Fireman Bernanke reaches for the money-hose again

It appears that Ben Bernanke and his chums at the Federal Reserve are genuinely round the twist as they resort to the printing presses once again

"Keep the taps running!"
Simon Miller
On 14 September 2012 11:31

When you are up a certain creek, it is usually sensible to stop paddling. The US Federal Reserve seems determined to ignore this advice and to continue floating in the muck as it embarks on a splurge of $40bn (£25bn) per month in quantitative easing (QE) – despite masses of evidence that suggests it’s actually a rather bad idea.

Like General Melchett in Blackadder Goes Forth, Ben Bernanke and his stooges seem convince that repeating the same mistakes again will result in a different conclusion.

The action is also coupled with the continuing policy of spending $45bn on extending the maturity of its securities holdings and reinvesting payments from the debt it already holds, back into “agency mortgage-backed securities” – basically selling short-term debt to buy long-term debt under its Operation Twist programme.

Somehow, the Fed has convinced itself that although the last two times didn’t work, this time it will.

However, this time it is different, they say – oh yes. This time, it is about jobs and helping households, not about monetising debt – although the effect is still the same.

But hang on, if anything the situation in the States has got worse. Unemployment sticks at around 8.3 percent with only around 230,000 jobs created in the last month – similar to the UK. Actually, when you look at those who qualify for unemployment, those not working have actually gone up, they just don’t qualify for aid.

Still, the markets are up aren’t they? That’s good right? Well, like an audience in a ghastly talent show or a US crowd at a concert, stock markets are applauding in anticipation of the song. They have only heard the first couple of chords and have no idea about the quality of the song but they applaud anyway – any hope is better than none in today’s markets.

But if they expect this to release a tidal wave of private action, they are very much mistaken. America, like the UK, is stoked in debt – both private and public.

The Fed seems to believe that this round of QE would lower rates – indeed it is a stated aim of this action – but if the public isn’t convinced by mortgage rates of around 3.5 percent, what would a 0.1 percent or 0.2 percent cut matter? They have debts and job security to consider first and faced with the lack of private debt demand, what do the banks do?

Even at quarter percentage rates, banks prefer the safe haven of the Fed; money – as we have seen in the UK – is not flowing out and fertilising the barren private lands, and it won’t, no matter what the Fed does.

I and many others have said this time and time again – QE does not work if you are looking to jumpstart an economy. It didn’t work for Japan in the first decade of this century and it hasn’t worked in the UK.

All QE does is store up problems for the future – what happens when inflation does rise, finally and inevitably?

What happens to asset prices that have been manipulated – yep, it’s not just banks that are good at that – by artificially keeping rates low?

What happens to a country when it has to get the debt bought back onto the market place whilst at the same time trying to get the dollars “printed” out of the market? If it doesn’t get those dollars out of “circulation”, inflation will boom and if you think the hit’s bad now, just wait until the US faces double digit spikes, because that could happen if this gets out of control.

And there’s a political element to this that renders the effect of QE even more pointless.

What happens to the slow economy when Taxmageddon occurs on January 1st next year?

The US is facing a year-end fiscal cliff where the expiration of Bush-era tax cuts, $1.2trn in automatic spending cuts, and expiring payroll tax breaks will give American taxpayers a not-very Happy New Year.

According to the ranking Republican on the Senate Finance Committee, Senator Orrin Hatch, income taxes will go up on every single taxpaying American with a family of four earning $50,000 seeing their tax bill go up by $2,200. A single mother with a $36,000 annual paycheck would see $1,100 more go to Uncle Sam. And a married senior citizen couple with $40,000 in income would see their taxes double - paying $1,700 in higher taxes.

Can you imagine the economic effect of this action? An action that would also see one-million small business owners hit – you know job creators? An action that Ernst & Young says will see a 1.3 percent drop in the economy with a further 710,000 lost from the American workforce.

So the US has got a politically-inspired recession on the horizon and a Fed-inspired hyper-inflationary scenario down the line.

It is not just here in the UK where we should be tearing our hair out. QE doesn’t work. What works is giving the money back to the people, freeing them by bureaucratic shackles, hell, freeing them from politicians.

“Printing” money doesn’t work, giving the private sector its freedoms does. Unfortunately, those that decide these matters think otherwise, and thanks to them we could see ourselves being very much driven round-the-twist as the US dives towards anther bust.

Simon Miller is a Contributing Editor to The Commentator and Editor of Financial Risks Today. He tweets at @simontm71

blog comments powered by Disqus