When QE Becomes Ineffective
Are we seeing the first signs? The Fed gave us the “number” a couple of weeks ago, just after the election. $600 billion seemed not to hot, not too cold. But the papers and airwaves are filled with discontent over the policy in general, to the point where Fed Governors Yellen and Dudley held seperate interviews to specifically claim that the Fed measures are NOT meant to devalue the dollar. Now, stop your laughing. Or crying. Or whatever your response was to the bald-faced lies. It doesn’t really matter what the jaw-boning of the Fed Governors is, the impact of printing trillions of new dollars is to devalue those in circulation. The real question is, has this policy created the impact the Fed wanted, and will it have an impact going forward?
I think it’s safe to say that the printing of dollars has indeed caused price appreciation (commodities, imports, etc.), however that price appreciation has not led to job creation, which is the mandate the Fed is arguably trying to meet. So if the first $1.7 trillion didn’t work, will the additional $600 billion? We don’t think so. It now appears that others are beginning to share our view.
The US treasury market sold off after negative comments from a rating agency about the additional $600 billion hurting the US government’s long-term credit rating. Our trade partners are becoming more vocal in thier criticism. Walmart is tracking an increase in a basic basket of goods, which points to inflation in living expenses no matter what CPI is (mis)reporting. The equity markets are showing signs of weakness, and bonds are losing ground.
This is the situation we have been waiting for. Our view is that the powers of deflation are overwhelming and will swamp the efforts of the Fed. The question has always been, how far will the Fed go in this direction of QE, or even monetizing US debt, before it throws up its hands in defeat? Will the Fed go the distance and ruin the US dollar as many forecast? We don’t think so. As Alan Blinder wrote yesterday in the WSJ, the governors at the Fed are not stupid. They might be misguided in their attempts to engineer a recovery when a washout event is more of what’s needed, but they are not so blinded in their mission as to go far enough to create severe inflation or even hyperinflation.
The sooner they stop, the sooner we can get on with the real task at hand – dealing with the deleveraging of the US and Western European countries, restructuring debt and prices. The sooner this is done, the sooner we can actually start the process of creating new jobs that are meaningful.
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