As expected, Ben Bernanke
officially launched QE IV with his announcement last week of $85 billion
dollars worth of unsterilized purchases of MBS and Treasuries. In
unprecedented fashion, the Fed also tied the continuation of its zero
interest rate policy and trillion dollars per annum balance sheet expansion
to an unemployment rate that stays above 6.5%. Now, pegging free money and
endless counterfeiting to a specific unemployment figure would be a brilliant
idea if printing money actually had the ability to increase employment. But
it does not.
The Fed recently celebrated
the fourth anniversary of zero percent rates and massive expansion of its
balance sheet. However, even after this incredibly accommodative monetary
policy has been in effect since 2009, the labor condition in this country has
yet to show significant improvement. Last month's Non-Farm Payroll report
showed that the labor force participation rate and employment to population
ratio is still shrinking. Goods-producing jobs continue to be lost and middle
aged individuals are giving up looking for work. This is the only reason why
the unemployment rate is falling. I guess if all those people currently
looking for work decide it's a better idea to stay home and watch soap operas
instead, the unemployment rate would then become zero.
But more of the Fed's easy
money won't help the real problem because the issue isn't the cost of money
but rather the over-indebted condition of the U.S. government and private
sector. Keeping the interest rate on Treasuries low only enables the
government to go further into debt. And consumers aren't balking on buying
more houses because mortgage rates are too high. The plain truth is this is a
balance sheet recession and not one due to onerous interest rates. More of
the Fed's monetization may be able to bring down debt service payments a
little bit further on consumer's debt. However, it will also cause food and energy
prices to be much higher than they would otherwise be. The damage done to the
middle class will be much greater than any small benefit received from lower
interest rates. Therefore, the net reduction in consumer's purchasing power
will serve to elevate the unemployment rate instead of bringing it lower.
Rather than aiding the economy
and fixing the labor market, what the Bernanke Fed will succeed in doing is
to ensure his unshrinkable balance sheet will not only destroy the economy
but also drive the rate of inflation to unprecedented levels in this country.
Ben's balance sheet was just
$800 billion in 2007. It is now $2.9 trillion and is expected to grow to
nearly $6 trillion by the end of 2015. A few more years of trillion dollar
deficits that are completely monetized by the Fed should ensure that our
government's creditors will demand much more than 1.6% for a ten-year loan.
The problem is that rising interest rates will cause the Fed to either
rapidly and tremendously expand their money printing efforts, which could
lead to hyperinflation; or begin to sell trillions of dollars worth of
government debt at a time when bond yields are already rising. If yields at
that time are rising due to the fact that our creditors have lost faith in
our tax base and its ability to support our debt, just think how much higher
yields will go once the bond market becomes aware that the Fed has become
another massive seller.
This new Fed policy is
incredibly dangerous and virtually guarantees our economy will suffer a severe
depression in the near future. Bernanke should start shrinking his balance
sheet and allow interest rates to normalize now. When the free market does it
for him it will be too late.
