Over the past couple months, it has almost become amusing how Ben Bernake and his merry band of capricious money printers have tried to deflect blame for the effects of their reckless monetary policy. This policy of course known as ‘QE2’, which began in November 2010.
Quantitative easing (QE) is an unconventional monetary policy used by some central banks to stimulate their economy. The central bank creates money which it uses to buy government bonds and other financial assets, in order to increase the money supply and the excess reserves of the banking system; this also raises the prices of the financial assets bought (which lowers their yield).
Expansionary monetary policy normally involves a lowering of short-term interest rates by the central bank. However, when such interest rates are either at, or close to, zero, normal monetary policy can no longer function, and quantitative easing may be used by the monetary authorities in order to lower interest rates further out on the yield curve and further stimulate the economy. Risks include the policy being more effective than intended or of not being effective enough, if banks opt simply to sit on the additional cash in order to increase their capital reserves in a climate of increasing defaults in their present loan portfolio.
Under ‘quantitative easing’, the general idea is that the Fed uses newly minted money to purchasing crappy assets from banks and government bonds. This is supposed to stimulate the economy by keeping interest rates low, and freeing up capital for banks to lend. Note that one severe criticism of ‘QE’ operations, is that it could be used to ‘monetize’ government debt by diverting newly printed money directly into government spending. The Fed asserts that this is not happening, and since they have been so candid about everything else, why I’m sure they are telling the truth about this too.
Unfortunately for the Fed, it is becoming more difficult to deny the correlation between ‘quantitative easing’ and the coincidental creation of three new dangerous bubbles.
Stock Market Bubble
Certainly the most popular effect of the Fed’s QE2 flood of liquidity is the current stock market bubble.
Indeed there is rarely ever a public realtions problem associated with a stock market bubble, and so the Fed has gladly accepted the credit for shamelessly inflating equities.
Some analysts may argue that corporate profits support the 25% runup in the S&P since the end of August 2010. Many of these same analysts are still waiting for their 1999 call of Dow 25,000 to come to fruition, and by most measures, the market has been levitating at historically lofty valuations that usually preceed a significant correction.
On the bright side, a higher market is a proven factor in boosting consumer confidence, and should support additional discretionary spending, at least to some extent. However, it makes little sense to create short-term euphoria that has no basis in longer-term reality. A trip to the dentist is also pretty fun until the nitrus oxide wears off, and if the market crashes again in a significant way it’s hard to see what credibility will be left for our fugacious Federal Reserve friends.
Here’s Charles Biderman, CEO of Trimtabs describing the Fed’s artificial inflation tactics on the stock market:
Now, in contrast to a stock market bubble, there can be public relations problems associated with commodities bubbles, especially when escalating input costs catch up with corporate profits and pop a cap in the backside of a festively bouncy stock market bubble.
The Fed in the case of commodities denies any responsibility for the relentless increase in prices since they embarked on their latest round of QE2 fallacious fiat money distribution, but this is just ridiculously disingenuous.
Proof that the Fed’s reckless money printing operation is responsible for escalating oil prices can be seen in a 5 year chart of oil:
The Fed would have us believe that in the summer of 2008, when they were frantically attempting to inflate our way out of the impending banking collapse, that they had nothing to do with oil reaching $147 a barrel. Oh, and yes, it was just business as usual when oil plunged to $35 a barrel just a few months later.
And the Federal Reserve propaganda campaign of plausible deniability knows no boundaries. It was rather amusing to find this headline a couple days ago, where one of Bernake’s charlatan tricksters attempted to put up a typical smoke-screen:
If oil prices continue to climb, it could force the Federal Reserve to make a new round of asset purchases, according to Atlanta Fed President Dennis Lockhart.
Appearing at the National Association of Business Economics in Arlington, Va., Lockhart said that while he doesn’t think additional purchases are currently warranted, more stimulus could be needed if oil prices continue to climb.
Oh, I see, the best way to put out a forest fire is the strategic dropping of napalm over the afflicted area, makes sense.
Student Debt Bubble
Lastly, and maybe the most dangerous recent bubble that the Fed has managed to orchestrate with their policy of misguided monetary generousity, is the student loan bubble.
Karl Denninger of ‘The Market Ticker’ describes the situation with an eloquent rage that only he is capable of:
So let me see if I get this right – we’re trying to crank consumer credit by turning into debt slaves the only group of suckers left – our young adults. The rest of America has wised up and contrary to media reports is not increasing their credit load, revolving or otherwise.
That’s right – our young adults who are too naive to understand are being intentionally exploited. Those young adults who our “High Schools” intentionally fail to teach the principles of the exponential function in the real world and intentionally fail to put forward the truth about how our economy and credit-based system works in real life. This leaves them “ripe” for the picking with stars in their eyes as they listen with rapt attention to the riches promised if they just go to college – whatever it takes.
Asked to take on $100,000 even $200,000 in debt for a college education that will leave them with a $1,000 a month or more after tax obligation, while foreign workers will and do come into the United States without that burden on H1Bs, thereby under-pricing them in the job market by $18,000 a year or more, these young adults are being exploited, screwed, blued and tattooed in a puerile and outrageous attempt to keep the debt-ponzi going by everyone involved from High Schools to Colleges to the Federal Government itself.
This is financial ****, and if you’re a parent with kids in college or about to matriculate and you are not warning your children about this outrageous incitement to financial ruin and doing everything in your power to stop it (or worse, you’re “helping” them to get screwed like this) I hope your now-adult children refuse the answer the door when Social Security and Medicare blow up and you’re rendered homeless, penniless and helpless.
This is one of the most-outrageous abuses I’ve ever seen perpetrated on anyone. It radically exceeds anything done to the subprime and ALT-A borrowers in that the young adults abused by this practice are by definition simply due to age and experience ill-equipped to understand what they’re getting into. They are relying on the adults advising them, from High School and College counselors to “Financial Aid” officers and their parents.
To put a number on this abuse the cumulative damage inflicted on our youth between the first of 2009 and January of 2011, just two short years, is almost two hundred and twenty-four billion dollars.
One quarter of a TRILLION dollars in debt has been larded up on our young adults in the last two years.
On a related note, if you expect this issue to be addressed by the mainstream media and partisan puppet pundits, don’t hold your breath: