“QE to Infinity” - Day Two
As noted here yesterday, we’ve entered a new era of central bank policy making as the Federal Reserve has followed in the footsteps of the European Central Bank in announcing open-ended money printing aimed at fixing what’s wrong with, in our case, the economy, and in the case of Europe, sovereign credit markets.
There’s been no lack of commentary on yesterday’s historic events and much of it seems to focus on who’s set to win and who might lose as trillions more in newly printed money is foisted upon the world.
This Bloomberg report hails Chairman Ben Bernanke as “the Fed’s most innovative chairman”, a characterization that is no doubt accurate, but one that omits the fact that this Fed Chief hasn’t been particularly good at peering into the future (otherwise, he probably wouldn’t have taken the job back in 2006) and that’s not necessarily a good indication of what the long-term effects of more money printing will be.
Promising to print money until the jobless rate returns to the 5-6 percent level known as “full employment” may end up being counterproductive if it turns out that structural factors in the labor market have moved “full employment” from that level, however, Fed economists seem convinced that, if enough new money is summoned, they can move it back to where it was.
My guess is that, over the long-term, this line of thinking will prove to be very good for the price of monetary commodities - gold and silver - but, for just about everything else … not so much.
Moreover, the Fed’s promise to keep money super-easy “for a considerable time after the economic recovery strengthens” would appear to be Fed code for allowing inflation to rise a bit before tightening things up sometime around 2015 (a date that keeps getting pushed back, but which could suddenly move forward), at which time the Fed’s hubris about containing any rise in the level of inflation is sure to be tested.
Continuing to print money until the economy improves seems, to most economists at least, to be a reasonable approach to the nation’s troubles today, but, it should be interesting to see how that decision stands the test of time, say, in another year or two after the world’s central banks have pumped trillions more new money into the financial system.
Back in 2008 and 2009, some used to characterize the arrival of sharply higher inflation (that never did arrive) as “the chain catching the sprocket”, a development that the Fed appears to now welcome, however, they’ve just made the sprocket a whole lot bigger (or maybe the chain just got bigger, I don’t know).
Returning to the question of winners and losers in the Fed’s launch of QE3, based on the reports below there seems to be some disagreement about the impact on the lower rungs of the socioeconomic ladder:
- With QE3, We All Win — Poor and Rich Alike - Bloomberg
- How Quantitative Easing Helps the Rich and Soaks the Rest of Us - Reason
We’ll find out soon enough which is correct though my money’s on the second headline, but, amongst all the commentary that can be found on Day Two of this new Fed era, there seem to be two sure losers - the U.S. dollar and fixed income investors, a point made succinctly in this report at Fiscal Times.
Again it’s wise to consider what future historians might write about yesterday’s events, perhaps starting out with, “On September 13th, 2012, Federal Reserve Chairman Ben Bernanke then launched an unlimited bond buying program that led to…”
It’s hard to imagine how what those dots represent can be anything good over the long-term.