QE-4 And The Monetizing of Practically All New Debt

The Federal Reserve made the expected announcement of QE-4  today less than three months after QE-3 was announced. QE-4 is an extension of a previous program called Operation Twist:

Under the "Operation Twist" program that will expire at the end of the month, the Fed was buying $45 billion in longer-term Treasuries with proceeds from the sale of short-term debt. The new round of government bond-buying it announced on Wednesday will be funded by essentially creating new money, further expanding the Fed's $2.8 trillion balance sheet.   

This 45 billion dollars a month purchases of treasuries is in addition to the 40 billion a month purchases of mortgage backed securities for a total of 85 billion dollars being printed each month. This figure is not set in stone and could grow or shrink in the coming months according to Bernanke. The stimulative effects of QE are lessening with each new round. The markets went up massively after the announcement of QE-1, less after QE-2, even less after QE-3, and negatively for QE-4.

Zero Hedge points out the startling fact that the Federal Reserve will be monetizing practically all net new debt:

Three months ago, as part of our ongoing explanation of what happens next to the Fed's balance sheet (which is now established as official canon in advance of the December 12th FOMC, when Bernanke will effectively announce QE4 consisting of $40 billion in MBS and $45 billion in unsterilized TSY purchases as we predicted the day QE3 was announced), we said that "the Fed will continue increasing its 10 Yr equivalents by roughly 12% (of the total market) per year, for at least the next 3 years, at which point it will own 60% of the entire Treasury market. It means that the Fed will monetize all gross long-term issuance every year for the next 3 years." Most looked at the bold sentence without it registering just what it means. Perhaps, now that the "serious" media has finally taken on the topic of applying a calculator to the one driver of all marginal risk demand, it will register a little better. 

In a Bloomberg story titled, appropriately enough "Treasury Scarcity to Grow as Fed Buys 90% of New Bonds" we read that "the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co." Actually that's incorrect and it is more like 100%. What is however 100% correct is what the bolded means in plain language: it is now accepted that the Fed will outright monetize all gross US issuance. Let us repeat this sentence for those who just had flashbacks to Adam Fergusson's "When money dies." The Fed is now monetizing practically all net new debt.  

Other central banks of the world have stated their intentions to print money on a massive scale. According Zero Hedge the incoming head of the Bank of England is signaling that he wants to print a lot more money:

Sure enough it was only a matter of time before Carney showed his true colors, and we were not at all surprised to read last night that the central banker, largely misperceived modestly hawkish, has done not only a full U-turn but is already suggesting the BOE not only resume QE but hit the pedal to the medal to an extent not even seen at the Fed, by pushing for NGDP targeting. Which is nothing but a fancy term for infinite monetary easing.

The most-likely-next prime minister of Japan, Abe, has said that he wants the Bank of Japan to implement unlimited monetary easing:

Abe, who heads the largest opposition party, also said he would appoint as the central bank's next governor someone who agrees with his proposed annual inflation target of 2 to 3 percent. BOJ Gov. Masaaki Shirakawa's term of office is set to expire next April.

"We would carry out necessary public investment and have the BOJ purchase construction bonds to forcibly put money in the market," [...] We would take fiscal policy steps as well as monetary policy measures to overcome deflation at an early time." [...]

Forcing the BOJ to buy government bonds has been long considered taboo because the move caused hyperinflation and devastated Japan's economy immediately after the end of World War II.[...]

Prime Minister Yoshihiko Noda has criticized Abe for threatening to undermine the BOJ's independence, telling a news conference after Friday's Lower House dissolution, "If a government sets specific monetary policy measures and goals . . . there could be problems in terms of the central bank's independence."

Last week, Abe said the BOJ should fall in line with an annual inflation goal of 2 to 3 percent that the LDP would set if it wins the Dec. 16 election and forms the next government. The bank's current target rate is 1 percent.

The BOJ should provide unlimited liquidity to achieve a 2 to 3 percent inflation target if the LDP is returned to office next month, and its governor should be held accountable if the bank misses the goal and he is unable to adequately explain the failure, according to Abe.

An LDP government would urge the BOJ to implement "unlimited monetary easing, he said Thursday, stressing the bank's recent expansion of its asset purchase program is not sufficient to boost the economy and end deflation. [bolded is my doing]

According to Kyle Bass Abe is going to detonate a bomb on the economy:

Japan is about to "detonate" a "debt bomb" and will be forced to massively devalue its currency, Kyle Bass says.

During an interview with University of Virginia business school professor: Ken Eades, Kyle Bass argues that Japan is already in a crisis, and that the possible election of Shinzo Abe next month will set off a chain of events that will result in a devaluation of the Yen and treasury yields skyrocketing. "In the next 12 to 18 months, I think you're going to see a move in their rates. Basically Japan is entering its final 'checkmate' phase of the chess game."

 As mentioned in a previous post on QE-3, the European Central Bank which was given the go-ahead by the German High Court to print unlimited amounts of money.

The central banks of the world are coordinating a massive money printing program on a global scale that will almost certainty lead to massive inflation and wealth destruction. A research report that is based on a cyclical view of economic events by Seymour Pierce, a London based investment bank, makes the case that the global economy is headed for a currency crisis and a wave of massive inflation:

Excessive monetary stimulus and low interest rates create financial bubbles. Central banks are creating the ultimate bubble in money itself, as they fight the downward leg in this Long Wave cycle. This is the biggest debt bubble in history. Each time deflationary forces re-assert themselves, offsetting inflationary forces (monetary stimulus in some form) have to be correspondingly more aggressive to keep systemic failure at bay. The avoidance of a typical deflationary resolution of this Long Wave is incubating a coming wave of inflation. This will not be the conventional “demand pull” inflation understood by most economists. The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system , with a new reserve currency replacing the dollar. [...]

Unlike earlier cycles, we are in a world of UNLIMITED CREDIT CREATION. Central banks will not permit a debt deflation under any circumstances, which would likely bring on systemic failure at this point in any case. Keeping the bubble inflated is still taking trillion dollar deficits, but has recently been supplemented by open-ended money printing (QE), not just in the US, But by other central banks in the developed world. Apart from brief pauses, this process will continue.

This is creating the ultimate financial bubble, in MONEY itself, as every time deflationary forces re-assert themselves, the offsetting inflationary forces (monetary stimulus) have to be more aggressive. This is not sustainable and is incubating a coming wave of inflation, which will eventually explode in currency crises.

The report is about 75 pages long, but it is worth skimming through. It makes the interesting point that the U.S dollar is in the process of loosing its status as the world's reserve currency. It points out what this new reserve currency will be:

When inflation leads to more serious currency crises, we will see a “reset” and the transition to a new monetary system. High level “insiders”, such as the heads of the People’s Bank of China and the World Bank have signaled likely elements of the new system. The dollar will be replaced as the reserve currency with a currency basket based on an expanded version of the IMF’s Special Drawing Right (SDR). The SDR is a reserve asset held by central banks which currently consists of the US dollar, Euro,Yen and Pound. In the new system, it is likely to be expanded to include the Yuan and possibly other BRICS currencies, and have some indirect backing by gold (at a much higher price).

This would be bad for America. I have read that the U.S dollar status as the world's reserve currency is one of the reason that the government has been able to service its debt at historically low cost. If the dollar looses its place this could increase the cost of servicing the debt to an unsustainable level. Even if the dollar maintains its status, if interest rates go back to their historic levels the cost of servicing the debt will increase dramatically. This fact will greatly reduce the Fed's ability to tighten monetary policy by raising interest rates when the time comes.

In conclusion, with the announcements of new rounds QE being announced closer and closer together, the fact that QE-3 and QE-4 are open-ended, and the lessening stimulative effect each new round is having coupled with the announcements by the central banks of the world of their intentions to print massive amounts of money, it seems as if the end of the tracks for the global economy is not that far  ahead. Economic events are accelerating at a very rapid pace. Whenever individual nations has enacted and carried out economic policies, monetizing debt, that are currently being or soon to be carried out by the central banks of the world, economic depression and massive inflation have followed. I can't predict the future, but from everything I have read it seems as if something big in the global economy is going to happen fairly soon.

The Fed Is Helping To Bailout Europe

I came across this article describing how the the Federal Reserve is helping to bailout Europe and what this is resulting in:

On Tuesday, March 26, 2012, I was invited by Ron Paul and his staff to assist a meeting of the Domestic Monetary Policy and Technology Subcommittee of the House Committee on Financial Services.[...]

The hearing dealt mainly with the Fed's currency swap with the ECB, which amounts to a covert bailout of European banks.[...]

During the financial crisis between 2007 and 2009, the Fed had bailed out European banks mainly through direct loans to subsidiaries in the United States. In order to conceal the bailouts, the Fed now uses mainly currency swaps. In the swap, the Fed sells dollars to the ECB and buys them back later at the same price, receiving interests. This construction resembles a dollar loan to the ECB at about 0.6 percent (0.5 percent above the federal-funds rate). The ECB can then use these dollars to lend them to troubled European banks. At the hearing the Fed officials did not deny the obvious: the bailout of European banks by the Fed. Rather, they claimed that the bailout was basically a free lunch for US taxpayers, as they would get an almost-risk-free benefit in the form of the interest on the swap.[...]

Let's have a look at these startling arguments. First, there ain't no such a thing as a free lunch; not even for the Fed, the ultimate money producer.[...] One cost of the swap operation acknowledged by the officials in the hearing is the moral hazard created. Banks and governments worldwide may expect that the Fed will come to save them, too, especially if they are well connected with the US financial system. So why be prudent?

The article then goes on to point out what bailing out bankrupt welfare nations through the IMF and the Federal Reserve is resulting:

The highest cost of the swaps, though, may be something else. Through the swaps, the Fed is helping the ECB to bail out European banks that finance insolvent and irresponsible governments. The Fed is indirectly bailing out countries like Greece, Portugal, and Spain, debasing the dollar. Thanks to the bailouts, the political project of the euro continues. Without the swaps, some European banks might have failed, and with them their sovereigns. Thanks to the swaps, the eurozone stays intact.

The project of the euro leads to an ever-increasing rescue fund, and gradually toward a fiscal union and more centralization. A European financial government and the European super state, which would most likely abolish tax competition in Europe, are on the horizon. The highest cost of the Fed policy, therefore, may be liberty in Europe.[...]

Finally, the Fed claims to be prudent. But how can the Fed know the point at which it is no longer prudent to bail out foreign banks? How can it know when the costs of the bailouts start to exceed the benefits to the US public? How can they know what is best for the United States? Interpersonal-utility comparisons are arbitrary. Thanks to the bailouts, some banks may win, some stock owners may win, but at the cost of liberty in Europe and to the detriment of dollar users. Moreover, bailouts produce moral hazards, crises, and losses for individuals in the future. Yet the Fed claims to know what to do: social engineering at its best — or, as Hayek would put it, a fatal conceit on the part of central (banking) planners.

In sum, the Fed has assumed the task of bailing out the financial industry and governments worldwide by debasing the dollar. Fed officials claim to know that the bailout-swaps are basically a free lunch for US taxpayers and a prudent thing to do. Thank God the world is in such good hands.

The whole article is a worth reading. This last main points of the article state some of the main arguments that I have against the IMF/World Bank, the Federal Reserve, and central banking in general: that is is allowing the continuation of failed socialist economic policies and failed welfare states to the effect of helping to set up a global economic system based on central planing/socialism. Whether this is by design or simply the result of hubris on the part of the central banks does not change what is happening. ("The Creature From Jekyll Island" is worth reading to learn more about central banking in general.)