MarketWatch featured a story with the intriguing title “Monetizing all the debt, all the time:”
The oracles at Goldman Sachs Group say that $750 billion of quantitative easing is priced in to the market, and possibly $1 trillion — a frightful prospect that was hardly diminished by last week’s lost jobs report.
On top of that, there’s $300 billion to $400 billion in annual GSE run-off that needs replenishment under QE1.5. So Brian Sack, the monetary apothecary who operates the New York Fed’s drive-thru window, is going to be giving Wall Street a lot of POMO. Call it $100 billion per month of Permanent Open Market Operations, and be done.
Not coincidentally, it appears that there’s also baked into the cake about $100 billion per month of new Treasury paper. According to CBO’s August update, the two-year, cumulative red ink under current law (FY 2011-2012) will total $1.7 trillion. But that doesn’t count the upcoming lame duck session’s predictable one-more-stimulus bacchanalia.
Juiced up by their election rout, the tax-side Keynesians in the GOP are certain to ram through a two-year extension of the Bush tax cuts for one and all.
In return, the hapless White House will insist this one-half trillion dollar gift to the “still haves” be matched with several hundred billion more in presently unscheduled funding for emergency unemployment benefits and other safety net programs for the “no-longer-haves.”
In combination, these measures — along with more realistic economic assumptions — mean that the FY2011-2012 deficit will be $700 billion higher than current projections, pushing the two-year total to at least $2.5 trillion. Read Minyanville’s “What a Republican Victory Means for Equity Markets.”
These considerations make one thing virtually certain: After the new Congress sinks into rancorous partisan stalemate and does absolutely nothing about this fiscal hemorrhage, the Treasury will be selling at least the $100 billion per month of new government paper for so long as the New York Federal Reserve is open to buy. Stated differently, national policy now amounts to monetizing 100% of the federal deficit.
In the olden times — say three years ago — the idea of 100% debt monetization would have been roundly denounced as banana republic finance. No more.
But what emergency motivates today’s greenback experiment?
It would appear to be two self-evidently foolish objectives. The first is the claim by the Fed’s money printer’s caucus that QE2 in the magnitude being contemplated might lower the 10-year benchmark rate by 50 basis points. Stunning. We have a nation drowning in 19 million empty housing units owing to the Fed-engineered housing bubble, households still buried in $13 trillion of debt from the same cause, and idle business capacity on a scale not seen since the 1930s — and we’re supposed to believe that taking down the current all-time low interest rate by another 50 basis points will make a difference?
Worse still, one salutary effect of this dubious proposition, according to chief apothecary Brian Sack, is that risk asset values are likely to be elevated to levels “higher than they would otherwise” reach — thereby encouraging consumers to go back to their former spending ways owing to the illusion of higher net worth, as conjured by the Fed.
These are pretty pathetic reasons for issuing massive quantities of digital greenbacks. Like all other experiments in printing-press finance, its main impact will be to give a destructively erroneous signal to fiscal policymakers on both ends of Pennsylvania Avenue: Namely, that chronic trillion-dollar deficits don’t matter because the Fed is financing them for free.
There is much more to this story; be sure to read the entire link if this subject interests you. QE-2 has been priced in the market and has been the main cause of this current rally. Should any disappointment about the size or the impact of the upcoming stimulus emerge, the bears will likely have a field day.
However, let’s be positive and assume that QE-2 is everything the market wanted it to be. Very likely will we see some further upside moves, however, I would be very cautious about its duration.
In my view, QE-2 is doomed to failure just like the original version did (along with all other stimulus packages) not produce much of a real economic impact.
Eventually, the actual economy will have to stand up, identify itself and, unless it has made serious and verifiable progress on its own, the bears will go after the bulls, and the market will collapse like a beaten piñata.
I am just as curious as you are as to how long the current QE-2 euphoria will last. Markets usually go down a lot faster than they go up, so be prepared once the inevitable turnaround arrives.
On a personal note, I have, for the time being, enabled the anonymous comment section again, so feel free to share your views. Offensive comments and spam will be filtered out.