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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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Warren Voth

Sep. 23, 2012, 5:11 a.m.

John;

If you are in the cheap seats, I am riding below with the extra bags of peanuts. Your answer to Chuck Shumer should be engraved on the foreheads of congress and the white house so it is the first thing they see when they confront each other.

As a small business person, who has kept the family business in the black (mostly) for 32 years, our trade policies are the second worst thing that has happened to America. The first being slavery. I remember attending chamber of commerce meetings, during the Clinton administration on why we should support free trade. I could never understand why I would want to send the jobs of my customers sent overseas. The result has been increasing transfer payments to middle America as the politicians cant tell America that it has priced it’s labor out of the market. Making money in foreign markets is one thing. Stripping America’s middle class is another.

As a conservative, I didn’t and don’t support Obama as he is content on re-slicing a smaller pie in the name of “fairness” whatever that really means. Tariffs were the fence around America’s middle class. In the rush to overseas markets Congress didn’t lower the draw bridge, it tore down the walls of America.

Without changes in America’s trade policies and our relationship with China, it matters little who will be elected. Neither candidate will rock America’s boat as the top tier money, which really drives both parties likes things just the way they are.

Alan Harris

Sep. 23, 2012, 3:07 a.m.

The problem is we count unemployment as a negative thing. But automation inevitably reduces the need for manpower, (that’s why we build the machines isn’t it?). Unless you can find an ever growing market wanting to buy mass produced product (that’s why they are looking for life on Mars…..they wanna sell them something!), growing unemployment is inevitable. I remember a programme on UK TV years and years ago that claimed America was working on a plan in the 50’s, to pay people NOT to attempt to get a job. (does anyone else remember this?). So the idea of the FED or whatever endlessly handing out money is not so new. Perhaps while we are all focussed on the ‘poor unemployed people’, Bernanke and pals have seen the writing on the wall, accepted its inevitability and simply factored the cost into the equation? They just haven’t got around to telling the people the ‘good’ news yet. I wonder which Presidential candidate will be the first?

Steven Smith 26339

Sep. 23, 2012, 12:08 a.m.

That’s funny.  The more this goes on the more this all sounds like Nevada (the whole State) to me.  I mean I grew up being taught that I have to listen to elders, you know parents and stuff.  Then after asking questions to my Uncle who was a civil engineer why Nevada governments do what they do, legalize gambling, started seeing people in my late 30’s and thru now get cancers and what not from the stress they put on themselves by being supervisors and all.  I still wish I could roll-back the clock about 20 years while I learn how to trade stocks on the internet.

Dale Danser

Sep. 22, 2012, 11:20 p.m.

Supply and Demand meet at a point called Price. If you change one of these three points, at least one other will change. Most likely, if you change one, both of the others will change.

That being said, the Fed over the last few years has tried to affect Demand by changing Price (Hyper-low interest rate). Their action has been to increase Supply. But there comes a limit to how much pressure can be continued. Theoretically, if you create such supply in new refrigerators as to drive the price down to $50, you’ll sell a lot of new fridges. But once everybody has one or two, or how many ever they need, Sales will plummet, unless Quality is measured somewhere below $50—which we won’t accept.

People have very much reached their saturation level on the Fed’s product, i.e. debt. They have bought debt from the Fed through the mortgage company and stored in the house, from the Fed through GMAC and stored the debt in the car, the boat, the wife’s car, the wife’s jewelry box, the new living room furniture. There’s more debt in the new microwave, the desk-top, the new lap-top, they’ve even managed to store some debt in the 401K(a supposed growth vehicle. Christmas is coming—they’ve even found a way for a little debt to be put back in the Layaway department. As soon as the tax refund comes in next year, that oldest vehicle is gonna need new tires—more debt stored there. The oldest child is in college, they’re teaching where he can store debt. He’s gonna have to learn quick—he had to get some debt so he could go to school and find out where to store his debt. Another child will go to college in a couple years, she’ll be sure to learn more about where to store debt than the first child since she’s so competitive. These kids probably already have debt stored in their vehicles, which forces the value of the insurance to be higher than if those cars were paid for, and had all the debt taken out of them.

Do you see any other places debt could be stored??  I do. Put it in that new mattress!!! Just like Grandpa used to do—Oh wait a minute, Grandpa actually put assets in that mattress, not liabilities. So the younger man dismisses it with “Well, I’m sure Grandpa never had $3000 in his mattress, but I do!!”  Yeah…..totally dismissed.

And the administration and media keep giving us the line, “We have got to get these banks back to lending!!” Like it’s someone else’s fault. Do you see any other places to store debt? Yeah there’s a few, but by the time the house gets to this point, they have begun to find out that Depreciation takes Value faster than Debt goes away.

Yeah, we’re told that it’s the Bank’s fault ‘They ain’t lending.’ Well, after a few years of loaning to a credit score of 280 with and income of $16K, the great sum of $476K in an ARM??????? I think I’d want to quit that habit if I had it. And I have read a couple or three weeks ago about the new 1000 pg regulations for Banks about how to define the borrowing customer. I don’t think I can figure out new regulations very fast, especially when my failure to do so may result in the loss of that job. I would figure out a few pages of new regs, then prepare a report to my boss outlining what I’d learned…..............The point of all this???? ANY New regulations would require some time to be learned by all the employees at the bank. It would require time to figure out how to set the computer systems so that the bank can be forced to follow these regulations…..

Maybe the banks aren’t lending because they have to figure out all the new rules, but that ain’t what Bernanke thinks. The banks must be ready to lend since he’s sending them the money. So the problem must be DEMAND. People just don’t want to store debt anywhere else. QE Infinity won’t change that by any great percentage. The currency river is dammed up by near-Zero Demand. Putting more supply in behind the dam won’t work. They can’t FORCE Demand to rise.

I have about $98K of debt stored in this house, and that’s the total of all my debt. As soon as I can get rid of that debt, we will probably start making some fairly major improvements to the house—it’s rather old. But I ain’t going out somewhere to find more debt. My generation was told when we were teenagers, ‘You are defined by how much you can finance.’ ‘If your dad doesn’t drive a ____________, you can’t be in our club.’ We’ve heard that for over thirty years now. We’re tired of hearing about it. We’re tired of simply having to purchase things to store the debt with which we purchased the items.

See, they inflate the amount of money in the 12 Regional Federal Reserve Banks, which means those accounts can possibly buy more. But what about my account? Nobody inflated that a bit. So I don’t have the possibility of buying more.

Gary Loest

Sep. 22, 2012, 10:38 p.m.

The lack of a sound fiscal policy by our Congress is the underlying cause of our anemic economy and lofty unemployment. Sadly, all of the recent QE has been placed in motion to hopefully correct the economic imbalances that would not exist but for the negligence of our AWOL Congress. The adjustments down the road will be very painful, and very risky. Our governmental model is a failure brought on by “leaderless” leaders. A reversal of this void will have to come through the election process, but for that to be successful, we need to educate our population at a very young age the principles of economics and money management. As Clint would say… More business professionals and damn fewer lawyers.

guido romero

Sep. 22, 2012, 10:08 p.m.

Dear John,

When you should have the time and inclination, I would like you to take a look at how Germany was able to re-industrialize and re-arm in the space of nine years between 1930 and 1939. In particular, I would like you to take a look at the role MEFO Bills may or may not have played during this period and, finally, I would like your opinion as to whether you see any parallels to what is happening today.

Craig Cheatum

Sep. 22, 2012, 9:46 p.m.

From what I recall, Obama inherited $1.3 trillion deficit spending per year for the first 5 years after Bush.  Forgetting to leave out this detail is a bit selective.

victor m

Sep. 22, 2012, 5:13 p.m.

Thank you John for your time and efforts to bring your newsletter to us. I’m quite busy, but, when I’m receiving your letter… just wonder, how you manage to find a time for writing all this!! You are such an inspiration for me. Thank yoiu again, Wish you a good health John!!

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