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Thoughts from the Frontline

QE Infinity: Unintended Consequences

September 22, 2012

Choose your language

There is an intense debate going on in the first-class cabin of Economics Airlines about the direction in which our plane should be pointed. And while those of us back in the cheap seats don't get to help decide, knowing where we will land is of intense interest to all of us. This week we listen in on the debate, in the form of speeches and academic postings passed back from first class for the rest of us to read. This type of debate also occurred when Greenspan held rates down at an abnormally low level for a very long time. The unintended consequence of that move was a housing and debt/leverage bubble. Are there potential unintended consequences to Bernanke's current monetary policy, which some are calling Quantitative Easing Infinity? I suggest you put up your tray tables and fasten your seatbelts – the ride could get bumpy as we explore QE Infinity: Unintended Consequences.

The Federal Reserve (that is, the FOMC – Federal Open Market Committee) last week gave us an open-ended quantitative easing policy. Most of the world thought they would only give us QE3, and more than a few observers expressed surprise that the Bernanke-led Fed decided not only to continue Operation Twist at its current level but also to buy an additional $40 billion a month of agency mortgage bonds. This latter easing policy will…

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Stuart Harnden

Sep. 24, 2012, 5:37 a.m.

It’s a shame so many people sitting around wringing their hands over all the money piled up in banks, sitting on the sidelines, sitting in bonds, money market accounts, etc.  don’t address what I consider the most obvious reason for all the uncertainty and hesitation by businesses and individuals to invest and spend.  And that is, the political course that this President and his shadow supporters, who are really the ones calling the shots for the President, diverges from the Constitution and the traditional form of government that our country has had since its founding.  By self admission, Obama believes in distribution of wealth, supports the Muslim world that wants to send America to the ash heap, believes in Communism, and is truly a Marxist/Socialist.  His unique czar system of ruling indicates that. His drive for total government control of all facets of our lives is what is scaring the daylights out of America, and since he attends fewer than half the daily security briefings, couldn’t recall the national deficit, can’t speak without a teleprompter, indicates he’s just a Campaigner-in-Chief, not the real President as we have known them. 

In short, Obama and his shadow handlers want, in my opinion, to take this country completely on a new path, in effect changing it to a country totally alien to what we baby boomers have grown up in, and until this issue is settled, either by his replacement, or by his actions, uncertainty will remain high and we will continue to sit in fear of losing all that we have worked all our lives for.  It’s time to stop dancing around the direction our country is heading and stop pretending this is just an economic downturn that’s going to end like all others - it isn’t.  We are Austria in 1939, heads in the sand, staring down the abyss. We need a serious, honest, discussion about where we’re headed politically, because where we’re going now, there’s no hope for a recovery.

Stuart B. Harnden

Jay Kost

Sep. 23, 2012, 5:06 p.m.

Marc Faber (another of the select few, including yourself John, that I read and listen to) has said that the Fed will ‘Destroy the World’.  After reading this assessment (as well as many of yours and other’s in the past), I fear the worst, but hope for the best.  I have little faith in Congress.  Even with this dire situation hanging over their heads.  And the Fed is simply out of control…

Alan Harris

Sep. 23, 2012, 4:39 p.m.

The promise of eternal growth is just pyramid sell.

Andy Biemiller

Sep. 23, 2012, 2:36 p.m.

I can’t agree wholly with Shultz et al, although I share a lot of their worries.  As Richard Fisher noted, what is needed is not only releasing money into the economy, but bluntly spending some of that money rather than leaving it inert.  People have to be return to work.
  At the beginning of WW2, the US stopped worrying about debt, started worrying about the then Axis enemy, and put the country to war both soldiering, but also to running factories at capacity.  The depression ended.  At the end of the war, the US quickly converted to peacetime production.  Many of the demobilized soldiers went to school at government expense—the most massive increase in history of the jump into the “middle class” (really, middle incomes).  Inflation between 1945-1955 was pretty rapid, but Americans as a group prospered.
    When Reagan became President, the nation also adopted substantial rearmament, while doubling the national debt in 8 years.  The nation prospered.
  Interestingly, G W Bush doubled the national debt during a period of wartime, but did not have the same beneficial economic/employment effects.  What was different?  A possible explanation is the consequence of 30 years of globalization—resulting in declining incomes for 2/3rds of the population, with resultant declining purchasing power.  The wealth greatly concentrated mainly in the top 1 percent did not produce US “job creators” but rather were money concentrators who often spent on luxuries, and often invested abroad.  The reality is that there was no growth in private sector employment (and a decline in income for those in the below the 90th income percentile) during the 2000-2011 period.  So much for the benefits from wealthy “job creators”. 
  John Mauldin speaks of possible investments for his readers.  I am concerned by the shift to “private investment”—outside of publically-monitored corporation activity—that represents a very “undemocratic” version of capitalism.  Not only is this “undemocratic” but unregulated.  While this may represent “business opportunities” to flog both real and frankly totally dishonest investment opportunities, a more honest and less hoodwinking economy would not try to sell fake businesses, nor keep reasonably profitable enterprises out of the public eye.  In short, if “free enterprise” is to be the hallmark of American economic activity, let it be publically seen and publically accounted economic activity.  I’m not sure how this is to be accomplished for enterprises beyond small family businesses,.  But I greatly fear for the future of the U.S. if business is to become largely the playground of the ultra-rich (1 percent) who now control a ridiculously large proportion of such activity.  It appears to be a continuation of Berle and Means (1932) work on The Modern Corporation and Private Property (re concentration of wealth). This may be a lot like Nazi Germany in 1938.  (Just a guess!)

Raj Shah

Sep. 23, 2012, 12:33 p.m.

  I just read an article by Cliff Wachtel on SA.about article by Reuters on Friday.I am very disturbed by it. I would like your opinion on that.
PS- I am an Indian living in Netherland and have interest in politics.

Jim Dundas

Sep. 23, 2012, 11:13 a.m.

I have been an avid reader of yours since almost the beginning of Thoughts from the Frontline.  I understand the progressitivity of our tax system and your quote that the top 1% pay 37% of all federal income taxes.  However, to put this in better context, it would be helpful to know what percentage of total INCOME the 1% represents.  i.e. the top 1% earn 20% of all income and pay 37% of all taxes or do they make 10% of all income and pay 37% of the taxes?  Making this number known would better illustrate the fact that they are paying “their fair share.”  No one has ever published this number and I think it would be very helpful in order to fend off the “fair share” argument.

Walter Clayton

Sep. 23, 2012, 9:35 a.m.

I was surprised to learn in recent months that interest rates in Germany actually were fractionally “negative.”  I do not understand how interest rates can go negative, “zero” is one thing, negative is a mystery to me.  However, is Bernanke’s “QE-Hyper Warp Drive” (to borrow from the “Trekkies” of which I am one… does the Fed policy effectively “threaten” negative interest rates, thus, the new “QE-Weeeeeeee!!!” is a gambit, that being, to “force” corporations to spend or pay the banks to hold their cash.  Of course they could go running to Europe with excess cash (LOL) or where else?  Have we reached the “proverbial precipice” and the essence is a threat of “negative” rates??  Just asking…

tricky rick land

Sep. 23, 2012, 7:29 a.m.

John:  Nice article and love the airplane analogy.  I see Bernanke’s actions all a smoke screen hiding the potential destruction of entire economy… the global economy.  The needs to constantly provide the liquidity IV to the banking system to prevent the dominoes of Interest Rate Swaps, Credit Derivations and the such.  All else is a side show.  If these monsters fall - fergetaboutit!

Donald Reinhardt

Sep. 23, 2012, 5:54 a.m.

If everyone – Congress,the President, the Fed Reserve – did the right things in the right ways then these financial and fiscal problems would not continue to writhe about. The Democrats want more taxes and government programs, the Republicans want budget cuts and tex reductions and the Fed Reserve is beside itself while putting more sand in, while the children in the sandbox argue and fight. No wonder we are where we are. We lack wisdom, courage and leadership to do the right things now and instead we wait for tomorrow and tomorrow and tomorrow while we creep at a petty pace – all to our own great sorrow ultimately.

Gordon Davis Jr

Sep. 23, 2012, 5:18 a.m.

What we are seeing is central bank capitulation.  The Fed, ECB, and BOJ are expanding their balance sheets on an open ended basis in order to keep their respective economies afloat.  The “open ended” part of QE3 was a bit of a surprise for me.  I had thought that sovereign debt would be our last big “bubble”, but apparently, it will be the Fed’s balance sheet.  No doubt QE3 will buy us some time, but as with other recent Fed actions, it offers no solution to our growing economic problems.  It’s hard to see how this can possibly end well.

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