"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Sunday, April 3, 2011

Once again we ask: QE, or not QE?

That is the question.  As June approaches, will the Fed end QE2 as promised?  Or will it immediately begin with the next program, to be likely dubbed QE3 by pundits?

I think a lot depends on other factors in the world.  The ECB wants to raise rates this month, just as the periphery countries, especially Greece, Portugal, and Ireland are becoming increasingly economically unstable.  Debt deflation and rising unemployment is common there, which will likely translate into political repercussions.

The US housing market is far from stabilizing, and that's one of the purported reasons for QE, right?  To stabilize the housing markets, keep interest rates low, and to push up asset values.

Oil too, is a major factor.  It has recently made a new high since the 2008 oil price spike deflated.  The Middle East situation is a major factor here, after all, an increasing price of oil is basically a tax that transfers money from industrial countries to the oil exporting countries. That's a huge drain of wealth.

Marc Faber makes some interesting points in this recent Bloomberg interview.  Others have their say in the first few minutes regarding the possibility and timing of QE3:


Dave Narby said...

Nice find Misthos!

Jim Slip said...

It seems to me that central bankers have a bias towards private credit rather than sovereign "credit". Whatever. I fail to see what good this policy of excess bank reserves and low interest rates is doing (FED), and I fail to see even more what good the policy of the ECB is doing (buy sovereign debt to make yields fall, but sterilizing the purchases and thus increasing the cost of money, and thus make yields, well.. rise).

Misthos said...


The US and the EU have different tools available and somewhat different problems, with one common problem - a banking system.

The US is not debt constrained in an MMT sense, and has a strong Federal Gov't. Decisions and resulting policy implementation is easier to accomplish, even if they are unpopular. The US also has a strong segment of its economy that is FIRE reliant, so asset values matter. QE is keeping asset values high and interest rates low, and is recapitalizing the Banks as a backdoor bailout.

The EU does not have a strong Federal Gov't, so in that leadership vacuum, Germany, and to a degree, France, fill that role. What are their goals? To protect the Euro and to protect their banking system - the bailouts are a way of recapitalizing their banks. Regarding the individual sovereigns that make up the EU, they are debt constrained, like the US (individual) States.

It's all about the banking system, and shifting costs onto citizens.

The US, having the world's reserve currency and the largest military, believes it can afford to devalue the dollar. The US uses its power to bargain with many other countries in order to sell its Treasuries. This we do not see, as this type of "horsetrading" is done behind closed doors. The EU, on the other hand, for many possible reasons, believes in fighting inflation.

The crisis we are experiencing is so severe, than any policy decision made will carry with it high costs. There's no way of avoiding it.

boatman said...

oooooh...they rolled on to a new featured clip.

i had to search "faber" but it came right up!

Don Levit said...

Assuming that the U.S. can never go broke, does that mean the full faith and credit of the U.S. dollar is assured?
The little I undferstand of MMT, it is given much authority to the U.S. due to it coercive and certain power to tax.
Right now, the taxes are providing 60% of our spending.
If that falls to 30%, would that weaken the full faith and credit of the U.S.? Do taxes have to have some miminal relationship to spending?
If so, then couldn't taxation be so high, that productivity is negatively impacted?
Don Levit

Misthos said...


When viewing government spending thru MMT, taxes are not used to fund government spending, as the government creates money whenever it spends. It doesn't need to wait for taxes to be collected.

The real purpose of taxation is to control aggregate demand - that is, to control inflation. So when government taxes people, it removes a part of their spending ability. Taxation is also a behavioral tool - with a tax code, you can introduce loopholes, write-offs, etc... that favor one group over another, or even further a public policy goal like homeownership and the interest rate tax deduction.

The US dollar is a fiat currency - so yes, it is backed by nothing but faith and credit. But there's something else that gives "teeth" to that faith and credit: so long as Americans need to pay taxes in US dollars and nothing else, the currency will exist, and domestic demand for US Dollars will exist as well. The value of that currency, however, can change drastically.

So what about those debt numbers? Well, I recently wrote in the comments section of the Pragcap blog:


I understand the operational realities of our monetary system, but at the end of the day, the goal of maintaining artificially low interest rates will not be discarded.

And I don’t think we keep track of such metrics as deficits or debt to gdp, etc… merely because they are some throwbacks to the gold standard days. We keep track of these debt and financing type metrics as measurements of the health of the economy. And in that regard, these metrics do matter. They affect everything. We need to keep these “books” so to speak. And so, we speak in terms of the operational realities of these metrics.

I think you would agree that in an MMT world, deficits do matter eventually. The argument lies in how much debt is too much.

As I see it, the MMT argument, reducto ad absurdum, or in extremis, leads one to arrive at the conclusion that we shouldn’t measure anything, that interest rates don’t matter especially in regards to foreign trade policies. Yeah, I know, we need enough money to avoid depression but not more than the productive economy can handle. But that ignores the goods and services we import or the global wage arbitrage we think is advantageous to us, but in the end, isn’t. It’s a global economy, you know? Doesn’t that complicate things?

The math has to make sense – even in an electronic fiat world. That math is how nations judge each other – how they determine the value of existing trade relationships, resource control/allocation, and each other’s currency usage. And there are real world consequences to that. Bilateral non dollar denominated trade agreements are on the rise for a reason. The Math is looking shaky for the US Dollar, and many other post industrial economies’ currencies.

In my opinion, the goal of QE# is to lengthen the lifespan of the current Ponzi game of debt by keeping rates below inflation. And with fingers crossed that we someday soon, somehow, economically grow again at a rate faster than the Ponzi’s rate of growth that leads to its inherent termination. Finger in the dyke solution, if you ask me.

boatman said...

hugh hendry agrees with QE-X


Misthos said...


Thanks for the link, I haven't read anything of Hendry's lately, and I used to follow him a lot.

I was worried about precious metals and the ECB hiking rates this month, but it looks like the market has already priced the ECB rate hike - hopefully. All eyes on Bernanke the next couple months.

To his credit, Cullen Roche over at Pragcap has a good post today on the effects of QE2 and where we may be heading.

I think QE3 is a certainty. It's the timing that is up for debate.

Jim Slip said...

IMF gives ground to capital controls.


I don't know what to make of this yet. Lots of variables to consider.

Misthos said...


Looks like I ran out of my 30 articles a month for free at the FT. So I googled it in news and found other sources covering this. Looks like really fresh news, just a few hours old.

First thing that I thought of when I read this is how different the world has become since about 20 years ago when globalization and market liberalization was the paradigm, and capital controls were frowned upon... I guess we reached a point where we have too much of a good thing...

Many have convincingly argued that Ben Bernanke has waged some sort of economic/currency war on China, as the US's largest trading partner that pegs its currency. Ben shipped off a boatload of inflation to China, and now they're pretty angry about it. But it's not just China. Most of the developing countries are bearing the brunt of devaluations.

You're right that there are lots of variables to consider, but when it comes to global institutions such as the IMF, one only needs to remember how powerful or powerless they are, as the case may be. If you're Irish or Greek, the IMF is pretty powerful.

If you're the US, or China, not so much. The IMF then is just a tool you use for leverage.

The global architecture of international trade and finance is really, really, difficult to govern now. It's every nation for itself. And the G20? Great for photo opps, but not much else.

I think most negotiations are being done, as always, behind closed doors. Are they successful? From the outside looking in and trying to guess, I just don't see that much success.

Capital controls are a tool that nations use. Why do they use it? Because other nations such as the US are using a tool as well - QE - interest rate manipulation to devalue the currency.

My Realpolitik view:

DSK and Sarko are trying to show the world that the French are multilateralists at the IMF and G20. Meanwhile, they send their military to engage Libya and the Ivory Coast!

Everybody wants to be a Superpower nowadays.

Jim Slip said...

Official, Portugal asks for bail-out.

Join the club. -)

boatman said...

ggoldman says spain will not need bailout.....home ownership spain-85% most on variable rates n many hanging by fingernails.....ecb rate hike blows them up....more forclosures.

but i guess empty houses don't mean nothing to zombie banks......until they do.

you don't think the rate hike leak n portugese bailout at same time was planned do you?

i bet they don't do hike or if they do they go back on it...didn't they do that in '08?

Misthos said...


I wouldn't be surprised if the ECB is hiking rates with Portugal in mind, or at least it is part of the equation. When I look back at the timelines of the Irish and Greek crisis, though, I see the market crushing the Euro months before official IMF/ECB involvement.

Which tells me the market is not dumb, or at least, not most of the time.

Gas prices too are a big factor in the ECB's (Germany's) decision to raise rates. Gas prices spill price inflation for everyday goods. The local gas stations where I am right now have the equivalent of about $10 a gallon! Last year, it was closer to $8 a gallon - the cost here is slightly higher than the EU average.

I really can't make sense of what the EU is doing. Do they want the Euro to stay at 1.40 or above? That is crushing the periphery economies.

Unless, they are rolling out something big and they want to get ahead of the market.

As you point out - Spain is the one to watch. Spain is the main course. Greece, Ireland, Portugal, are mere appetizers.

But what I am witnessing here in this part of Greece is debt deflation and rising unemployment. It's really bad. Storefronts, even at prime locations, empty, job losses... friends of mine in Athens say its much worse over there. Crime is going up, companies aren't hiring, etc... I just can't believe the same is not going on in Spain. Housing is a big deal.

But here's something else to think about: In the US, many states are non-recourse. People default or strategically walk away from a mortgage, and they automatically have extra disposable income.

From what I have read about Spain, and elsewhere in the EU, mortgage debts follow you for life. Add to the mix that these countries' economies are not growing, and government is not spending either - (no stimulus) so you have a perfect storm of debt deflation = Depression.

boatman said...

didn't know that about liflong debt personal in EU....interesting....hey, that would make one a real zombie....the walking dead with a bad debt hanging around their neck for life....

when two fools met: when someone loans money to someone who can't pay it back.

Jim Slip said...

"Unless, they are rolling out something big and they want to get ahead of the market."

I've thought about the same thing myself.

In the meantime, another excellent article at Eurointelligence, which highlights the technical aspects of the system.


"National central banks lend to their banks using repurchase agreements. But the securities used in these repos are government bonds or lower quality assets, and the Emergency Liquidity Assistance (ELA) provided by the Irish central bank reaching nearly €70bn in support, is explicitly government-backed. Thus the ultimate guarantor of eurosystem loans to Irish banks (via the CBI) is, at best, the Irish government itself.

In the event of Irish – or Greek – sovereign default, it is not clear whether losses would fall on national central banks or on the ECB. But this is of little relevance as the national central banks are the ECB’s shareholders and the Bundesbank is both the largest shareholder and the largest eurosystem lender. Losses of the Bundesbank would be for the account of the German treasury."