October 2012:- BEN Bernanke and his fellow blinkered central bankers could once again be sowing the wind for the next global crash, writes Neil Behrmann. The chairman of the Federal Reserve Board is placing the US and global economy at risk through his reckless monetary experiment known as quantitative easing (QE).
His third round of QE, notably the purchase of US$40 billion of mortgage securities each month on top of his previous “Operation Twist” purchases of US$45 billion long-term treasuries to push the interest rates even lower, will be over and above the whopping US$2.3 trillion purchases of US bonds. The multi-trillion-dollar purchases and reserves available for bank lending, are aimed at repressing bond yields and hence long-term interest rates well below inflation rates.
By also suppressing short-term rates to almost zero for a promised three years or more, Mr Bernanke has provided heavenly manna for investment and other bankers. They are encouraging investors to take risks and buy equities, gold, silver, other commodities and property at welcome commissions and other fees.
QE junkies
Market sentiment has already improved markedly and it is only a matter of time before the “animal spirits” permeate throughout the economy, QE enthusiasts say.
Others in favour of the policies of Mr Bernanke, notably President Barack Obama’s campaign team, CEOs of zombie banks and Keynesian economists who believe in borrow-and-spend now and worry later, have cited several advantages.
These, according to them, include keeping deflation and depression at bay and providing banks with the firepower to encourage companies and citizens to borrow, invest and spend to reignite economies and reduce unemployment.
Mervyn King, Bank of England governor, is another former academic and QE fan and, in recent weeks, European Central Bank (ECB) chief Mario Draghi has torn up the institution’s constitution with an intended buying spree of Spanish, Italian and other speculative bonds to keep struggling nations in the eurozone.
Last week, the Bank of Japan joined in the fray but, in its defence, the QE is an attempt to counter yen overvaluation which has kept the economy in a recession straitjacket.
Mr Bernanke and his Bank of England colleague claim ad nauseum that QE helped the US and global economy avoid a deflationary depression and will ultimately boost the economy and lower unemployment. Indeed, QE3 is open-ended until such aims are met, says Mr Bernanke.
QE fails because it worsens misery index of unemployment plus inflation
The problem, however, is that QE has been going on since late 2008 and, in five years, the policy has not generated the much desired economic bounce and new jobs. Instead Britain and Continental Europe remained mired in an inflationary recession, similar to the 1970s, while the US is encountering a mild inflationary revival. This means unemployment remains high but inflation is creeping up.
The growing number of critics who maintain that the US and other economies would have improved, without higher and higher doses of the monetary drug, cite several reasons for this policy failure:
The overriding problem for businesses is that it is difficult to decide on significant job-creating medium- and long-term investments because of uncertainty on how the Fed and other central banks would react in the event of a surprise inflationary economic revival. If global markets get wind that central banks are about to stop buying bonds or sell them, investors will also offload. Bond prices would swiftly tumble and interest rates surge. This could lead to a crash in equities and other assets and recession. QE has so far encouraged short-term risky investment and speculation in equities, gold and other assets, but limited investment in factories, plant and equipment.
Dollar Devaluation, a policy tool that the Fed denies
The hidden agenda of the Fed’s QE has proved to be US dollar devaluation. This, in turn, has caused global instability as investors have switched money into other currencies. Since 2008, the Japanese yen has appreciated by 56 per cent against the greenback and Singapore dollar by 25 per cent. The surge in the yen has been a major reason for continued recession there, while flows into currencies such as Singapore dollars have made it difficult for their central banks to control their money supply. The result has been speculation in property and general inflation. More recently, the euro and British pound have rallied at a time when those nations desperately wish to boost exports to reignite their economies.
“Mal investment”-the misallocation of capital
QE encourages “mal-investment”, i.e. misallocation of resources into commodity and real estate speculation, i.e. over-abundance of construction that can lead to business failures. China’s current bubble implosion is a classic example.
A gold price of almost US$1,800 an ounce compared with US$250 in 2001 before the Fed chairman Alan Greenspan, advised by Mr Bernanke, began a monetary explosion that generated a real estate, equity and commodity bubble that collapsed in 2008. In the meantime, QE since 2009 has underpinned high energy and other commodity prices that, in turn, raised raw material costs and were also an effective tax on the consumer.
QE hurts the fast-growing greying community who either receive pensions or are about to receive pensions. Their capital is swiftly depleted because the return on their savings is inadequate. This community, with the exception of the wealthy few, are forced to consume less, thus reducing demand in the economy.
It raises pension fund deficits as low bond yields are inadequate to fund members. QE effectively forces pension fund managers to purchase equities, real estate, commodities and hedge funds, that can decline in volatile markets.
Financial repression of bond yields encourages governments to continue to overspend at an unsustainable rate as they can borrow at below normal rates. The inevitable result, as the fall out from the 2008 to 2009 crash shows, are uncomfortable austerity policies and debt repayments that cause recession and social upheaval and riots.
QE bolsters zombie banks and businesses which are a drain on economies and are a tax burden for corporations and individuals.
In short, QE distorts the natural adjustment and renewal process in free enterprise economies.
© Copyright Neil Behrmann-Author Trader Jack-The Story of Jack Miner