Considering how popular the term "Quantitative
Easing", or "QE" for short, has become, it's remarkable that
many commentators on the financial markets appear not to understand what QE
is. It is, by definition, an increase in the money supply brought about by
the central bank in an effort to reduce the cost of credit. Since the money
supply can be increased by commercial banks as well as the central bank, QE
can more specifically be defined as an increase in the Monetary Base (bank
reserves plus currency in circulation) implemented to reduce the cost of
credit. This is because the Monetary Base is the monetary aggregate that the
central bank (the Fed in the US) directly controls in its efforts to
manipulate the economy.
With the above definition in mind we can easily show
that there has been no QE in the US since the completion of "QE2"
last June. We simply need to point out that since the end of June-2011 there
has been a slight DECLINE in the US Monetary Base -- from $2.64T to $2.63T.
Not coincidentally, minimal change in the US Monetary Base since last June
has been accompanied by minimal change in the total quantity of Reserve Bank
Credit. There have been some shifts between items on the Fed's balance sheet
over the period in question. For example, the amount of US Treasury
securities held by the Fed increased by $57B and the amount of
Mortgage-backed securities held by the Fed decreased by $75B. But the total
size of the Fed's balance sheet is almost exactly the same now as it was at
the completion of QE2.
Consequently, anyone who claims that the Fed has been
engaged in QE over the past 9 months either doesn't understand QE or is more
concerned with promoting an agenda than being accurate. There has been a
sizable increase in the US money supply over the past 9 months, but this
increase is due to the combination of US dollars fleeing Europe's beleaguered
banking system and an expansion of US commercial bank credit.
In the US, QE hasn't happened in the recent past and is
not happening now. However, it almost certainly will happen in the future.
The unfortunate reality is that the most influential people at the Fed
believe that increasing the supply of money can help during periods of
economic weakness, despite logic and a mountain of historical evidence to the
contrary. With a lot of economic weakness lying ahead it is therefore a very
good bet that a lot of QE also lies ahead, at least up to the point where "inflation"
is widely perceived to be "public enemy no. 1". The only real
question concerns timing.
The next round of QE isn't likely to begin until after
it becomes obvious to mainstream pundits that US equities have commenced a
cyclical bear market and/or that the US economy is headed into recession.
This is the sort of cover that the Fed will need, especially with QE2 having
clearly failed to do what the publicity machine said it would do.
The November Presidential election could also play a
part in the timing of the next round of QE. Bernanke will be reticent to
inject himself into the political fray, but that's exactly where he will end
up if he appears to be propping up the markets in the lead up to the election
without the cover (excuse) described above. In particular, Republican
policymakers will be all over Bernanke if he implements pre-election stimulus
programs without an 'excuse' in the form of an impending economic emergency.
Steve Saville
www.speculative-investor.com
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