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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Mo’ Debt, Mo’ Problems (Mo’ Keynesian Cynicism)

Christ, is Matt Yglesias stupid. Stupid or high, or maybe he’s just a cynical bastard—I really can’t make up my mind.

The U.S. Debt: Notice a trend?
[click to enlarge]

He just wrote a piece in Slate proposing that the U.S. government go into even more debt, ballooning the Federal debt to even higher levels than the “mere” 120% of GDP it currently is.

His “reasoning”? To take advantage of the lower interest rates currently prevalent in the bond markets.

Prima facie, Yglesias sounds reasonable. As he rightly points out,

[T]he inflation-adjusted yield on 10-year Treasury bonds was negative 0.56 percent. Savers, in other words, want to pay the American government for the privilege of safeguarding their money. For the longest-dated bonds we sell, the 30-year Treasury bond, rates were 0.51 percent. That’s higher than zero, but far below the long-term average economic growth level. [emphasis in the original]

All good up to this point.

But then in the very next breath—I mean, literally the very next line—he writes something of startling imbecility:
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Why Isn’t Gold Higher?

Hint: Because it’s the Credit Default Swap of the Next Financial Crisis

Why isn’t gold higher? Two of the three reserve currencies of the world—the dollar and the yen—are on a relentless race to the bottom, and only recently have the Europeans figured out that they’d better start kicking the euro down, before they price themselves out of the global markets.

With this general fiat currency devaluation, you would think that gold would be much-much higher than it is now.

But gold isn’t higher—it’s drifting. Consider this chart of gold, over the last decade:

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Mr. Abe’s Trigger

Prime Minister Shinzō Abe

The newly elected Japanese Prime Minister, Shinzō Abe, has caused quite a stir. The leader of the Liberal Democratic Party, which scored a landslide victory in 2012’s election, he’s promised to restart the Japanese economy, whatever it takes.

How will he do this? He “will implement bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment, and with these three policy pillars, achieve results”—according to his statement following the LDP election victory.

By “bold monetary policy”, what he means—and what he has said—is to end the independence of the Bank of Japan, and have the government dictate monetary policy directly. (You could argue whether any central bank in any of the developed economies is truly “independent”—or indeed, has ever been so. But for the sake of this discussion, let’s assume that they have been.)

The perception is, the Bank of Japan will not only print yens and buy government bonds à la Quantitative Easing of old—it is also generally thought that Mr. Abe and the incoming Japanese government fully intend to target the yen against foreign currencies, like Switzerland has been doing with the euro.

This perception is what has been driving the Nikkei 225 index higher, and driven the yen lower. Prime Minister Abe’s policies have yet to be fully implemented—so far, it’s all been just talk. But the markets are taking Mr. Abe at his word, convinced that he is going to set a policy very similar to what the United States and the Federal Reserve have been doing: Targetting the equities markets, and printing in order to bring the yen down, and thus make Japanese products competitive in foreign markets.

But why was this decision triggered? For going on twenty-three years, Japan’s GDP growth has been sluggish at best, it’s government amassing huge debts, all the while the yen slowly strengthening and the Nikkei index meandering—yet all of a sudden, now the Japanese government is ready to do whatever it takes to turn the Japanese economy around, which begs the question: Why now?

Simple: Japan’s balance of trade has turned decisively negative for the first time since the Oil Shock of 1980—and this has put the fear of God into the Japanese leadership. Look at the following chart:

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Post Mortem On The Trillion Dollar Coin (or, Krugman Jumps The Shark)

So the idiotic idea of the Trillion Dollar Coin—floated so as to get around the debt ceiling—is dead as Dillinger. The official White House announcement stated:

Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.

Since we won’t know how this decision was made until a few years hence, when Obama officials start publishing their memoirs, the current best speculation of what probably happened comes from Bruce Krasting:

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The Trillion Dollar Coin: The Zimbabwe Dream of the Obama-heads

Why do banks spend money making sure that their branches look good and solid? Why do banks spend even more money making sure their main offices look as solid and stately and settled as ancient temples?

Is this what Yglesias
and the Obama-heads
have in mind?

Why, to give the illusion of solidity. Because in finance, the illusion of solidity begets solidity—just as the appearance of banana republic-dom begets a banana republic.

The trillion dollar coin idea floating around out there is the dumbest idea ever—but it’s also dangerous for two reasons: It is a naked power grab by the executive, and it shatters the illusion of solidity and sense in the monetary system.

Matt Yglesias over at Slate is fervently in favor of the trillion dollar coin idea, and he gives as good a précis as any of the situation.
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