Bruce Krasting caught the biggest tidbit to come out of Ben Bernanke’s rather boring testimony today (which I first saw on Zero Hedge) , does the grim math, and comes up with a conclusion that shows just how worthless, literally worth less, the Fed is making the dollar.
Alabama’s Richard Shelby asked the Fed chairman how he decided that $600 billion was the right amount for QE2. You can watch the C-Span video for yourself; the exchange comes around the 32-minute mark.
The Fed chairman explained that the central bank’s rule of thumb has been that roughly $150-$200 billion in bond buying has the same effect on the economy as a 25 basis point rate cut in the fed funds rate. So, by going out and buying $600 billion worth of Treasurys, the Fed is essentially cutting interest rates by 75 basis points. I say essentially, of course, because with the actual fed funds rate at zero (a band between zero and 25 basis points, to be precise,) it can’t cut interest rates any further. So it buys bonds.
Krasting takes the rule of thumb to its logical conclusion:
The sum of QE 1, QE lite (the top off of QE1) and QE2 is $2.35 trillion. Using Bernanke’s formula you get a range of 4% to 5% as the approximate interest rate consequence of QE. (2.35/.15 or 2.35/.2)
That is an extraordinary number. The Fed’ ZIRP policy set interest rates at zero. QE has brought that to -4.5% (average) based on Ben’s numbers.
I don’t think that this has ever happened before in the USA. The examples I can think of in history outside of the US all ended badly. Ben has set monetary policy so that interest rates are 5-6 % below inflation. There can be only one possible result. Inflation of everything we use is going to explode. Food, clothes, energy, transportation, ball bearing, plastics, you name it. The only thing that is not going to get inflated is wages and residential real estate. Cheap money will not fix structural problems.
When you make something literally worth less, people treat it as worthless. When the Fed slashed interest rates, when it made borrowing ridiculously cheap, people stopped worrying about risk, stopped worrying about prudence. They treated money with reckless indifference. The result was a global meltdown. The current regime has taken money to places even Greenspan didn’t dare go.
With negative effective rates, it’s like the Fed is paying people to borrow money. They’re begging people (people, who are we kidding, bankers) to take money and do something with it, anything. Coupled with the Fed’s suppression of interest rates, you are actively pushing people to take hot money, venture out on the risk curve, and speculate with it. You could not possibly engage upon a more reckless path as a central banker.
Possibly Krasting is off. Possibly there is a difference between a Treasury-buying program, which is what QE2 is, and a MBS-buying program, which is what QE1 was. Perhaps the economic benefits given the different time-frames of the programs work out differently.
But the essential fact can’t be denied that the Fed has set monetary policy on a dangerously reckless path. I feel like I’ve said this four times this week already, but it bears repeating: Alan Greenspan dropped interest rates to 1%, and it lit the fire that resulted in the worst economic catastrophe in 80 years. That was 1%. Bernanke has gone far, far deeper into the rat hole, and he’s taking us with him.