QE3 Ship Sails
Off the keyboard of RE
Its all over the Blogosphere and the MSM, Helicopter Ben has once again loaded up the Chinook Choppers and is going to drop anywhere from $40B to $125B worth of Funny Money on the TBTF Banksters EVERY MONTH from now to Kingdom Come.
Graham Summers of Phoenix Capital on Zero Hedge is busy eating CROW after months of predicting that the Bernank would NOT run another QE Gambit. After 2 Epic Fails with QE1 & QE2 & “Operation Twist”, yet ANOTHER one of these Helicopter Drops you would think a Normally Smart Academic like Helicopter Ben would not undertake. There are however extenuating circumstances here you have to consider in the situation as it stands.
The primary consideration you have to grasp is what is going on over in Eurotrashland. The Krauts and the Bundesbank basically Caved to Super Mario Dragon and have agreed to fund the ESM and look the other way while the ECB does back door buying of Sovereign Debt of Spain and Italy. IOW, Super Mario is going to Print to Fund these economies, at least for a while. This will require a LOT of Ink and Paper to print those colorful Euros.
What happens if Super Mario is Printing non-stop to fund those economies and Helicopter Ben does NOT print in tandem? Answer: the Exchange Rate goes to hell in a handbasket in short order. The Euro would drop in value rapidly, the Dollar would rise in value and all the trade based on the current relative valuations being held stable would fall apart. In order to Validate the Value of the Euro, Helicopter Ben HAS to print just as fast as Super Mario does.
As Steve on Economic Undertow often points out though, CBs like Da Fed and the ECB don’t really Print Naked, they Print to match “Collateral” that is thrown at them and Buy this Collateral with the New Money. The issue here is that just about anything these days serves as Collateral on completely Fictitious Marking of Value.
Not quite Baseball Cards here as Collateral, but Close. For the ECB, they are “buying” Sovereign Debt that is Irredeemable Debt, it cannot and never will be repaid. In the case of Da Fed, they are Buying MBS that basically amounts to non-performing loans. Stop and THINK about that. Even if it is JUST $40B a month, are people REALLY taking $40B/month out in Mortgages anywhere now?
The $40B DaFed CAN buy each month is the Trash on the books of Fannie and Freddie and the TBTF Banks. In return for the worthless securities, they hand over new worthless Toilet Paper money. This is LIMITED though, because really the TBTF banks and Fannie and Freddie have only a limited number of these securities to SELL to Da Fed. At this point ALREADY after 2 rounds of QE, I suspect these Banks hold few MBS, Da Fed ALREADY “owns” most of the Trash. For the Banks to get MORE Cash for Trash, they would have to issue out more Mortgages. To WHOM will they issue such mortgages?
THAT is the problem here. You see, Da Fed can Buy infinite Debt, but only if infinite Debt is issued out and somebody SIGNS for that debt. Dead BROKE J6P is not signing for new Debt, nor are TBTF Banks OFFERING him debt to sign for either. You have this HUGE ZIRP Credit Line, but unless you can get somebody at the bottom end you define as a “Good Credit Risk” to sign, you cannot distribute out the money this way. THAT IS THE PROBLEM.
Helicopter Ben can make the money cheap to free with ZIRP to the TBTF Banks, but if those Banks do not push that money out into new loans, it just exists as Digibits on a ledger in a Super Computer. It is NOT real MONEY!
Now, with the few MBS that some of the TBTF still have, they can Sell it to Da Fed and get back more funny Money to “Invest” elsewhere. Which of course generally amounts to Pumping and Dumping the Stock Market and Bidding up Commodities these days.
Far as the Stock market is concerned, this produces the “Wealth Effect: where Stock Holders THINK they are getting Richer because the Stock Market goes inexorably upward. Similarly, the Commodities markets get driven upwards as those who now have GOBS of new Free Money can bet it in those markets also! So UP go the Oil futures contracts, UP go the Soybean Futures also.
Problem here of course is that at the OTHER end of the line, Konsumers have no access to Money Drops from Helicopter Ben’s Chinook Chopper. The Money problem here is a DISTRIBUTION PROBLEM, not a CREATION problem. HB can create INFINITE Money, what he CANNOT do is move that money outward any further than the TBTF Banks responsible for pitching it out in more LOANS.
In prior incarnations of this cycle, as long as CBs pushed out more money at low interest rates,those with access to that money used it to “invest” in industries that might employ some people, so the money got distributed out that way. NOW these Banksters are NOT pushing the money out that way, what they are doing instead is blowing bigger bubbles in the Stock and Commodity Markets, and MANY economistas see this as a precursor to Hyperinflation. Which it could be, but ONLY once complete FAITH is lost in the system as whole, and we are not there yet.
QE3 will NOT get a Huge number of people taking on new Mortgages, because they are not Credit Worthy people! Even if you HAVE a Minimum Wage Job Flipping Burgers somewhere, this does NOT provide enough income to service a mortgage at anywhere NEAR typical McMansion Valuations. So there will NOT be massive creation of new MBS for Da Fed to Buy here. All they really can buy are all the old non-performing loans already handed out.
Similarly, the ECB can buy more Sovereign Debt, but they are not getting paid back EITHER. All these CBs are becoming “Bad Banks”, the final Bag Holder for a LOT of irredeemable debt. However, as long as they keep printing in UNISON and the holders of energy reserves ACCEPT this toilet Paper for the energy, the system can exist for another hour, another day.
A point here will come though at which the Money is not accepted and the available fuel to distribute out is not enough. We appear to be very close to this point if we are not already there.
Hyperinflation in the Dollar remains unlikely in the near term, and in fact as long as the Major CBs print in Concert, Hyperinflation of any of these currencies also remains unlikely. Commodity Price Inflation is likely but this is Range Limited by the Distribution problem. What will occur is that Speculators will drive the wholesale prices up on on the markets while the consumption decreases through Demand Destruction, forcing more bankruptcies. IOW, QE3 will have precisely the same effect as QE1&2, which is to do absolutely NOTHING to stop the deflationary spiral.
It is a MISTAKE to focus on the Prices here, it takes your eye off the ball of the economic dynamic in effect, which is credit contraction. Even if Da Fed or the ECB mkes EZ credit available to the TBTF, that does not mean they move the money further out into the retail economy. The “Wealth Effect” of an increasing Stock Market price is very limited overall and does not jump start the Main Street economy a priori.
What it WILL do likely here for enough time is to get the Elections done with. Long as they keep pitching out Funny Money, long as this money serves to buy Oil from somewhere, you can perpetuate a Long Emergency/Slow Collapse. The problems created though are more Political than they are Economic, and you just never know when a Fruit Vendor Self Immolating will get enough people motivated to set fire to a few Embassies. That is the War economy we are working our way into now.