Fed Chair Ben Bernanke’s QE2 Death Spiral Is Going To Take Us Down

Bernanke’s QE2 Death Spiral


theCL 2010-11-03 Debt, Economic, Federal Reserve

Federal Reserve Chairman Ben Bernanke announced today that the Fed will purchase $600 billion of long-term Treasuries between now and the end of the second quarter 2011. This btw, is on top of another approximately $300 billion in purchases from reinvesting principle payments from its agency debt and mortgage portfolio over the same period.

In other words, Bernanke is going to destroy the dollar. We will see double-digit inflation by the end of next year.

That Fed Announcement

The figure that everyone has been waiting for: $600 billion. “In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. ” 10-year and 3-year rates immediately shot up on the announcement, which is probably not what the Fed wanted but reflects expectations of price inflation down the road.

Fed Gone Mad: Total Supermoney Through Second Quarter of 2011 could be as Much as $900 Billion

First, this is supermoney the Fed will be putting into the system. At the M2 money supply level it could easily be twice the QE2 amount of $600 billion. Further, the Fed is going to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities.

So in total, we could be talking about the Fed in roughly an eight month period pumping as much as $900 billion in super money.

The key is to realize that supermoney can have a multiple impact on the money supply ... A multiplier impact of 2 or 3 is certainly not out of the question. That would put the M2 money supply increase in the range of $1.6 trillion to $2.7 trillion. In other words, an annualized money growth rate of over 20%. And this is conservative.

Folks, the dollar is now securely on the road to major devaluation. Price inflation at the consumer level by the end of 2011 will be well into double digits. Way, way into double digits.

The following was written back on August 9, 2010, by Gonzalo Lira.

QE2 Will Sink Us

Regardless: The Fed has been buying up mortgage backed securities from the Too Big To Fail banks, in order to bail out the banks. The TBTF banks have in turn used the cash to soak up all those Treasuries the U.S. Government has been emitting to finance its stimulus spending. China’s sale of Treasuries—to prop up its homegrown asset bubble—will need to be purchased by someone: The U.S. cannot allow its debt to tank.

Enter QE2, stage right: QE2 will be used to prop up Treasuries—and this will spook the markets. People will realize that Treasuries are as vulnerable as Greek euro-bonds—which they are, of course. So people will want to get out of Treasuries.

So the Fed will be forced to defend Treasuries—with QE2 cash. Instead of buying up mortgage backed securities, they’ll be forced to buy Treasuries. It’ll be 2008, only Treasuries tanking, rather than MBS’s.

This will light the hyperinflationary fire. People will lose faith in the dollar, and try to get out of it—at all costs, all at once ... hyperinflation is when nobody wants to be caught dead with a currency.

And even if QE2—by some miracle—does not bring about hyperinflation, then in 18 months or so, Bernanke and the Fed will do QE3: Their rationale will be that they did it “successfully” with QE in 2008 and QE2 in 2010, so why not QE3 in the fall of 2012?

If your only tool is a hammer, then every problem looks like a nail. Bernanke and the Fed will bring about hyperinflation—obviously. They are so irrationally terrified of deflation—and they are so committed to defending aggregate asset prices, regardless of what it takes—and since their only real power is monetary expansion—that they will let loose the QE spigot ... And in their zeal, they will kill the U.S. economy.

"Instead of buying up mortgage backed securities, they’ll be forced to buy Treasuries" ... which is exactly what the Fed announced it is doing. Sweet, uh?

Peter Schiff a couple days ago.

Bernanke's QE 2 Will Sink Just Like The Titanic

In the year 2010, "QE 2" doesn't refer to a sumptuous ocean liner, but a second, more extravagant round of "quantitative easing" — stimulus. In the past, this technique was simply called "printing money." As if the nation has not already suffered enough from the first round, Captain and the Fed are determined to compound the damage by hitting us with another monetary juggernaut. Their stated goal is to boost the economy and create jobs. However, since economic growth cannot be achieved by printing money, their QE 2 will sink just as surely as the Titanic.

[T]he bogeyman of deflation is really not a concern at all. It's not a threat because falling consumer prices could serve as a relief for many suffering from layoffs and pay cuts in the recession. Even if it were a threat, it's not even likely because so much liquidity has already been created and an infinite amount could still be created at will by the Fed. Consumer prices are already rising across the board, despite a contracting economy, so what's all this talk about deflation?

The Fed is quick to point to falling real estate prices. But a drop in real estate will no more cause consumer prices to fall than the real estate boom caused them to rise. Real estate prices are too high, and the economy will never truly recover unless they are allowed to fall. It is interesting that when real estate prices were rising, the Fed did not raise rates to bring them down, but now that they are falling, the central bank feels compelled to lower rates to prop them up. If falling real estate prices threaten deflation, why did the Fed not perceive an inflation threat when real estate prices were rising?

My thinking is that, at the end of the day, all this deflation talk is a red herring. The true purpose of QE 2 is to disguise the decreasing ability of the Treasury to finance its debts. As global demand for dollar-denominated debt falls, the Fed is looking for an excuse to pick up the slack. By announcing QE 2, it can monetize government debt without the markets perceiving a funding problem. If the truth were known, a real panic would ensue. So, the Fed pretends buying treasuries is simply part of its master plan to boost the economy, even though, in reality, it is simply acting as the buyer of last resort.

Which is exactly what the Fed is doing, monetizing the debt. Printing money out of thin air to payoff debts the government cannot afford and killing the dollar in the process.

Stock up on gold, oil, bullets and canned food. We just took a big step towards hyperinflation.

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Here's a big issue the 112th Congress can get on right away--the systematic intentional collapsing of the American Economy.

From what I've read Bernake is intending to double the currency currently in circulation, by printing enough QE2 dollars in order to partially buy back some of the over supply of treasuries on the foreign market.

The above article mentions hyper inflation. Before hyper inflation happens there is a period of run away inflation.  In my economics 101 class inflation itself was defined as--too many dollars, chasing too few goods. During a period of too few goods/services being produced, (due to a condition such as high unemployment) then  consumers start competing or bidding against each other for the goods that are available, which in turn drives up the price of the goods. This is classic inflation.

 If farmers for instance are paying out a higher cost for the things they require to produce food, then a) some farmers are going to go out of business diminishing the overall level food supply and b) the price for food that is produced will have to go up.. Start watching the CPI consumer price index for larger monthly/quarterly jumps. This index is a measure of basic consumer goods.  ( it tracks the national average price of basic consumable goods  such as food, gasoline etc) The CPI  is used as an indicator for inflation.

When we have so much unemployment how can we have too many dollars chasing too few goods? It will happen when the printing presses effectively double the amount of currency in circulation for no other reason than to swap out one form of debt (treasury note) for a another ( currency/legal tender) then you are doing nothing other than devaluing the prime resource of the monetary system- the US dollar. The EMPLOYED with their earnings, will be the ones who begin competing for the dwindling goods being produced, which leads to sustained inflation, which leads eventually to hyper-inflation. 

It was two or three decades ago when Argentina was suffering sever hyper inflation.In the early 1980's I was working  here in America   as the project controller for a petroleum refinery under construction near Buenos Aires, for YPF the Argentine national petroleum corporation. I recall conversations with one of their attorney reps where he recounted stories of Argentine's being paid on a daily basis, and spending the money as quickly as possible because to wait a day or two saw a huge devaluation in the purchasing power of their just earned wages. To pay the light bill manyana risked not having the full amount and what that entailed, when you did have it the day before. Same for food, same for gasoline, same for everything.

What eventually happened, all old currency was recalled and replaced by "new currency". The pesos were exchanged at a rate of about 10,000 old pesos for 1 new peso. Imagine having to do the same with your dollars. For every $10,000 "old" US dollars you receive one "new" dollar.When this happened many lives were turned upside down. A lifetime of work wiped out with the stroke of a pen. People referred to their funds as old pesos and new pesos. For many caught in this trap retirement became an impossibility.

 All  because of  the crazy spending and crazier monetary policies of the Juan Peron regime, which spawned the hyper inflation  of the immediate post Peron period.  Obama-Bernake have us on  that same Argentine fast track to economic collapse with  this latest plan. Devaluing our currency is not the answer. Creating an economic climate which encourages private enterprise to flourish is the way out of the current morass. That means a climate of lower taxes, and fewer not more  burdensome regulations ( which add to the cost of doing business). When this economic climate change occurs, then jobs will begin  to be created again.

Steve