Monday, July 22, 2013

The Democrats Finally Embrace Money Printing

Quantitative Easing is no longer just a palliative Federal Reserve policy—it has just become a political issue. Which is why it will get bigger—and worse.

If you’ve been following American political theater since the start of the Global Financial Crisis in 2008, you’ve probably noticed how many (but not all) Republicans line up on the side of fiscal austerity and tight-money policies so as to limit the fiscal deficit and reduce the government debt (at least when it comes to non-military spending. And non-law enforcement spending. And non-bank-saving spending.)—

Who says the Dems don’t like money?
—whereas the Democrats have insisted that the government needs to take on more debt, and spend its way back to prosperity. In the Dems’ worldview, deficits and debt don’t matter: What matters to them is how much is the government going to spend in order to “save the economy”. (“Paging Professor Krugman!”)

But last Thursday, during the testimony Federal Reserve Chairman Ben Bernanke gave to the Senate Banking committee, Democratic senators questioned why Bernanke was thinking of tapering off the bond purchasing programs of Quantitative Easing (QE). They wondered out loud if maybe QE should continue “until the economy further improves”.

In other words, the Democrats have finally realized that not only does QE mean they don’t have to rein in the deficit—QE also means that they can expand the deficit, confident that additional debt will be bought and paid for by the Federal Reserve. Confident that additional debt will be monetized by the Federal Reserve—because after all, that’s what QE is: Debt monetization, and everybody knows it.

(What, you really think that the Fed is gonna one day unwind its QE position? Sterilize all that money printing and rein in its balance sheet to less than $1 trillion, as per the status quo ante the Global Financial Crisis? Hue’ón, you buy that, then open your wallet, ‘cause I got a bridge to sell you.)

Which means that, with their calls for more QE, it’s clear that the Democrats have finally embraced flat-out money-printing.

It took a long time for them to arrive at this place. Before QE, all the Democrats cared about was deficit spending—they essentially did not care about monetary policy per se, except where low interest rates affected home buyers. Whenever they focussed on the Federal Reserve and its chairman, they concentrated on the jobs creation side of the Fed mandate, or else (cosmetically) on the regulatory side. (The Dems are in the pockets of the banksters to the same degree that the Republicans are. The Republicans are just more blatant about it.)

But even though Quantitative Easing started in 2008, it seems as if Democrats didn’t really “get it”. They viewed it as a way to save the banksters’ collective bacon—they didn’t see it as the way by which the Federal government could go into limitless debt.

But with Thursday’s testimony, it’s clear like a bomb blast that the Democrats finally understand what QE really means. This is the reason-why of the Democratic senators’ questions/comments during Thursday’s testimony: The Chairman of the Senate Banking Committee, Tim Johnson (D-SD) wondered whether it might be too soon to “taper off” Quantitative Easing. Senator Robert Menendez (D-NJ) later asked, “Isn’t it still way too soon to consider any kind of policy tightening?” Senator Chuck Schumer wondered aloud about more hawkish Fed board members, and how Bernanke’s departure next year would affect QE.

The upshot of all the questioning was that it revealed how the Democratic senators implicitly realize that it is the size of QE—and not the size of the deficit or the debt ceiling—that restricts how much the government can spend.

Democrats would probably deny and dismiss this characterization. They might well argue that their concern for the size of QE purchases is so as to ensure low unemployment. But QE does not affect unemployment directly. After all, it’s a bond-buying program. It affects unemployment indirectly—not to say circuitously—by providing price support to Treasury bonds, which thereby allows the Federal government to issue more bonds without fear of rising interest rates, and thereby have more cash to spend in order to soak up the unemployment by way of fiscal spending.

It is QE and QE alone that is providing price support to the bond markets, and ensuring that the Treasury Department has a buyer of last resort for all those bonds that it is issuing to cover the debt. At this time, QE purchases amount to some $85 billion-with-a-“B” per month—over a trillion dollars per year. Which is the lion’s share of the yearly Federal government deficit.

So Democrats might claim that they want more QE in order to get more jobs—but those jobs are by way of Keynesian-style Federal government deficit spending. Viewed this way, QE is Paul Krugman’s best friend: QE allows as much deficit spending as the Democrats or Krugman might ever want.

The B-story to this narrative is the coming nomination and confirmation of Ben Bernanke’s successor.

Anti-QE advocates, such as some Republicans and most clear-eyed observers of the state of the economy, have been nearly hysterical about how Quantitative Easing creates bubbles in equities and real estate markets, and sets the stage for a serious, perhaps catastrophic debasement of the dollar. These people (myself among them) want the next chairman of the Fed to get out of the QE business altogether, and deflate all these bubbles so that the economy might crash and reset in a more or less controlled manner, as opposed to a currency panic and collapse, which (from hard experience) is much, much worse.

But now, as Democrats come to see how useful QE is in expanding Federal government spending and thereby (in their eyes) “saving the economy”, they will insist on a new Fed chairman who will continue QE, if not expand it.

Enter Janet Yellen, the vice-chair of the Federal Reserve, and the odds-on favorite to be the confirmed nominee. (Ignore Larry Summers’ surge in the betting pools. Obama despises him, and I think the hash he made with Harvard’s endowment—which a lot of people are all of a sudden reminiscing about as his profile rises in the Fed chairmanship race—will be enough to torpedo his chances.) She is famously dovish with regards to QE, concerned more than anything with full employment. If she becomes the next Fed chairman, she will certainly not taper QE, if unemployment levels are not to her liking. And if the situation continues to deteriorate, employment-wise, she will in all likelihood expand QE, so as to tacitly provide the Federal government with room to expand its deficit, confident that the Fed will buy up all those T-bonds it issues.

That’s why Janet Yellen will most definitely be the next Fed Chairman. Bonus for the Dems: She’ll be the first woman Chair of the Fed, which will earn them a few silly op-eds that will be missing the real point—the real point about Yellen being that she’s a QE-to-infinity-and-beyonder.

Anti-QE advocates always thought that the debate about QE-or-not-QE was a strictly economic debate: Technocrats on one side, technocrats on the other, like a super-nerdy version of dodgeball. But now with the Democratic senators questioning why Ben Bernanke is going to taper off QE, and whether he should continue it and/or expand it, the issue of Quantitative Easing has ceased being a technical, inside-baseball, What-would-Gary-Gygax-say debate, and become a political issue.

Now that the Democrats have realized how essential QE is to the continued Federal government deficits, there is no doubt as to what they are going to demand: More QE. A lot more QE. And to make sure this is the outcome, they will put a Fed Chair who agrees—i.e., Yellen.

Which means that Quantitative Easing is about to become a political issue. The Dems won’t want QE-IV or QE-V, or (as I’ve called it) QE-∞—no, what the Democrats will want is Super-QE. QE-on-Steroids, QE-to-the-friggin’-Moon.

And to any anti-QE argument that Quantitative Easing might lead to a collapse of the dollar, the pro-Super-QE Dems will argue that, in five years of QE, there hasn’t been a significant rise in inflation—which they will therefore claim indicates that QE cannot cause inflation and thus the dollar cannot crash because of QE.

QE? Meet QED.

The More-QE Dems won’t be alone: The more populist, more irresponsible, more war-mongering Republicans (“Paging Senator McCain!”) will agree with these money-printing Dems—and join the bandwagon of Super-QE. Because more QE means more deficits with which to pay for pork and prisons and wars, without the pain of raising taxes. Which is what McCain Republicans want.

So for a significant majority of the House and the Senate, more QE—Super-QE—is most definitely in the offing: They will lobby the Fed for it, and they will ultimately vote for a new Fed chair who will explicitly guarantee that QE will not only continue, but will be expanded. Which is what Janet Yellen tacitly promises.

Once the Democrats start to seriously push for more QE over and above the current $85 billion per month levels, it will only be a matter of time before the dollar is broken.

How will the dollar break? I’ve argued since donkey’s ears that all that cash sloshing through the system because of QE will flow to commodities, sending them stratospherically higher, the rise in commodity prices cascading throughout the economy, until rising prices become a self-reinforcing phenomenon. And since the economy is too weak to apply some Volcker-style inflation-fighting interest rate hikes, rising prices will quickly turn from ’70’s style stagflation to hyperinflation.

You think I’m smoking righteous weed when I say this? Well then think it over a bit, because it’s all right there: Once the markets realize that Super-QE has been implemented, sure, equities, bonds and real estate will blast off—for a while. But the rush by a significant segment of the market will be to get out of every paper asset, and into hard commodities and precious metals. And that, as I have argued repeatedly, is when hyperinflation will take off.

Democrats—or more properly, Democratic politicians—have always been a little slow when it comes to economics. It only took them five years to figure out what Quantitative Easing really means. But now that they have, the Dems are going to ride that QE pony into the ground—and if that means ruining the dollar and thus breaking the economy, well . . . it was all done in order to “save the economy”.

And aren’t good intentions enough?

Correction: Janet Yellen’s name was misspelled. It’s been corrected.

Strategic Planning Group


  1. Unfortunately, the democRATS know exactly what they are doing.

  2. Perhaps the dollar is under assault right now. Gold went up 3% in one day.

  3. Will all that cash sloshing around be enough to offset the deflationary effects of retiring and dying Boomers?
    Why so certain the rush will be to commodities and not productive real estate or equities?

  4. and the RepubLICKans are so much better? At least Dems are not a bunch of old war-mongering white bigots available for the highest bid

    1. What a funny comment. The world as you know it is going to end, and you are stuck in the same old politics is everything mindset. I feel sorry for you.

    2. Do you realize that more people died in foreign wars in Obama's first terms that in 2 Bush terms. We now spend more on foreign wars than the day Obama was elected. Obama's recent appointment to the UN believes in a more military interventionist policy foreign policy. Viet Nam, Korea, WWI and WWII democrats.

      Only in the liberal blogosphere are democrats anti-war.

    3. More people died in foreign wars in Obama's term? Maybe - but under who's watch did the war start? Bush - Republican. IMO both major parties should be nuked from orbit.

    4. There was only one truly anti-war candidate in the last two presidential elections. Ron Paul. A Republican.

  5. The USA has been collapsing for 32 years producing less and less yield.

    The FED is not a leader...It's just a follower claiming to be a leader.

    Yield rates have been collapsing...and will continue until they are zero and go negative and then the USA along with the world will collapse.

    The top or owners have known all along about this.

    All of the employees of the enterprise are ignorant.

  6. None of you get it yet. Check out how many times political leaders have said,"Don't let a good calamity go to waste." Check out how many of them are associated with organizations pushing for a one-world government. They only need a sufficient trigger, like like United States government going bankrupt and dragging the whole world into a depression to achieve their goal. The scary thing is that the Bible predicts this will happen in the last days.

    1. "They claimed to be wise, but they became fools" Rom 1:22

  7. And the commodities that the money surplus will move into first will be:
    1. oil - check
    2. food - pending
    3. energy substitutes for oil (i.e. coal for electricity generation) - pending
    4. building materials of all types (iron ore, cement etc)- much later if at all.

    My wild ass guess is to look for Dr Copper to fail to indicate the eventual price rise in many commodities due to inflation, because demand for copper (like most building products) will be way lower than demand for necessities like petrol, wheat, rice, corn, electricity etc.

    But also Gonzalo - what about your prediction that a gyration in the market for Treasuries would prompt an avalanche of selling and some panicky response by the Fed and then Congress? Thus triggering a flight from cash into commodities and then hyperinflation. Do you still think that scenario is on the cards? Possible? Unlikely?

    Or will we just see a steady spike in commodity speculation without a breakdown in the bond market?


  8. Most of us make the politicians and corporate America very happy. They hear you arguing about which party is worse. Meanwhile, we are distracted from the real issues. News flash: Neither party gives a rat's ass about the average citizen. The repubs make it obvious while the demos disguise it a bit better. I'm convinced they laugh at our feuding. As do their special interest groups.

    The author's words: "(The Dems are in the pockets of the banksters to the same degree that the Republicans are. The Republicans are just more blatant about it.)

    When I read this, I yelled "Eureka!" I've been saying that for years. It's so good to read it again somewhere.

    Then I read the fighting between DEMONcrats and RePUKEants in the above posted comments. Get a clue people. They're in bed with each other (figuratively and probably literally as well). They love to see us argue. It keeps our eye off the real ball. Bitch on sheeple!

    1. Amen Bro! Anyone who falls for that partisan BS is a fool. However there is a difference between the two parties. As Pat Caudell, former Democratic pollster and Presidential adviser says: Democrats are whores, but they expect to be paid; Republicans’ are content to have their names scrawled on the bathroom wall: “For a good time, call the GOP!”

  9. Nah, Paul Krugman will replace Bernanke. He is precisely what Obama and his neo-nazis want, to support absolutely unlimited predatory government. Well, unlimited until the dollar goes the way of Zimbabwe.

  10. With the Banking Cartel (NWO) firmly in control of the world's money value there is only the question of how to take the most real profit from the unwinding of the paper currencies. Good farm land should be the most valuable asset in the world because all free market demand begins with the need for food. However if the Georgia Guide Stones are any indication of the Banking Cartel's goals then starvation and death is on the plate for the world population. I think the Banking Cartel will eventually buy farmland and limit the production of food. This will increase their real power and net worth into gilded kingdoms of lords over surfs...

    1. Here in Oz the chinese have been buying tens of thousands of hectares of farmland.The 2000% of max EPA radiation in US milk will likely spread around the globe as the ocean currents mix with no end in site to fukishimas seawater cooling pumps spreading the poison.
      All these things must pass before Jesus returns to cleanup the mess of satan and his nwo oligarchy.

  11. Funny how this article ends up endorsing people that have recklessly printed for 10 years generating 25 to 30% inflation....

  12. Theyre printing but there will be no serious inflation. Look theyve printed 3 Trillion and inflation is relatively moderate(it does exist in food and energy but not bad).
    The dynamics of money and capital flows have changed. Hyperinflation isnt going to happen. The USD is the most attractive currency with the clap. It will soar between now and 2015. We will see a currency crisis but it will be when the jackboot US govt comes door to door for assets. This is how empires die...the police state, then it decays over time, currency fails, then dark ages. We arent there yet, but the police state part:thats in place waiting for a crisis to declare martial law in the US. Obama is licking his evil chops at the thought.

    1. There is no 'serious' inflation at the moment because almost all of that money has been held in the financial sector and probably the public sector. None of the fantasy money reached the streets.

      When the idiots bust the debt ceiling yet again, and Janet Yellen says, lets treble the QE and see what happens (Mr Krugman says it will be OK), then we will get our double-digit inflation.

      And when China and their new friends say they really don't want dollars any more, gold will do fine, then the nightmare really begins.

      Which is why, Professor Lira, you should start posting again.
      Hope the dawg is doing OK.


  13. Is the USA a Spanish-speaking country yet? Because if it is, the next step, after hyperinflation takes care of our debt problem, is a "golpe de estado". The new junta immediately balances the Federal budget by cutting all non-military spending to zero. Welfare parasites and their lefty sympathizers riot in the streets, a few hundred get shot dead, and the rest start looking for jobs.

  14. The question is - inflation for who? Inflation is low for someone with a six figure income. If one is on a fixed income or one lives from paycheck to paycheck - inflation is very real. Wages and interest income are stagnant for over 50% of the American people - but not their costs. Energy, food, medical, and shelter costs are going up! If you are low income - the stated government inflation rate is a lie.

    The alternative for these people is to spend their own stored wealth (for as long as that lasts) or to indebt themselves or their society. Only when this cannot happen will the whole system fail.

    Debt, debt, and more debt!

    Who doesn’t think that the greedy oligarch bankers are responsible for all of this?

    Does anyone really believe that Bush or Obama - has any actual control over these bankers?

    Whoever owns the Fed - is in charge of America.

    Why don’t we know who they are?

  15. I am looking for someone to debate on hyperinflation.

  16. Gonzalo, I think Japan is very close to hyperinflation. What do you think?

  17. Gonzalo, I think Japan will get hyperinflation soon. What do you think?


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