QE Won’t End—It Will Increase

The markets are panicking about the possible end of QE. Everything but the dollar is down—and down hard—which is no surprise, considering how addicted to Quantitative Easing the markets have become.

“To Inifinity . . . and Beyond!”

This turn of events didn’t come out of the blue. Chairman Ben Bernanke and his minions at the Federal Reserve had been hinting for over a month that Quantitative Easing (QE)—the policy whereby the Fed purchases some $85 billion worth of Treasury bonds and other assets per month (per month!)—would begin to be “tapered off” starting later in the year. On Wednesday in his press conference, Bernanke essentially confirmed that strategy, claiming that the underlying economic data was improving enough to support this move. (Pelado cabrón, are you high?)

Let’s leave aside how asinine Bernanke’s view of the real economy really is, and instead focus on one brief exchange Bernanke had with a questioner at his press conference on Wednesday:

Question: Mr. Chairman, you've always argued that it’s the stock of assets that the Federal Reserve holds which affects long-term interest rates. How do you reconcile that with the very sharp rise in real interest rates that we've seen in recent weeks? And do you think the market is correctly interpreting what you think is most likely to be the future path of the Federal Reserve's stock of assets? Thank you.

Bernanke: We were a little puzzled by that. It was bigger than can be explained, I think, by changes in the ultimate stock of asset purchases within reasonable ranges, so I think we have to conclude that there are other factors at work, as well, including, again, some optimism about the economy, maybe some uncertainty arising. So I'm agreeing with you that it seems larger than can be explained by a changing view of monetary policy.

I can’t overstate how important—how revealing—this lone comment really was. The fact that Bernanke was “a little puzzled” by rising Treasury yields in the weeks before the Wednesday QE tapering announcement points to two things that are essential, if we want to understand what will happen to the markets and to the economy over the next 18 months:

One, Bernanke does not realize that it is the amount of the monthly purchases of assets—and not the inventory of purchased assets that the Fed already has on its balance sheet—that determines the prices (and therefore yields) of those assets. And two, ending QE is tantamount to ending the price support for Treasury bonds—which means that yields will rise much much more, if the Fed exits QE. Since rising yields means rising interest rates, and the Fed explicitly does not want this until at least 2015, QE purchases will continue in order to prevent this rise in yields. They will continue, and if necessary (because of rising interest rates) they will increase.

Let me restate this in simple terms for the peanut gallery in the back: There will be no “tapering off” of Quantitative Easing—instead QE will continue indefinitely, and most likely in even greater quantity, even as yields rise and drive up interest rates in the economy.

My argument is simple.
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This is the Moment

Anyone following the gradual transformation of the United States from an open society into a police-state has probably been mainlining the Greenwald-Snowden-NSA leaks case like a junkie shooting up China White.

For those who missed it, Edward Snowden, a private contractor working for the NSA, leaked several key documents which conclusively proved that the National Security Agency not only spies on all Americans’ electronic communications, but that they have the full-fledged support of the major tech companies, such as Yahoo!, Apple, Microsoft, Facebook and Google, among others.

This has been potent stuff, stuff that pretty much confirms what a lot of hard-core civil libertarians such as myself have suspected about the United States over the last few years: America has been drifting towards turnkey totalitarianism, using the War on Terror as the excuse to roll back civil liberties, and taking advantage of technology¹ to create (in Snowden’s wonderful phrase) “the architecture of oppression”.

Something Edward Snowden said, in the Glenn Greenwald interview where he revealed himself as the source of the NSA leaks, struck me hard: “The greatest fear that I have regarding the outcome for America of these disclosures is that nothing will change.” (Video here, quote at 10:49. Also embedded below.)



He’s right, and it’s my fear too. In fact, it ought to be the fear of anyone who cares about the future of the United States as a representative democracy that stands for basic human rights and against oppression. If the people of the United States do not stand up to their government now, right now, in the face of this blatant violation of all the core principles of the American Constitution, then we’re screwed. If nothing is done now, then the next stop—inevitably, irrevocably—is police-state fascism American-style.

How’s this so? Here’s my argument:

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