Wednesday, October 13, 2010

QE2 is not a ship

The dollar has been dropping, gold has been rising, on rumors that the Federal Reserve will start another round of "quantitative easing" to pump up the economy by lowering interest rates. [They are already so low, the effect is like pushing on a string.] I don't know if Karl Denninger is precisely correct about causes and effects, but there's a good possibility. Here's what he wrote.

"The total decline in the dollar since June has been about 13%. The increases in commodity prices have been radically greater, with the exception of oil, which has roughly matched the dollar depreciation point-for-point.

"The problem with currency debasement as a means of trying to control a debt implosion (occurring as a consequence of hidden bad debts) is that it doesn't work. You can print more dollars and put them into the system but you can't control where they go. When the system is debt-saturated 'where they go' is overseas, generating a carry trade. This effectively exports what you're trying to do (generate positive inflation) overseas, and causes inflation there. It in turn, however, drives up commodity prices, which translates into input costs and ultimately compresses both operating margins and consumer balance sheets. This then produces a profit recession, which ultimately produces a 'classical' recession, and when it occurs into a debt-saturated environment you get bankruptcies by the boatload along with the sort of crash we had in 2008.

"You'd think that Bernanke would have learned from the last time - which was just a couple of years ago. You'd be wrong.


"Bernanke and the markets think 'QE2' will save us. [QE2 = the second round of quantitative easing, where the Federal Reserve prints money and uses it to buy up bonds and possibly other assets, a backdoor bailout for the banks, by the way] It will not. All it will do is produce another depression inside the one we're already having and the government is unable to add another $1.5 trillion annually in deficit spending on top of the spending it's already doing. The lower and middle classes will feel the inexorable weight of the commodity price ramp starting about now, and continuing into the holiday season and the New Year, which will do exactly what it did the last time.

"This is a proved failed policy, but there's nobody with a brain home in Congress, the White House or in The Fed who will pull their head out of their ass long enough to realize that fellating bankers will not resolve what ails us, when they're the ones who have been robbing the citizens with fraudulent schemes for the last 20 years and are now desperate to avoid the just desserts that should attach to their behavior."

Karl's entire rant is good reading.