Saturday, July 28, 2012

When Will QE Come?

"Quantitative Easing" was when the fed created a  bunch of money from thin air and used it to buy either its own longer term debt, or bought toxic assets from the banks.  The practice is effectively transferring wealth from the taxpayers to the big banks.      It gave the economy a very temporary and weak shot in the arm, the effects of which have now faded, leaving only the debt used to fund the money creation and a pile of toxic "assets".

QE failed to bring us out of the Great Recession.    Paul Krugman and others have argued that we just have to do it bigger, but that risks disastrous inflation.   What the Fed has tried to do is keep the stock market up with hints of a coming QE but then never actually pulling the trigger.   Stocks rally at the idea of future money being created, and in anticipation of that money flowing to stocks, some people buy stocks.   So far they have tried to boost the market by talking about unleashing a pile of borrowed money, without having to actually release the money.    Each time this trick is tried, it has less effect.

The big banks have rigged the game so that they win either way.  They win in inflationary times by getting early use of the money and by creating an environment where it is safer to highly leverage, since all asset values will tend to rise in those circumstances.    They win in deflationary times too though.   They win because in those conditions each dollar can buy more.   They loan dollars when each dollar is worth less and are repaid in dollars whose value is higher because dollars are harder to come by and prices of many assets are lower.     If they have enough capital, they will  be able to acquire assets on the cheap as some people crack under deflationary pressures and have to sell out for pennies on the dollar.

So they win under mild to moderate inflation, and they win under mild to moderate deflation.  Where they lose is if things swing too far either way.  If inflation gets so bad that people can't afford to borrow and the dollars they get back are worth significantly less than the original dollars loaned then the banks can lose.   If deflation gets so bad that defaults escalate and instead of getting back stronger, rarer dollars in loan payments they get no dollars back at all.

So what the global banks want- and increasingly it appears that "our" government is run by them, is alternate periods of mild to moderate inflation, followed by periods of mild to moderate deflation.   During inflationary periods, everyone is tempted to borrow to the hilt and rush out and buy, buy, buy.   You lose if you don't.  But during deflationary periods those people who borrowed all that money get strapped for cash.   Some of them don't make it and have to sell their assets for whatever they can get for them to try and pay off their debt.

Of course the heartland is suffering right now.   Lots of people are hoping for another QE in a hurry.   There are two problems with this.   One is that QE's do no lasting good, but they can do lasting harm.   There is lots of money sitting on the sidelines right now.   Average Americans don't have it, but the big boys do.   But they are not going to try to fight the government and the bankers.   If that side of this system hits "Ctrl +P" and prints, then they know that there will be a flurry of commercial activity, and they will jump in and increase the momentum.

That makes QE an even more dangerous game.    It's like the FED is walking a tightrope.   Go too far one way and you fall off on the deflationary depression side.  Go too far the other way and you fall off unto the hyperinflation side.   The U.S. economy is about to fall off unto the deflationary depression side, but if Bernake on that tightrope shifts to the inflation side, about 100 monkeys are gonna jump on the rope with him - and that could knock them all off into hyperinflation.

But it looks like the big banks have found a way to keep the deflationary screws on the rest of us without great risk to themselves.    Say they have 10 financial instruments on their books, say loans or a bundle of loans turned into "securities".    The economy is cracking up.   The heartland is hurting.  One of those loans goes bad.   The "security" has lost 80% of its book value.   So while the loans that are paying give the bank dollars whose buying power is increased due to asset deflation, this gain from deflation would be more than offset by the loss of dollars from the one that quit paying due to the deflationary collapse.  Except that the big banks own the government, and they take these non-paying loans to the FED's "discount window" and get a "loan" from it with the toxic asset as the "collateral" for the "loan."    The Fed won't even tell Congress what they gave for the collateral, but you can bet its a sweetheart deal far above the true market value of that instrument.

So with the current set-up the big banks have, they really don't have a great incentive for another "QE."   "QE" is just an a version of what they can do now on steroids.   As long as the defaults don't come at a bigger pace than they can stuff onto the taxpayer's books in the current system, they have incentive to keep us in a deflationary environment.    They can buy us out for bargain prices, and if any of us crack and quit paying on their loans, they can pawn those bad loans off on the taxpayer.   The big banks who control the government have no incentive to QE until it gets so bad that the standard channels by which they hand their bad bets off to the taxpayers becomes over-stuffed.

The government on the other hand, is a borrower.   They will continue to issue debt to pay for spending, so I expect to see continued inflation in everything the government sends money to, even while the private sector not connected to the government continues to deflate.    Medical care and higher education are two of the biggest recipients of government money.   These payments will not stimulate the economy so much as prop it up - until it snaps because the number of bean redistributors keeps growing while the amount of beans made by the bean producers is stagnant or even deflating.

So when will QE come?     Only when (and if) the Big Banks think they need it, not when the Heartland of America thinks so.    That would require a Black Swan event.   What we see now is biflation.  A collapse in price of things we need to borrow money for- such as homes and autos, and an increase in price in anything connected to the government or necessary for day to day living.     

The dollar is still in trouble long term, but it will not be solely due to overprinting, but rather a combination of overprinting combined with keeping the screws down tight on credit so that the underlying economy stagnates.   More dollars without more economic growth = each dollar worth less.   It won't be all from more printing so much as there is less economy underneath it to support whatever printing the government does, combined with a central bank balance sheet stuffed full of trash.     What wealth there is will be more and more concentrated in those close to the government and those close to the big banks.

As long as real interest rates are negative, and they are, I would still advise putting some money in silver or in gold.  But that is with what you can afford to hold.  Staying liquid is the priority right now.  You don't want to be among those forced to liquidate at a loss as the banksters attempt to squeeze every last drop they can out of this deflationary phase.    Without QE, metal holders may not see an overnight massive gain in value, but they will over time continue to see appreciation in a period when nominal interest is at essentially zero. 



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