QE2. What's The Point? … Given the likely consequences of another round of quantitative easing it's hard to see why so many investors seem so pleased at the prospect. In August Ben Bernanke acknowledged with trademark central banker understatement that economic activity was "somewhat less vigorous" than policymakers had been expecting. Indeed it was! But there was more. With bold directness he went on to say that the Fed was prepared to provide additional monetary intervention through unconventional measures, if it proves necessary.' And the crowd went wild. Sensing 'QE2′ (very witty) around the corner, stock markets rose and the dollar plummeted. The euro is up over ten cents against the greenback since then. – Wall Street Journal.com
Dominant Social Theme: The Federal Reserve will do what needs to be done.
Free-Market Analysis: In our attempts to track the fading of the elite's central banking promotion, we have sensed a kind of turning point. No doubt many others have as well but since we have been predicting the decline and fall of central banking for some two years now (actually ten years one way or another) we feel protective of the issue. Sub dominant social theme: "Why can't they get anything right – and what's the point anyway?"
In aggregate, central banking constitutes a bizarre Western economic ritual. Sure forecasting potential financial scenarios is logical endeavor. But imagine giving a selected group of people the ability to act on their beliefs by printing as much paper money as they thought appropriate on behalf of the larger society. Imagine, furthermore, giving the same handful of people a virtual carte blanche to perform this activity without real oversight or controls because of potential "conflicts of interest."
It is truly a ludicrous system. It is nothing but price-fixing – which everyone acknowledges does not work. Yet somehow the compliant mainstream media continue to treat the idea that top central bankers can forecast the future (and print appropriate amounts of money) as a valid one. Beyond the media there are think tanks, private analysts and a vast array of Western universities and other temples of higher learning, all devoted to the idea that central bankers can predict how much money a given economy will need in the future with a degree of exactitude that the market itself cannot provide.
Central bankers inability to predict the future ALWAYS (sooner or later) causes them to print too much money. This results is tremendous booms and wrenching busts that have a corrosive and eventually ruinous effect on society. Businesses are destroyed; confidence is shattered; whole industries expand too fast and in the wrong places and then often are reduced to rubble. Through it all, the paraphernalia of modern Western society – its educational, political and social networks – tolerates the inevitable distortions and, in fact, go out of their way not to mention them. (The chastening effect of Money Power being operative at all levels.)
But gradually we have noticed a pulling back from the religiosity of central banking. In America especially but even in Britain a good deal of doubt is beginning to be expressed even within the mainstream over the manifestations of central banking practices. In a sense, one could hypothesize that the belief system – long unquestioned – is starting to be subject to considerable scrutiny.
Yes, it seems to us that the twin pressures of the Internet and the financial crisis have begun to erode a good many of the elite's faith-based, fear-oriented promotions. It doesn't help of course that there is a perfectly rational economic substitute for central banking, which is free-market thinking and free-banking (or at least private banking). It also doesn't help that the ritualistic performances of central banking are not only being perceived of as useless but also unwise – detrimental to accumulated wealth and civil society.
Where we see this most recently is in generalized pushback to another round of "quantitative easing" by the US Federal Reserve. Initially, this catchphrase seemed glamorous and mysterious – filled with the mystery and magic that generally surrounds the banking process. But now as the economic crisis runs on and the truth-telling of the Internet itself has generally dissected what it means (and accomplishes) the consensus seems to be shifting.
Compound this dilemma with other actions now percolating against the Fed. Ben Bernanke himself received a good deal of pushback regarding his reappointment. Libertarian Congressman Ron Paul has been extremely effective in mustering support for a thorough audit of the Fed. And Ron Paul wants an audit of the gold in Fort Knox as well. (The Fed and, generally the powers-that-be, are resisting.) We can see that the rising chorus of doubts about quantitative easing are part of a trend – not merely an isolated incident. In fact, one can find dozens of fairly negative articles on the Internet about another round of quantitative easing. Here's what Trader Dan has to say about in the Market Financial:
The result of [quantitative easing] has been a huge influx of speculative money flows into the commodity sector pushing up food prices across the board. We have argued at some point soon, the rising cost at the wholesale level as indicated by the CCI and the futures boards would translate into higher retail prices for consumers, who are already being pinched by stagnant wages and falling net worth.
The result – consumers are forced to retreat on spending with the next result – a slowing economy – with the next result – more Quantitative Easing – with the next result – more rising prices as currency induced inflation in essentials rises further compounding the problem as the cycle repeats itself.
As long as the market is convinced that the Fed is going to set off another round of QE, it will go after the Dollar driving it lower forcing money into commodities making life miserable for a large swath of the American citizenry. The decision by the monetary authorities to deliberately sacrifice the Dollar is going to come back and haunt all of us for years to come.
This is certainly true. Going into the financial marketplace itself to purchase failing financial products in the hopes of getting money to circulate more robustly is probably an ineffective solution. The distortions are so large at this point (even after two years) that people won't borrow and banks won't lend. There's too much uncertainty about the economy and what companies and ideas are viable. Too many bad ideas and sectors have been propped up. Too many zombie companies are still being supported by governments and forgiving central bank policy.
So easing won't provide growth. But what another round of quantitative easing WILL do is continue the formation of various kinds of speculative bubbles. Businesses may not borrow; entrepreneurs may not flourish, but money will find its way into some forms of speculation, be it oil, gold, food, etc. Thus Trader Dan is correct. Quantitative easing will cause price inflation but do little or nothing to stimulate animal spirits and create jobs. Eventually, the Federal Reserve will need to confront the largest problem of all: its growing lack of credibility and a system based on fraudulent pretences that is being exposed to a larger and larger audience every day.