Ruminations, February 17, 2013
What happens when the world models itself after a failed model?
Quantitative easing (QE) is an economic strategy that Fed Chief Ben Bernanke has employed to ease the unemployment situation in this country. Bernanke believes that it has helped. Others disagree and suffice it to say that a definitive answer on its efficacy is elusive if not impossible. The potential negative side effects of QE are legion: inflation, economic bubbles, trade wars and an increased national debt, among others. Even Bernanke admits that the longer QE continues the less effective it is in creating jobs. After spending some five years working this program, the Fed is not about to admit failure.
The Fed goes full speed ahead on a policy that doesn’t work. Federal Reserve Vice Chairman Janet Yellin is rumored to be the successor to Chairman Ben Bernanke and proved her worthiness on Monday. Speaking before the AFL-CIO, she said, in effect, that the Fed policies were not producing more jobs, were weakening the currency, and were creating economic bubbles, so the Fed would continue with the same policies.
Three years ago, Yellin admitted that “…accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking in the financial system." In other words, QE can cause economic bubbles – which cause economic crises. And last week, as the Fed monetary policy headed toward a fiscal cliff, Yellin said “We have our foot not only on the gas but pressed to the floor.”
A Fed slowdown? But a couple other Fed officials have indicated that applying the brakes to the Fed’s printing presses isn’t a bad idea. Sandra Pianalto, President of the Cleveland Federal Reserve and James Bullard, President of the St. Louis Federal Reserve, both past supporters of QE have suggested that the time to slow the printing presses may be here. Speaking in Florida on Monday, Pianalto said (in typical Federal Reserve obfuscatory prose), “To minimize some of these risks, we could aim for a smaller-sized balance sheet than would otherwise occur if we were to maintain the current pace of asset purchases through the end of this year.”
Bullard, according to The Wall Street Journal, suggested that QE purchases be tied to the unemployment rate and for each tenth of a percent drop in the rate, the Fed would print $15 billion less. But Bullard knows that unemployment figures are notoriously inaccurate and to focus-in precisely on a tenth of a percent is ludicrous. So perhaps what he is saying is that we can begin to slow the printing presses, period.
Esther George, President of the Kansas City Federal Reserve and another voice in the wilderness, last month voted against the QE purchase of $85 billion (which, by the way, raised the Fed’s holdings to over $3 trillion). She said that “the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations,” In other words, if we keep on doing what we’re doing, we could really screw things up.
G20. Meanwhile, over in Moscow, the world financial mavens were meeting to pretend that they were straightening out the world monetary crisis. The G20 met and took specific steps to avoid criticizing Japan (which had publicly mused on the potential for weakening the yen). Since Japan is going to weaken the yen, the lack of criticism is, in effect, tacit approval. And if it’s good for Japan, who else is it good for? Everyone?
Japan struggles. Japan, as you may be aware, has been in economic doldrums for better than 20 years. It had built its post World War II economy largely on exports, which seem to work fine for a time. And then the comparative advantage that Japan held started to shift to other countries and, at the same time, the real estate bubble burst; and Japan entered into a slow growth and deflationary cycle. Added to these problems is the political instability of having eight prime ministers in the past seven years and soaring energy costs exacerbated by the Fukushima nuclear power plant disaster. To help itself out of the economic climate in which it finds itself, Japan has cut interest rates to near zero and increased taxes – neither has helped.
The new Japanese Prime Minister Shinzo Abe announced that his government would work with the Bank of Japan to increase the money supply and increase inflation to 2 percent per year. Of course, increasing inflation and the money supply means weakening the yen and driving down the cost of domestically produced goods. You know, if you change “Abe” to “Bernanke” and “Bank of Japan” to “Federal Reserve,” the story would be equally true, wouldn’t it?
The G20: Fed wannabes? Now the Moscow G20, led by the United States, the European Union and Japan, issued a statement saying that market forces -- and not direct manipulation -- should determine currency exchange rates. That sounds good except when the Bank of Japan, the Federal Reserve or the European Central Bank increases the currency supply and explicitly hikes inflation. In doing so, they strongly influence market forces, drive down the price of their currencies and create economic bubbles in other countries (such as Mexico and Turkey, for example, whose currencies are appreciating).
Remember, three years ago President Barack Obama said he had hopes “of doubling U.S. exports in the next five years,” – a task made infinitely easier by devaluing the dollar. In fact, Yellin last week said “For quite some period of time now the U.S. dollar has been depreciating very gradually in real terms and I think it has made a very substantial difference [in increasing exports and decreasing imports],"
The major economies of the world are kind of pretending that this isn’t happening, since they are all involved (or may be involved) to varying degrees through QE or other stimulus programs. They are also pretending that a currency war has not begun.
Whom do you trust? When you look at the machinations of the world’s financial masters, you kind of appreciate the motto that is inscribed on U.S. currency: In God we trust. There are certainly few others who can be trusted.
Quote without comment
Brazilian Finance Minister Guido Mantega, in an interview with Reuters last Monday in Moscow:” I think the most important discussion at the G20 will be the return of stimulus policies."