Stephen Roach: US cannot handle the liquidity provided by Fed
Stephen Roach argues that the U.S. is not equipped to turn the Fed’s liquidity into domestic demand so the liquidity provided by quantitative easing will simply leak out abroad to form asset bubbles somewhere else. He is principally concerned with Asia here and suggests capital controls are one route to deal with this problem. Of course, the same is also true for Latin American countries like Chile or Brazil as well. Ultimately, for Roach this is about Asian countries moving away from a mercantilist economic policy toward one which is more driven by domestic consumption demand.
(video embedded below)
Source: Roach: Federal Reserve creating ‘a tsunami of money’ – BBC News
The US and wider media are constantly using a $75 billion USD per month rule-of-thumb for QE2, but this drastically fails to portray the scale of the dollar injections.
QE2 = $600B plus $250B to $300B MBS ‘re-investment’
QE2 = 600 + ((250=300)/2) = $875B
QE2 per month = 875 / 7.5 = $116.6B USD per month
QE2 per week = 875 / 33 = $26.5B USD per week
That’s ~36% more than media talking-heads are saying and any talk of a ‘cease-fire’ in the ‘currency war’. as was heard in the G20 media wrap-up is nonsense. There can be no ‘cease-fire’. Washington politics effectively abdicated control of economic policy to the Fed at the beginning of 2009 and has failed to present any viable or credible path forward, once all the eloquence, platitudes, rhetoric, and obvious lies and misrepresentations denials and approved delusions are stripped away. Assuming there’s an actual economic plan, it has little to nothing to do with what has been presented to the US public so far.
The Fed is acting as an economic placeholder, because Washington is in paralyses, and given the Fed has such a terrific track-record of always getting both its philosophy and its policy judgements and timing ‘just right’, we can predict the result of that placeholder.
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Bernanke on April 28th; “The path forward contains many difficult trade-offs and choices. But postponing those choices and failing to put the nations finances on a sustainable long-run trajectory would ultimately do great damage to our economy.” – Ben Bernanke, April 28 2010 – US Deficit Hearings.
In other words; if Washington won’t do anything policy-wise, about the chronic mess, as they’re supposed to, but instead leave it all up to the FOMC, then don’t be at all surprised how badly I screw it all up. That’s what he is warning; if you release the economic dogs-of-war, then don’t be at all surprised at what results. Washington tries desperately to ignore all such warnings.
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Ben is pumping up a giant unquenchable global asset bubble, because that is what the Fed does, thus generating raw economic fear buying, rather than the more traditional credit bubble or ‘pseudo-investment’ bubble.
No one thinks this fear-driven bubble can only go up and up. Everyone (who’s paying attention) knows it’s a matter of time for a shock to bring it all down. So fear-buying rather than investment is increasingly a rational act of self-preservation in this new ‘Great Immoderation’.
QE2 reminds me of the final scenes of Terminator-2 where the liquid metal Terminator falls into molten metal and as it melts and mixes in, it tries all its repertoire of morphing tricks, taking on all its past different forms in quick succession, but none of the old forms achieve anything to help it get out of its novel and consuming existential dilemma.
The Fed is likewise out of tricks (i.e. ones that actually work, as they were in the 1930s, when the same things happened) and all the Fed can do, given Washington is determined to do as little as possible, is to act very destructively with ultra-blunt ‘tools’, to try and save itself and its favorite banks, for as long as Washington politics allows it to. Which will be a long time by the look of things.
The response of top Democrats last week to the massive fiscal reform measures proposed was almost comical, if it were not so clinically delusional. Their talk of finding an easier alternative to cutting is pure delusion. The only possible ‘fast easy way out’ at this point is mass-default (by the public, for the Govt will debase and create even bigger problems for the citizen), but instead you are getting QE debasement to grow inflation, that inevitably leads to chronic long-term poverty growth, near term trade-war, and definitely to protracted austerity (whether via policy, or accident, or backed-in inflation over time).
And intensifying longer-term state rationing will be necessary to cope both with the damage of debasement and destruction of buying power and especially the jump in inflation and unaffordability of daily needs, by a large portion of the population. So this informal austerity (via inflation of daily stuff which the idiotic CPI measure strangely always ignores … it is an index after all, and things index off of it, and you can’t have that) will inevitably transition to entrenched rationing, but only for the poor … at first.
Hence fear-buying. There’s no trick that can work in the present situation, as debt-defaulting and spending the cash, freed-up by this, will be the actual path, that will unavoidably be a deeply flawed path to nascent final-demand recovery and production growth (as is already initially visible in US retail sales even though the mass defaulting has barely begun). And the Fed’s favorite banks will be eliminated in that process even as GDP recovers, as per 1933-1934. The only question is; do you want the Fed to survive like it did through the 1930s this time? And if the answer is no, then what constitutional mechanism are you going to replace it with, that will not be abused by politicians, and their so-called ‘budgets’ – which are not budgets at all, and have not been budgets for a very long time.
When I budget, I have to make sure I can make ends meet but that is not what occurs in politics in many countries. That is a fundamental (and I think criminally irresponsible) problem that has caused all of this mess. It is the absurd and unreal pretense that you are richer than you really are or really can become, both privately and publicly.
Unless that laughable pretense is addressed economic viability can NEVER return to any such credit and QE ‘consumed’ country. You are not the consumer society, you are the ‘consumed’ society (like the way possessions possess their possessor).
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“It is unacceptable to hold the aspirations of an entire people hostage to the greed and paranoia of bankrupt regimes.” – President Obama, India, Nov 8 2010.
Note: to clarify, he was referring to the Burmese regime, not the Washington-Wall Street TBTF Cartel sucking the fat of ~$26.5 billion USD per week to the detriment of the too-small-to-matter.