As reported in the UK Telegraph yesterday, it appears that the Fed is considering opening the money supply spigot once again with a gargantuan round of quantitative easing, which is the fancy term for printing money.
The reason? The economy is not “rebounding” as Tim Geithner told us last week in the New York Times; rather, it’s slowing. Productivity is slipping and unemployment is far worse than anyone in the government is letting on. Even with $2 trillion of easing since 2008, credit is elusive and consumer confidence and business investment is low. For Ben Bernanke, this raises the ugly specter of deflation and the Fed chief apparently thinks we’re circling that particular drain right now.
And his solution? Print more money and continue buying up US Treasury debt. After all, no one else is going to buy it. The Chinese economy is both slowing and turning inflationary. So, after pledging that we’d have no further purchases of debt or GSE securities, we’re now apparently going to continue the same course.
Needless to say, the markets reacted negatively yesterday, forcing the Fed into a hasty retreat. Now the Fed is pursuing “quantitative easing lite”:
But rather than allocating new funds to the effort, the central bank said it will use the proceeds from its first $1.7 trillion (£1.1 trillion) quantitative easing (QE) cycle to buy the government bonds “in order to help support the economic recovery in a context of price stability”. The proceeds are estimated to be $200bn to $300bn over the next 12 months, allowing it to keep its balance sheet at close to its present $2.06 trillion.
It’s this sort of madness that puts me in a Churchillian frame of mind.
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