Bernanke arriving at Bilderberg...
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Gross is honest about Bernanke but then disavows any connection to natural intelligence with his statement that QE2 will work. Sorry Bill, but it won't. I wrote last week that QE is...
- Quantitative easing is little more than dollar-destroying, nano-crapmagic money printing.
- Andy Xie says "If you print a trillion, I'll print a trillion," as he dances on Bernanke's Keynesian corpse, through the fields of Tokyo.
- And...
Fellow Keynesian warlord Joseph Stiglitz is screaming for Bernanke to stop the madness, while his buddy Paul Krugman wants so much more QE it will make your corneas bleed and your soul take a vacation.
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More commentary below...
Read the truth and insanity of PIMCO's Bill Gross.
There’s another important day next week and it rather coincidentally occurs on Wednesday – the day after Election Day – when either the Donkeys or the Elephants will be celebrating a return to power and the continuation of partisan bickering no matter who is in charge. Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing – a polite form disguise for “writing checks.” The market will be interested in the amount (perhaps as much as an initial $500 billion) as well as the targeted objective (perhaps a muddied version of “2% inflation or bust!”). The announcement, however, has been well telegraphed and the market’s reaction is likely to be subdued. More important will be the answer to the long-term question of “will it work?” and perhaps its associated twin “will it create a bond market bubble?”
The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009. If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity. Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels. The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.
We at PIMCO join with Ben Bernanke in this diagnosis, but we will tell you, as perhaps he cannot, that the outcome is by no means certain. We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan.
Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.
Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.
Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead.
The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.
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DB here.
More detail from Andy Xie - former Chief Economist for Morgan Stanley.
QE: The Numberless Oblivion by Andy Xie
Enough is never enough for Paul Krugman – and other instances of behavior leading the world toward high inflation and political instability.
- "The stimulus has failed. How should one interpret the result? If you were Paul Krugman, you would say it wasn't enough.
- "Of course, if 20 percent of GDP in budget deficit and another round of QE still don't work, he would say not enough again. You can never prove Krugman wrong. Such a smart fellow."
I love those last 2 lines from Xie. Let's look at why QE will fail.
It's pretty simple - it's too small, and we're stuck in a liquidity trap. QE1 was $1.75 trillion and yet failed like the miserable, slobbering, hyperventilating, sleestack of Satan's 2nd spawn, spit out of Volcker's colon during a difficult moment on the DC belltway.
The same will happen with QE2, only worse.
There is no way in Bernanke's Tokyo nightmare that $2 trillion of printing will slow a $50 trillion deleveraging push. Rates are already astronomically low, and there is no refinancing boom. Too many homeowners are underwater and can't pass the appraisal-equity game in order to get one of those new lower rates. And the ones who could qualify, have already refinanced. Make no mistake, this is a Brian Sack gift to the equity markets and the banks, pension funds, and others who already own treasuries.
It will hurt the Dollar, and won't even make a dent in the deleveraging. Better to give up on extend, pretend, and just take it in the aft end, at least for awhile. It's gonna be a long slog.
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