QE infinity

Posted By Darren Winters on Apr 8, 2019


QE infinity

Quantitative easing (QE) infinity could now be a reality.

QE which is defined as a large scale of financial asset purchase such as bonds and in some cases, even stocks by the central bank to inject liquidity into the economy is back in the spotlight following US President Trump’s calling for another round of QE, QE4.

So in these extraordinary times should we now expect QE infinity or emergency monetary policy to be the new norm?

Former Fed Reserve Chairman Allan Greenspan said on CNBC, 30 June 2011 that he “would be surprised if there was a QE3 because it would continue the erosion of the dollar.”

But despite QE3 and operation twist (QE with a different name), the dollar continues to remain strong and there is no inflation, according to the official version.

Even Trump the citizen said (2011), “the Fed’s reckless policy of flooding the market with low dollars needs to be stopped or we will face record inflation.”

Why has Trump recently called for another round of QE4, or better said QE infinity if the domestic economy is “the best it has ever been?”

QE infinity

There is something odd about standing on your soapbox saying through one side of your mouth that the economy is the “best it has ever been” and on the other side calling for the Fed to move to QE infinity emergency monetary policy.

Think about it. Either the economy is ticking over nicely and the Fed can start moving towards monetary normalization or the economy is in trouble and the Fed needs to continue accommodating. So it is either one or the other. There is nothing normal about record low-interest rates and a central bank balance sheet bloated with 3.2 trillion USD of assets.

Perhaps QE infinity could be about preventing the economic slowdown from accelerating.

There is a raft of economic indicators such as the brick and mortar meltdown, shipping rates free fall and declining worker participation rates which are all pointing to an economy losing momentum. Moreover, the Fed’s patience signalled by the FOMC’s decision last month to pull the reins on its normalization policy suggests that the Fed is mindful of a slowing economy.

QE infinity policy could be the ultimate pillar to keep assets prices artificially propped up, bearing in mind the velocity of money is near record lows

The velocity of money (or the velocity of circulation of money”) is a measure of how fast money passes from one holder to the next. So if the economy were in a boom the velocity of money should be high right now instead the money velocity is near historic lows. Take a look at this chart showing the declining velocity of money stock (M2V).

If the fundamentals don’t support higher asset prices, then QE infinity will be implemented to keep assets prices artificially high

The economic fundamentals are probably a lot worse than what the data suggests and that could be why the economy needs the type of economic policy that prevailed during the Great Recession. If the economy were out of the woods why is there still chatter about Fed rate cuts and QE to infinity?

QE infinity won’t fix the fundamental problems with the economy

The greatest monetary easing experiment in the history of finance was implemented during the Great Recession and what has been the result?

The velocity of money continues to be near a record low, work participation rates are also low and we see a widening wealth gap between the rich and poor which has helped to fuel populist governments.

Moreover, I would argue that QE has debased the currency and caused hyperinflation in asset prices real estate particularly and spiraling health and education costs.

Even the Fed has come clean and admitted the negative side effects of QE, which is a widening wealth gap.

Kevin Warsh, a former Fed board member said, “QE as a policy works purely through an asset price channel enriching the few who own stocks or other financial products (and not the 96% of Americans who receive the majority of their income through labor)”

If QE to infinity is unlikely to fix the real economy and great widening wealth inequality which potentially leads to political instability through polarised political parties why then is it being considered as a policy solution?

Some say it is the political class colluding with the bankers but the answer could be more complicated than that.

QE to infinity keeps the greatest debt bubble in history from bursting

The bubble of all bubbles is the bond bubble. If the market for US treasuries collapsed the price of treasuries would collapse sending their corresponding yields higher and that would make it financially crippling for the US government to service its debt. In other words, spiraling treasury yields would bankrupt the federal government at current debt levels.

QE to infinity policy could be about extending the debt bubble

There is a known correlation between economic growth fueled by debt and population growth. Put simply, central banker’s monetary policy indirectly impacts population growth. So deflating the debt bubble to a sustainable level in a drastic way would not only burst the debt bubble it also implies depopulation in a catastrophic way, think of a mad max scenario.

No central banker or leader wants to be at the helm when that happens.

QE infinity would eventually debase the currency to junk with hyperinflation banging at the door

That has yet to happen despite, QE1, QE2, QE3, Operation Twist which entailed trillions of USD of liquidity being created by the Fed the USD has strengthened because it is the last domino to fall when things go crazy.

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