I’m calling the fourth effect of QE) completely undoes the decrease in interest rate risk (the third effect of QE). QE ends up having no effects, except for those associated with any new forward guidance that it signals.

What happens when QE 2 ends? The U.S. government is going to have a bunch of trouble funding its operations, that part we know. I would recommend going long popping corn and peanut oil.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


OldSouth said...

One does wonder what will happen when Little Timmy needs to go flog his debt to the world at large, with a Congress in no mood to cooperate.

Pete said...

"My guess is that unemployment would be about the same (a bit lower, perhaps, for scare purposes), as would consumer credit, manufacturing, retail sales, housing starts, etc etc."

That's a very US-centric guess.

The USD is the world's reserve currency after all. Time for a rethink JDA.

PS - I really do like your blog.


Not for much longer.

I was speaking specifically about the impact QE 1 and 2 had on the economic situation here at home... we'll get into unintended consequences around the world some other time ;)