By Gonzalo Lira
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 antethe 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.
It took a long time for them to arrive at this place. Before QE, all the Democrats cared about was deficit spending—they essentially did not care about monetary policy per se, except where low interest rates affected home buyers. Whenever they focussed on the Federal Reserve and its chairman, they concentrated on the jobs creation side of the Fed mandate, or else (cosmetically) on the regulatory side. (The Dems are in the pockets of the banksters to the same degree that the Republicans are. The Republicans are just more blatant about it.)
But even though Quantitative Easing started in 2008, it seems as if Democrats didn’t really “get it”. They viewed it as a way to save the banksters’ collective bacon—they didn’t see it as the way by which the Federal government could go into limitless debt.
But with last Thursday’s testimony, it’s clear like a bomb blast that the Democrats finally understand what QE really means. This is the reason-why of the Democratic senators’ questions/comments during Thursday's testimony: The Chairman of the Senate Banking Committee, Tim Johnson (D-SD) wondered whether it might be too soon to “taper off” Quantitative Easing. Senator Robert Menendez (D-NJ) later asked, “Isn’t it still way too soon to consider any kind of policy tightening?” Senator Chuck Schumer wondered aloud about more hawkish Fed board members, and how Bernanke’s departure next year would affect QE.
The upshot of all the questioning was that it revealed how the Democratic senators implicitly realize that it is the size of QE—and not the size of the deficit or the debt ceiling—that restricts how much the government can spend.
Democrats would probably deny and dismiss this characterization. They might well argue that their concern for the size of QE purchases is so as to ensure low unemployment. But QE does not affect unemployment directly. After all, it’s a bond-buying program. It affects unemployment indirectly—not to say circuitously—by providing price support to Treasury bonds, which thereby allows the Federal government to issue more bonds without fear of rising interest rates, and thereby have more cash to spend in order to soak up the unemployment by way of fiscal spending.
It is QE and QE alone that is providing price support to the bond markets, and ensuring that the Treasury Department has a buyer of last resort for all those bonds that it is issuing to cover the debt. At this time, QE purchases amount to some $85 billion-with-a-“B” per month—over a trillion dollars per year. Which is the lion’s share of the yearly Federal government deficit.
So Democrats might claim that they want more QE in order to get more jobs—but those jobs are by way of Keynesian-style Federal government deficit spending. Viewed this way, QE is Paul Krugman’s best friend: QE allows as much deficit spending as the Democrats or Krugman might ever want.
The B-story to this narrative is the coming nomination and confirmation of Ben Bernanke’s successor.
Anti-QE advocates, such as some Republicans and most clear-eyed observers of the state of the economy, have been nearly hysterical about how Quantitative Easing creates bubbles in equities and real estate markets, and sets the stage for a serious, perhaps catastrophic debasement of the dollar. These people (myself among them) want the next chairman of the Fed to get out of the QE business altogether, and deflate all these bubbles so that the economy might crash and reset in a more or less controlled manner, as opposed to a currency panic and collapse, which (from hard experience) is much, much worse.
But now, as Democrats come to see how useful QE is in expanding Federal government spending and thereby (in their eyes) “saving the economy”, they will insist on a new Fed chairman who will continue QE, if not expand it.
Enter Janet Yellin, the vice-chair of the Federal Reserve, and the odds-on favorite to be the confirmed nominee. (Ignore Larry Summers’ surge in the betting pools. Obama despises him, and I think the hash he made with Harvard’s endowment—which a lot of people are all of a sudden reminiscing about as his profile rises in the Fed chairmanship race—will be enough to torpedo his chances.) She is famously dovish with regards to QE, concerned more than anything with full employment. If she becomes the next Fed chairman, she will certainly not taper QE, if unemployment levels are not to her liking. And if the situation continues to deteriorate, employment-wise, she will in all likelihood expand QE, so as to tacitly provide the Federal government with room to expand its deficit, confident that the Fed will buy up all those T-bonds it issues.
That’s why Janet Yellin will most definitely be the next Fed Chairman. Bonus for the Dems: She’ll be the first woman Chair of the Fed, which will earn them a few silly op-eds that will be missing the real point—the real point about Yellin being that she’s a QE-to-infinity-and-beyonder.
Anti-QE advocates always thought that the debate about QE-or-not-QE was a strictly economic debate: Technocrats on one side, technocrats on the other, like a super-nerdy version of dodgeball. But now with the Democratic senators questioning why Ben Bernanke is going to taper off QE, and whether he should continue it and/or expand it, the issue of Quantitative Easing has ceased being a technical, inside-baseball, What-would-Gary-Gygax-say debate, and become a political issue.
Now that the Democrats have realized how essential QE is to the continued Federal government deficits, there is no doubt as to what they are going to demand: More QE. A lot more QE. And to make sure this is the outcome, they will put a Fed Chair who agrees—i.e., Yellin.
Which means that Quantitative Easing is about to become apolitical issue. The Dems won’t want QE-IV or QE-V, or (as I’ve called it) QE-∞—no, what the Democrats will want is Super-QE. QE-on-Steroids, QE-to-the-friggin’-Moon.
And to any anti-QE argument that Quantitative Easing might lead to a collapse of the dollar, the pro-Super-QE Dems will argue that, in five years of QE, there hasn’t been a significant rise in inflation—which they will therefore claim indicates that QE cannot cause inflation and thus the dollar cannot crash because of QE.
QE? Meet QED.
The More-QE Dems won’t be alone: The more populist, more irresponsible, more war-mongering Republicans (“Paging Senator McCain!”) will agree with these money-printing Dems—and join the bandwagon of Super-QE. Because more QE means more deficits with which to pay for pork and prisons and wars, without the pain of raising taxes. Which is what McCain Republicans want.
So for a significant majority of the House and the Senate, more QE—Super-QE—is most definitely in the offing: They will lobby the Fed for it, and they will ultimately vote for a new Fed chair who will explicitly guarantee that QE will not only continue, but will be expanded. Which is what Janet Yellin tacitly promises.
Once the Democrats start to seriously push for more QE over and above the current $85 billion per month levels, it will only be a matter of time before the dollar is broken.
How will the dollar break? I’ve argued since donkey’s ears that all that cash sloshing through the system because of QE will flow to commodities, sending them stratospherically higher, the rise in commodity prices cascading throughout the economy, until rising prices become a self-reinforcing phenomenon. And since the economy is too weak to apply some Volcker-style inflation-fighting interest rate hikes, rising prices will quickly turn from ’70’s style stagflation to hyperinflation.
You think I’m smoking righteous weed when I say this? Well then think it over a bit, because it’s all right there: Once the markets realize that Super-QE has been implemented, sure, equities, bonds and real estate will blast off—for a while. But the rush by a significant segment of the market will be to get out of every paper asset, and into hard commodities and precious metals. And that, as I have argued repeatedly, is when hyperinflation will take off.
Democrats—or more properly, Democratic politicians—have always been a little slow when it comes to economics. It only took them five years to figure out what Quantitative Easing really means. But now that they have, the Dems are going to ride that QE pony into the ground—and if that means ruining the dollar and thus breaking the economy, well . . . it was all done in order to “save the economy”.
And aren’t good intentions enough?
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