The Democrats Finally Embrace Money Printing

Quantitative Easing is no longer just a palliative Federal Reserve policy—it has just become a political issue. Which is why it will get bigger—and worse.

If you’ve been following American political theater since the start of the Global Financial Crisis in 2008, you’ve probably noticed how many (but not all) Republicans line up on the side of fiscal austerity and tight-money policies so as to limit the fiscal deficit and reduce the government debt (at least when it comes to non-military spending. And non-law enforcement spending. And non-bank-saving spending.)—

Who says the Dems don’t like money?

—whereas the Democrats have insisted that the government needs to take on more debt, and spend its way back to prosperity. In the Dems’ worldview, deficits and debt don’t matter: What matters to them is how much is the government going to spend in order to “save the economy”. (“Paging Professor Krugman!”)

But last Thursday, during the testimony Federal Reserve Chairman Ben Bernanke gave to the Senate Banking committee, Democratic senators questioned why Bernanke was thinking of tapering off the bond purchasing programs of Quantitative Easing (QE). They wondered out loud if maybe QE should continue “until the economy further improves”.

In other words, the Democrats have finally realized that not only does QE mean they don’t have to rein in the deficit—QE also means that they can expand the deficit, confident that additional debt will be bought and paid for by the Federal Reserve. Confident that additional debt will be monetized by the Federal Reserve—because after all, that’s what QE is: Debt monetization, and everybody knows it.

(What, you really think that the Fed is gonna one day unwind its QE position? Sterilize all that money printing and rein in its balance sheet to less than $1 trillion, as per the status quo ante the Global Financial Crisis? Hue’ón, you buy that, then open your wallet, ‘cause I got a bridge to sell you.)

Which means that, with their calls for more QE, it’s clear that the Democrats have finally embraced flat-out money-printing.

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My Dog, Claire

My dog, Claire, in the kitchen at home. 

I got my dog, Claire, back in March of 1999—over fourteen years ago. She was a nine week-old puppy back then. And since then, I’ve spent more hours of my waking life with her than with any person—even my parents when I was growing up.

Think about it: I work at home, so she’s always hanging around—either napping directly behind my chair, or stepping out onto the balcony and watching the world go by. Even during the years when I worked in an office with other people, I would bring Claire along. (I could get away with that, of course, because I owned the businesses.) I once even had a fairly tense meeting with some investment bankers in my office, and Claire was there. No one noticed her: She lay under a corner table, watching everything without making a sound, the squad of banksters completely oblivious to her presence.

Claire was probably wondering, What are these crazy humans up to?

Claire isn’t my child, by the way:
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Gold is a Crap Investment—Unless...

About gold as an investment, Barry Ritholz said it best:

This is not to say gold is not affected by Macro issues. But that is very different than saying Gld has a fundamental value, an intrinsic worth. It does not. [. . .] Gold is not, and can never be, an investment. It has no true intrinsic value, no cash flow, no earnings, no coupon[,] no yield. What people call fundamentals are nothing more than broad macro analysis (and how have your macro funds done lately?). Gold is the ultimate greater fool trade, with many of its owners part of a collective belief theory rife with cognitive errors and bias. [bold emphasis in the original]

Ritholz is absolutely right: Gold does not have cash flow, earnings, coupons, or yields. Unlike, say, a factory, or a piece of land, gold cannot produce anything; gold just sits there, inert. Though it has a handful of industrial applications, and of course can be used for decoration, gold has no practical use. You can’t eat gold. You get caught in the middle of the Sahara with a ton of gold and not a drop of water? You’ll be the richest corpse in no time.

So just like Ritholz says, gold is not an investment—unless.

Unless what? Unless the fiat currency itself becomes worthless.

It is this possibility—that the novel, experimental and reckless measures being taken by the central banks of the major reserve currencies might well end up debasing the dollar, the euro and the yen to the point where they are as worthless as Weimar-era Deutsche marks—that makes mincemeat out of Ritholz’s perfectly sensible analysis.

The central banks’ screwing with the fundamentals of fiat currency is why gold is a good investment. At this time, in this era of “heroic central bank measures”, gold is probably an essential investment, considering the general direction the global economy is headed in.
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If You Are A Baby Boomer, You Will Go Bankrupt—If You Stay In America

Recently (drum roll, please) I had a tooth removed (cymbal crash!).

Unlike us, he’s got no worries—
he can afford a good gerontologist. 

But I live in Chile. So I wound up paying $62 for the extraction of a cracked rear molar, and an additional $450 for a state-of-the-art implant with a porcelain crown that ought to last me the rest of my life. This was done at a fancy-pants private dental clinic, with the latest equipment and some very hot nurses, lemme tell ya. I practically looked forward to going! (Don’t tell my wife. Please.)

Meanwhile, a friend in Texas, with nearly the identical problem, wound up paying $2,000 for the implant, and an additional $1,500 for the crown—almost 8 times what I paid. I told her it would have been cheaper—substantially cheaper—for her to fly down to Chile, stay at a nice hotel, and get the procedure done here. She thought I was kidding—until she compared the costs of the procedure, added the airfare and hotel costs, and then realized that I was right. (If you don’t believe me, check out the American Airlines website and the Holiday Inn website for yourself, then do the math.)

Another example: My 89 year-old grandmother has senile dementia, so she requires round-the-clock nursing care. Her cost? Here in Chile it’s about $1,500 per month—and this is private nursing care through a professional agency, with fully acredited RN’s taking care of her day and night in her own home. In the U.S.? The cost for the same quality of care would be between 5 and 10 times as expensive, if not more.

Now, I’m not bringing up these examples because I’m working for the Chilean ministry for tourism—I’m not. I’m giving these examples in order to highlight something crucial about globalization.

Globalization has meant that labor costs are much cheaper outside the developed world. A factory in China will produce a doodad at a small fraction of what it would cost to produce in America or Europe. Which is great, if you want to buy that doodad.

But globalization has also meant that the care and services required for older people are much cheaper outside the developed world—and prohibitively expensive in the U.S. and Europe.

Which is a disaster for retirees in America. Because if you are a retiree—or if you are a Baby Boomer who will soon be retiring—then you live on a fixed income: Be it a pension or Social Security checks or an annuity or some combination thereof. So if you live on a fixed income, and the price of health care (or health insurance) is continuously rising, then it is a certainty that you will go bankrupt before you die.

Pretty much sucks, yeah? Here’s why.
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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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