Thursday, November 4, 2010

QE2, the good, the bad, the ugly

QE2 is here. It was announced yesterday that the FED will print up to 1T of new money and buy all kinds of things with it but mostly bonds.

Couple more thoughts

1/ Social engineering
At a moment when politics in the US is at a standstill, the FED, unilaterally, is going to print 1T of money, without anyone's supervision, in order to restart the economy. Of course, the tax debate is irrelevant since this is brand new money out of thin air. The fact is that modern policy is conducted by the FED. It is also targeted at the haves, and will hurt the have-nots.

2/ China
QE2, at heart is a way for the US to default on its foreign obligations. The risk is a debt trap, where the interest on debt consumes GDP. This is a way to solve the foreign debt trap problem. If the US wanted to get back at China for currency manipulation, this is it.

In general, QE2 is just creating a massive carry trade where, people borrow in dollars and just spend it OUTSIDE the US. Meaning the growth will be felt elsewhere. This is rooted in the fact that few growth opportunities are perceived to be left in the US and the differential with emerging markets is too high. The net result of this may be curtailed by capital controls being put in place.

4/ Trickle down QE
QE2 is printing money to buy assets (preferably bonds). This creates speculation in assets. If you are a asset holder, let's say a house, then the price of your house will artificially increase. This makes housing harder for those that don't have it, the young most notably. The basis for this as acknowledged by Bernanke, is that it will kickstart spending by the wealth effect. This is pure trickle down economics, conducted by the FED. Theory is give to the rich, at the expense of the poor, hoping it will all trickle down quickly.

5/ pushing on a string
Many commentators have pointed out that adding to bank reserves is unlikely to spur lending. Lending is driven by perceived opportunities, and there aren't many perceived in the domestic US.


Anonymous said...

You start of with saying the "good, the bad and the ugly".

I see the bad and the ugly but don't see much good. What are your thoughts on the "good".

Marcf said...

Sorry I should have made it explicit since it is in the eye of the beholder.

For me personally, 1 and 2 are the good

1 because at least someone is doing something.

2 because it ultimately drives at the imbalances of the payments between cn and usa

mostly I consider QE to be the "only way forward". Tax and spend doesn't make any sense, not politically acceptable. CN will not revalue so this does the job. It is always hard to say 'good/bad' in large scale things like these so much depends on the observer.

Stephen G said...

So if QE is the only way forward, does that mean QE2 and then done, or QE3 dead ahead?

Marcf said...

Good question.

I have blogged on QE1 vs QE2 and clearly these 2 are different beasts. The first one was aimed at breaking up the death spiral dynamic of deleveraging (march 08 was a free fall). QE2 is aimed at deleveraging itself, since the dynamics are semi-stable. The one salient point for me on QE2 is default on foreign holdings. It is a double whammy on CN, one the debt is called, two the dollar is tanking. Of course the way for CN to sterilize all these inflows is to engage in a tit for tat QE2 (pronounced che-liang) which they have done for QE1.

So all in all, this may go down as the start of the currency wars, cold war WW4.

Anonymous said...

So I'm still trying to understand how this is a good thing? The more we look at this, the more it looks like the bad and the ugly.

Marcf said...

yeah, I agree.

And just in case your initials are MP, it is clearly not good for CN. It signifies a new intransigeance from the US. How they respond to this is going to be interesting. Given the nationalistic fervors on both sides of the pacific I would expect a tit for tat peg which mean QE2 china which means further bubble and over-heating. Death by bubbles! sort of the opposite of what the US did to Russia. In this case I do not see a way out for our friends, the dollar WILL devalue whether they collaborate or not.