STAFF NEWS & ANALYSIS
The Desperation of Quantitative Easing
By Staff News & Analysis - March 11, 2010

"Quantitative easing (QE)" is an ugly name for an important task: the need to make monetary policy effective when interest rates are close to zero. The world's leading central banks, including the Bank of England, have taken such actions. But is UK policy working? Yes, but not quite enough. The argument about quantitative easing is polarized: some critics wail about inflationary "money printing"; others complain that too little attention is paid to the flow of credit. Of the two camps, the latter is the more persuasive. At its simplest, as Charles Bean, the Bank's deputy governor, has explained, the Bank uses newly created money to purchase assets. Hitherto, the UK's QE has amounted to £200bn ($274bn), mainly used to purchase government bonds. The new money, in turn, ends up as bank reserves at the Bank. … As Mr. Wilkes also argues, in today's exceptional circumstances, the Bank could usefully buttress its inflation target with a medium-term objective for nominal demand. Then, if QE has to be restarted, the Bank could use such a framework to explain why. Desperate times need desperate measures. The times are not over. Nor, therefore, are the measures. – Financial Times

Dominant Social Theme: It's a really good idea and it works.

Free-Market Analysis: This editorial in the Financial Times from March 7, 2010, excerpted above, is a tiny little yelp from the power elite, in our opinion. Maybe, just maybe, the ruckus over so much central bank money printing is beginning to reach the ears of those who actually create the money – even in the rarified heights of British high finance. Here's the telling phrase: "The argument about quantitative easing is polarized: some critics wail about inflationary 'money printing'; others complain that too little attention is paid to the flow of credit."

The critics who rail about "money printing" are actually those who use free-market Austrian analysis of the type for which economist FA Hayek won a "Nobel" prize. The point of the article, so far as we can tell, is to promote the idea that quantitative easing helps bolster credit liquidity. Of course this is a non-sequitur in terms of answering the argument as to whether or not injecting massive amounts of fiat money into the West's (Britain's) financial system eventually creates massive price inflation. History seems to show that it does.

The Financial Times fears "desperate times" and states "the times are not over." It seems to us, in fact, that this is actually a fairly strong statement in defense of quantitative easing. It is also noteworthy for another reason. It seems to indicate a certain level of defensiveness by a main mouthpiece of the British banking establishment.

That the Financial Times would seek to defend quantitative easing in an apparently unsigned editorial is a remarkable event from our point of view. Only a few decades ago the phrase might have been used, but the idea that such a policy would ever become controversial would likely have seemed far-fetched. But almost everything concerned with central banking these days attracts argument. The Financial Times is not alone in noticing it. Policymakers at the Bank of England seem to be backing away from QE as fast as they can, claiming that more stimulus will not be needed. Here's an excerpt from a recent Dow Jones newswire post:

Bank of England policymakers hope they won't have to add more stimulus to get the U.K. economy back on track, assuming there aren't any further shocks, Monetary Policy Committee member Adam Posen said Tuesday. Speaking on Sky television, Posen said if an additional boost were necessary, an extension of the BOE's quantitative easing asset buying program would be the most likely outcome, but it would depend on the nature of the problem.

The BOE launched the policy, through which it has bought GBP200 billion in mostly U.K. government bonds with freshly created central bank money, last March, having slashed its key interest rate to an all-time low of 0.5%. "We hope we've done it," Posen said, when asked whether the MPC would need to extend the program. If inflation and output growth follow the path the MPC has projected, "in that case, there's no need for more QE. It's if something negative happens to the economy again, then we may have to do something," he said.

Reading between the lines on all of this mainstream media commentary – something we try to do – it would seem that central bankers in Britain anyway are starting to feel the pressure. It is not enough to screw interest rates to zero; now one must inject cash directly into the coffers of the world's largest financial entities to ensure their solvency, or so the logic goes. And people just are not buying it anymore.

Central banks have been propping up their distribution networks (money center banks, etc.) for two years now and justifying their money-printing ways by claiming that without such cash injections the system will collapse bringing untold misery. Yet there is ALREADY enough misery to go around. Unemployment in the West is bad and getting worse. More sovereign defaults threaten. The European Union is struggling to hold itself together by floating a European version of the UN's IMF. The Great Unraveling proceeds apace.

What British policymakers – and their media mouthpieces – are apparently doing when it comes to monetary policy is twofold. On the one hand, they are continuing to position QE as a necessary evil with redeeming qualities that outweigh the risk of price inflation. On the other hand, they are claiming as Posen does, that more QE may not be necessary as it has done its job.

Here's how long-time financial commentator, Don Lowery, recently summed up the effects that QE has on the economy in a column titled, A New Definition of War:

Depreciation of the currency is direct war on all dollar holders worldwide. No toy soldiers, no guns, no tanks, no budgets, no charges of crime, no fear of the press, no public outcry. The fox is in charge of the henhouse but the hens are unaware. In fact they are unaware that they are unaware.

O, the foxes, they don't talk about printing money, they call it "quantitative easing." They are "easing" millions of people into poverty.

This final world war will leave millions and millions destitute and in poverty. All but the few still won't know what happened.

Is there anybody out there who doesn't know that if you keep pouring water in the milk, you finally have all water?

This is how fiat finally destroys all savings and purchasing power. All that is necessary is to keep printing new money and call it "quantitative easing." The more paper money spewed out the more worthless each one of those paper dollars in your pocket or your mattress, or your "bank account," or your retirement funds. What do we call this, a cruel hoax?

Yes, the modern alchemists have taken nothing, multiplied to infinity and with it transferred to themselves the wealth of the world.

These are not incidental statements, nor extraneous editorials. The elite doesn't waste time or energy when it comes to such things. We figure there is increased worry at the top that the system is going to come under another sustained attack and that MORE money printing –and other equally dramatic measures – will be necessary to bail out not just private concerns but whole countries. Once every 50 or 100 years in a fiat-money mercantilist/central banking economy monetary distortions become so bad that the whole system begins to fall apart. We increasingly believe this is such a time. If it is, all the money printing in the world will not prevent it.

After Thoughts

Of course the power elite that stands behind the West's central banking regime will continue to try. They will pour as much money into the system as they believe they have to. The trouble the elite foresees, and we see it too, is that patience is just about gone for such maneuvers. Thanks especially to the Internet, people see what's going on and they are finding it increasingly unfair. What is the elite to do if people do not believe anymore in central banking – and by extension the mercantilist money system that has been built up over this past century? This is a grave problem and it is one that is giving rise to the quiet, little yelps that we have documented today. In our opinion, investors should pay attention to such small noises as they often presage bigger explosions to come.

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