Senator Shelby asked Bernanke to explain how he came to the $600b QE2 program. The answer came at minute 32 of this C-SPAN
clip. Ben explained that he felt that a monetary ease equivalent to a
75 BP reduction in the Fed Funds rate was in order to avoid deflation.
He equated $150-200 billion of QE as being equivalent to a 25BP
reduction in short term rates. The justification for QE all along has
been that monetary policy is range bound by zero interest rates. QE
brings us below “0” in equivalent policy.
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.
I was glad that Ben put a number on what he has done. I didn't think it
would be as big as it is. It’s so big that it is irreversible. That’s
not what Ben has been contending. We are going to find out before the
year is up. Mean time if you think there is a connection between rising
commodities prices and global political turmoil, get your seat belts on.
Inflation is just now rearing its ugly head. This boat could not be
turned around in less than a year even if all engines were in reverse.
And Ben has it on Full Speed Ahead.