The Bankwatch

Tracking the consumer evolution of financial services

QE2 and the gamble it represents for us all

A nicely written piece from Scott S. Powell, a visiting fellow at Stanford’s Hoover Institution, is a managing partner at RemingtonRand Corp. and Alpha Quest in the NY Post.  It makes the reality of QE2 clear.   This is not some subtle central bank maneuver. On the contrary it represents a gamble.

The road to a US insolvency crisis | NY Post

Today’s auction of 10- and 30-year US Treasury notes and bonds won’t tell us as much about the US economy as auctions used to — because the Federal Reserve has started buying up the notes as part of Fed Chairman Ben Bernanke’s "quantitative easing" effort.

Bernanke: By buying up long-term gov't debt, Fed chief courts chaos.

Until recently, a plentitude of bidders for long-term US government debt was a sign the US economy was strong. But Bernanke is buying that debt in what he says is an effort to make the economy stronger.

This has a lot of people nervous — and the news that the Fed may spend up to $800 billion on this, rather than the $600 billion figure initially given, doesn’t help.

The Federal Reserve’s balance sheet — the bonds and other instruments it has bought up — has already tripled over the last two years, to some $2.25 trillion, yet Bernanke seems unruffled

This can’t be good for any country, let alone the US.  The US Federal Reserve is outbidding China and other countries to purchase US Treasuries, ie lend money to the US to cover the deficit.  The US is lending money to itself under QE2.

This is important because this ‘outbidding’ of other countries means interest rates are kept low … until QE2 stops.  When that happens Bernanke is betting that the US economy will be resilient and growing based on consumer spending, not government spending as it is today.  When we layer on the consumer de-leveraging that is occurring, the bet is that paying down debt will be over, confidence resumed and growth back to pre 2008. 

Its no co-incidence that Federal Reserve Board Governor, Elizabeth Duke just made this speech in Philadelphia noting the 15% drop in US credit card debt since 2008.  This is all to support the bet.

Relevance to Bankwatch:

We (or at least I) care because America represents 25% of the world economy.  When this elephant sneezes we all get a cold.  To restate the bet;  the US consumers will be back at Walmart, Home Depot and stores all over the US before the $800 billion in QE2 runs out.  I am no poker player, but that hardly seems a safe bet, when compared to the alternative that is personified by the UK approach which is to go into austerity mode now and move towards elimination of overdraft politics.  High stakes stuff that involves future currency and interest rate shifts that affect all countries.

Written by Colin Henderson

December 3, 2010 at 00:36

Posted in Uncategorized

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