Quantitative Easing = Fed Shopping Spree
By - December 18, 2008

The Federal Reserve on Tuesday cut its target for overnight interest rates to zero to 0.25 percent, bringing it closer to unconventional action to lift the economy out of a year-long recession. "The message is they're instituting quantitative easing on a fairly large scale," said Doug Roberts, chief investment strategist at Channel Capital Under quantitative easing, central banks flood the banking system with masses of money to promote lending. They usually do this when lowering official interest rates no longer is effective because they already are at or near zero. The central banks add cash by buying up large quantities of securities — government debt, mortgages, commercial loans, even stocks — from banks' balance sheets, giving them plenty of new money to lend. It is a tool used by Japan earlier this decade to combat deflation and stimulate the economy. – Reuters

Dominant Social Theme: It is all so intricate, thank goodness for big brains.

Free-Market Analysis: The Fed is going to buy up securities to push up prices – and this quantitative easing is intended to replicate the Japanese pseudo-success with that deleveraged economy in the 2000s. The idea, though, for which the Fed wants to gain credit is that while it took the Japanese over a decade to get involved with quantitative easing, the Fed has arrived at the strategy only a few months after the Western economic unraveling began.

So will it work? Hm-mm … We harken back to the idea of a tobacco plantation that is in ruins. Because of government incentives, the farmer stopped growing corn and wheat and just grew tobacco. So much tobacco that the tempting, noxious weed glutted the market. Now no one wants the tobacco in the field. Even if the government comes along with a plan to buy up most of the tobacco, will that create demand for the rest? If an economy cannot or won't absorb a product – mortgages, bonds, whatever – then what good will buying them up do? Buy them up; the public still won't want the leavings.

What the Fed and Ben Bernanke are indulging in might be called "technical analysis." The idea is that if the Fed buys up part of something, then the rest will be worth more. This works with apple turnovers and even with precious metals, but central banking is not subject to the rules of the marketplace because the product of a central bank is money and it only survives because central banking is basically a money monopoly backed by government power. Market rules don't apply. It is incredible that those at the top of the central banking heap don't see this. Or maybe they do.

Insofar as this sort of Japanese style stimulation is concerned, we need to note that the Japanese apparently started this sort of quantitative easing in 2000 and it only had some minor effect on that country's economy in 2005. And this was after more than a decade of previous underperformance. Whatever it was that the Japanese did in the 2000s, and which Bernanke is intent on copying, it certainly didn't result in a V-shaped recovery and the Japanese securities markets continue to languish today.

So again we ask: Don't central banking types see this? Are they blind to the lack of success that various central banking "bullets" inevitably have when faced with the current massive deleveraging? Since we don't think central bankers are actually all that stupid, we wonder if something else isn't behind all this apparent desperation. We wonder if Bernanke is simply throwing everything he can at the market to get all the logical strategies out of the way. This has two effects. First it allows those in charge of monetary stimulus to say truthfully that they have done all that they can do – and promptly. Second, it allows them to move ahead with even more radical actions such as suggesting the merger of various currencies – the dollar, the peso and the Canadian loony come to mind.

After Thoughts

Paranoia? In a epoch when most if not all of the West's major banks have been seen as technically insolvent within the last months, at a time when the demand for gold is outstripping supply (while prices stay flat or even plunge) in a world where the American government pledges a sum nearly equivalent to the US national debt of US$10 trillion to prop up the domestic economy, in such a world we are entitled to some paranoia – aren't we?

We can't shake the suspicion that Western central bankers want to use the current crisis as a way to further centralize the money system and its regulatory structure. Are the American Fed's rash and seemingly desperate moves setting the US dollar up for a kind of eventual devaluation that will verge on hyperinflation? If, at that time, with gold soaring and the dollar diving, central bankers throw up their hands and announce that the only solution is a combined currency, we won't be surprised. We may still be paranoid, though.

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