by Harry Koza
The torture, as Frank Zappa once said, never stops. Just when you think you’ve already seen every conceivable hare-brained rehashed Keynesian scheme to reflate the debt bubble from Ben Bernake and Tim Geithner and the Plunge Protection Team, they come up with a new one.
It’s the new mania. We keep moving from one to the next; we segued smoothly from the tech mania to the housing and leveraged debt mania, and then to the bail-out mania. But we’re not done.
Oh no. The latest mania is Quantitative Easing, or QE. It’s the flavour of the day. QE is, basically, printing money. The Federal Reserve is already buying U.S. Treasury Bonds in the market, paying for them with cash created out of thin air. The Fed plans to buy US$300 billion worth of bonds, plus another $750 billion worth of agency (Freddie Mac and Fannie Mae) mortgage-backed securities, plus another $100 billion in Freddie and Fannie bonds, for a total of US$1.15 trillion. That’s a lot of clams.
The original idea was that by buying long bonds, the Fed would push interest rates lower, making mortgages more affordable. Since they’ve actually started buying back Treasury Bonds, though, bond prices have gone down after each one.
Quantitative Easing is pretty much the end of the line for monetary policy, the last act of a desperate central bank – it’s for when you’ve exhausted all your interest rate-cutting ammo and are reduced to throwing rocks at your enemy. The enemy in this case, of course, is deflation. The Fed, and others of its central bank ilk, are scared stiff of deflation.
Deflation makes the debt mountain that’s weighing down the global economy heavier, and central banks desperately want to create some inflation to help whittle it down. In a deflation, the dollar you have becomes more valuable every day, while the dollar you owe becomes more of a burden.
In order to fight deflation, then, goes the logic, we have to have QE. It’s hardly a new idea: consider the poster couple of QE, Juan and Evita Peron.
Time was, Argentina was a comer in the global economy. Then the Perons came to power.
Peronist Argentina featured huge social spending, a metastasizing welfare state, rampant protectionism, confiscatory taxation, gigantic deficits, fawning corporatism, and the printing of lots and lots and lots of money. Gee, that sounds a lot like what’s coming out of Congress these days, doesn’t it? Even worse, the U.S. was arm-twisting at G20 to get everybody else involved in QE, too. Here, have some Kool-Aid.
QE is the new black, as the fashionistas might say, and governments around the world, such as Gordon Brown’s United Kingdom, are jumping on the idea faster than tornados on a trailer park. There’s even some expectation on the Street that the Bank of Canada will jump on the QE bandwagon.
Bank of Canada Governor Mark Carney is rapidly running out of room to lower rates any further, so QE is on the agenda at least for discussion. On the other hand, the Bank’s mission statement promises “We work to preserve the value of money by keeping inflation low and stable.”
That’s a good thing, especially since QE is little but an effective mechanism for debasing the value of money and creating inflation. I can’t see why the Bank of Canada should even think about going there.
Another problem with QE is that it is the acme of trickle-down measures. Problem is, by the time the new money created by QE does trickle down to the consumer, any expansionary effect of the new cash will likely have been attenuated by inflation.
Extreme times, it is said, call for extreme measures. Quantitative Easing Dementia, however, isn’t a desperately extreme measure. It is a cure that is far worse and more pernicious than the economic slowdown we are trying to escape.
AIMS’ Fellow in Financial Markets Harry Koza is Senior Analyst for Canadian markets at Thomsonreuters’ IFR Markets.