El-Erian Warns QE2 To Backfire, Sees QE3 Coming Soon

Tyler Durden's picture

Blunt QE2 instrument likely to backfire, by Mohamed El-Erian

Given the high market expectations, the US Federal Reserve had no choice but to announce a second tranche of quantitative easing, nicknamed QE2. But the measure is an inevitably blunt instrument for the difficult task of restoring growth and generating jobs. The benefits accruing to America come with burdens for other countries, and both could soon be swamped by the unintended consequences of this unavoidably imperfect policy approach.

By signalling its intention to purchase another $600bn of longer-term Treasury securities by the end of June 2011, the Fed hopes its injections of cash will lower interest rates, bolster asset prices, increase wealth and encourage households and companies to spend and hire. Moreover, by noting the possibility of doing more if the data disappoint, it is also hoping that markets could price in the institution’s future asset purchases, turbo-charging the direct policy impact before those purchases have even been specified.

While willing to act, the Fed is acutely aware that the potential benefits come with the certainty of collateral damage, and the likelihood of adverse unintended consequences.

The Fed faces three problems, with its solo role being the first. Having warned in late August in Jackson Hole that “central bankers alone cannot solve the world’s economic problems”, Ben Bernanke, the Fed’s chairman, is now leading an institution that is virtually on its own among US policymakers in meaningfully trying to counter the sluggishness of the US economy and the stubbornly high unemployment.

Other government agencies are paralysed by real and perceived constraints, seemingly happy to retreat to the sidelines and let the Fed do all the heavy lifting. But liquidity injections and financial engineering are insufficient to deal with the challenges that the US faces. Without meaningful structural reforms, part of the Fed’s liquidity injection will leak right out of the US and result in yet another surge of capital flows to other countries.

The rest of the world does not need this extra liquidity, and this is where the second problem emerges. Several emerging economies, such as Brazil and China, are already close to overheating; and the eurozone and Japan can ill afford further appreciation in their currencies.


The unfortunate conclusion is that QE2 will be of limited success in sustaining high growth and job creation in the US, and will complicate life for many other countries. With domestic outcomes again falling short of policy expectations, it is just a matter of time until the Fed will be expected to do even more. And this means Wednesday’s QE2 announcement is unlikely to be the end of unusual Fed policy activism.

The Fed would be well advised to prepare for this possibility from now.

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SpeakerFTD's picture

And this means Wednesday’s QE2 announcement is unlikely to be the end of unusual Fed policy activism.

But it might be the end of the Fed.

Herd Redirection Committee's picture

We need to stop PRETENDING immediately that the Fed's actions accomplish something other than what they are trying to accomplish.  THEY KNOW they are just boosting financial assets, and devaluing the currency.  They know "that QE2 will be of limited success in sustaining high growth and job creation in the US"

Lets stop with that crap.  The Fed (and other central banks) is serving their masters, the Oligarchy.  They are destroying the US dollar purposefully, not by some unintended consequence of their policies, but because that IS the intent of their policies.

El-Erian, tell it like it is.


geminiRX's picture

I reckon it's time for the santa clause rally

caconhma's picture

I wonder why anybody even mentions the Q2 $600B.

The FED will print & monetize as much money as the pleased. Consequently, QE-numbers are totally irrelevant since the next QEs will follow at any time FED wish doing that.

Ragnarok's picture

I want to puke.

TheMonetaryRed's picture

Calm down.

Buy some bonds and sell them back to the Fed.

What do you care?

homersimpson's picture

I care because the Fed keeps punishing savers and is privatizing gains while socializing losses. (read: US is a banana republic)

Besides - we can't buy bonds on margin like those clowns associated with Wall Street can. Big deal. We buy X amount of bonds. Wow.What did we make? 25 cents? 2500 dollars? Maybe more? Is the money we made worth the amount of damage being done to the US populace? HELL NO.

Meanwhile, the Fed burns up more cash to benefit the extreme minority. F--k that. There's no excuse for letting Wall Street bathe itself in more $100 bills every night while the US taxpayers get stuck with the bill. We're ALL better off by letting the Fed stop intervening at taxpayers' expense and letting the leveraged assets and stocks drop to their true value.


TheMonetaryRed's picture

Well, the way I see it, so-called "savers" - that is "risk-free rate" bondholders - have been privatizing gain and socializing risk for 30 years.

Do your interests align with bondholders or not?

Bartanist's picture

You have a valid point. So the solution is to make the charging of interest illegal ... as many societies have done over thousands of years.

So, let's get started... oh, but wait, then we would have no way to support bank fraud and embezzlement. Sorry, stupid idea.

Boba Fiat's picture

This question has been bothering me all day:


If Bernanke can create $600 billion dollars by pressing Enter, why do I pay taxes?  They've made the dollar almost an imaginary unit of measurement. 

Manbarepig's picture

I was actually thinking about this earlier. $75B a month annualized is $900B in fake money... and unless I'm reading this wrong 2009 Individual Tax Receipts amounted to $915B (http://www.cbo.gov/ftpdocs/119xx/doc11936/SeptemberMBR.pdf). Sooooooo yeah...

Cognitive Dissonance's picture


Makes you wonder what's really going on, doesn't it.

Minion's picture

What's going on is the Federal Government will be hopelessly insolvent if interest rates rise.  FED is just extending the glide path to the site of the crash by buying government debt via primary dealers, keeping rates down and providing unlimited debt ceiling.

It's now obvious to me that private banksters own the government and are keeping it afloat for a while while preparations are made for the next world monetary system. 

Isn't it obvious that our government leaders are not acting in the interests of the populace?

Bartanist's picture

It goes beyond that to the very purpose of money and debt. Money and debt are the carrots and whips by which society is enslaved and controlled. It is oh so much more civilized than brute force. That is reserved for those who do not accept our loans and resist becoming debt slaves. "Take my silver or take my lead" Pablo Escobar.

People do not inherently need money or debt. It was created for a purpose... and what could have been simply media for exhange of value became a means of control.

You may ask WHO or WHAT is really behind the curtain.

traderjoe's picture

Just six months ago they were discussing 'exit strategies'. Now we are on QE3 (yes, reinvesting was QE2). 

Let's review: 2 stimulus packages (Bush tax checks #1), C4C, 2 homebuyer tax credits, 99 weeks of unemployment, loads of government spending, lots of money printing, etc., etc. 

And what do we have to show for it all? Has anything actually been fixed?

lead salad's picture

The only way to fix this turd is to push the reset button.

Cognitive Dissonance's picture

So how are you going to do that?

Bartanist's picture

Believe it or not, I believe the bankers are actually working toward a scenario to do exactly that, but on THEIR terms ... and having the people beg for it to happen.

US citizen: "Please, please, please just end the madness and restore some stability and sanity to my world so that I can sleep at night!"

Central Banks and International Bankers: "Certainly, just accept this global currency and any thought of future indepence and self rule and we will take care of your every need. You will never need to worry again."

oh_bama's picture

YES! Certainly things are ALL FIXED!!

  • More americans retired early than any other time in HISTORY!
  • More young americans pursue GRADUATE level education!
  • Foreclosure is FIXED once and for ALL. No more foreclosures in more than 50% of 50 STATES!
  • Home owners STAY in their homes with or without paying!
  • Food price is ALL TIME HIGH (indication of a strong economy!!)
  • It just take a TINY BIT OF MORE TIME for my policy measures to work!


TheMonetaryRed's picture

Fed's "Austrian Soution": $4 Trillion of monetization - minimum.

We're buyin' your bonds, bitchez!


doolittlegeorge's picture

"sorry 'bout that Ireland.  yea, yea...ah, ah....yeah....sorry 'bout that Greece.  What?  Who?  Where is that one?  Well...tell 'em "i'm sorry about that" to that, is that even a country?  it used to be? oh, well...sorry about that too.  Who?  The President!  Of the United States!?  Bring out the caridigan sweater and turn the heat down.  I'll pretend to be surprised when he arrives and you tell him "everything's going according to plan" and do the spreadsheet thingy."

maff's picture

"Whats that? The Greeks are on line 2 to the Chinese, you said"

plocequ1's picture

Ok, Lord Bernanke, You win. I will buy stocks. Now leave me the fuck alone so i can go home and get my Shine Box

Rainman's picture

Too late for Lucy Erian to pull the ball......Ben just kicked it.

Bigger Dickus's picture

Well well well, Mr El-Erian has taken 5 minutes off liccking Bill's ass to address us peasants. Kneel down, Jethro, we aren't worthy.

bingaling's picture

"The benefits accruing to America come with burdens for other countries"

"sustaining high growth and job creation in the US"

Is there some paralell dimension where this other United States exists?

NotApplicable's picture

It must be the same dimension where the Fed "had no choice but to announce a second tranche of quantitative easing, nicknamed QE2," even though it will fail, bringing about QE3.

Isn't this basically the same thing he said the last time about QE1? I swear, every time I see El-Erian he is always engaging in this double-speak about how necessary it is for the Fed to act, but that it won't work. I think his accent must be hypnotic to the CNBS crowd. Or maybe it's his moustache, I'm not sure which.

All I know is that he really likes to empower failure.

Rainman's picture

I thought ME-E's boss, Bill, was hot on Brazil. Now it's going to overheat from QE2. Somebody make up mind.....ain't like they couldn't hear this bullet train coming. 

AccreditedEYE's picture

Overheating isn't necessarily bad if you know how to time your exit just right... (and bet the other side down the roller coaster)

Gold...Bitches's picture

For someone that is almost always referred to as one of the smart people, El-Erian would impress me more if he actually took the line of reasoning one step further to its conclusion.  Of course, the liquidity is leaking into other economies.  They have a choice, correct the imbalances, or we will overheat their economies and inflate them to parity.  As if the leakage and implicit overheating of other economies wasn't in the plan to begin with if they don't/won't modify.

macholatte's picture


The history of the last century shows, as we shall see later, that the advice given to governments by bankers, like the advice they gave to industrialists, was consistently good for bankers, but was often disastrous for governments, businessmen, and the people generally.
Carroll Quigley


jus_lite_reading's picture

No shit Sherlock. I had an uneasy feeling, the Fed would not surprise, but rather buy just a little more time, until the next round of QEIII.

I'd rather have it quick and painless than slow and painful. It literally is the death of a thousand papercuts. Just enough time for China to unload their holdings, and equally weighted amount of Fed buying to keep rates low.

Rogue Economist's picture

How is China going to unload their holdings, and to who?  The Fed is pretty much the ONLY buyer of Treasuries now, and the minute the Chinese start dumping, the Fed stops buying, or the Fed buys it with freshly printed but worthless bills.  The Chinese are stuck with this debt already.  Its a fait accompli.


New_Meat's picture

but china has WMT and others' USD cash flow to direct.  Maybe stuck with current debt, but their maturity is way short (like lots <3 years).  So they can disentangle with the volume that they have over (relatively) shorter time period.

So maybe crafty slant-eyes have figured it out (my bet--but it is pretty easy at that level to be smarter than Timmy the Tax Cheat).

- Ned

Logans_Run's picture

Yeah I was wondering this myself. If the FED is creating demand for TBonds by this buying spree what's to say that the Chinese aren't already selling into this in the shadow markets and boosting their gold or other PM holdings? Is their something behind the scenes here where the FED is allowing China to monetize or commoditize some of their holdings? Just asking.

Kaiser Sousa's picture

here's what happened to Silver & Gold today....


Hagens Berman Sobol Shapiro: JP Morgan and HSBC Face RICO Charges in Silver Futures Class Action Lawsuit

NEW YORK, Nov. 3, 2010 /PRNewswire/ -- JP Morgan Chase & Co. (NYSE: JPM) and HSBC Securities Inc. (NYSE: HBC) face charges of manipulating the market for silver futures and options in violation of federal commodities and racketeering laws, according to a new lawsuit filed Tuesday in the U.S. District Court for the Southern District of New York

The suit – which alleges violation of the Commodity Exchange Act and the Racketeering Influenced and Corrupt Organizations (RICO) Act – alleges that the two banks colluded to manipulate the market for silver futures starting in the first half of 2008 by amassing huge short positions in silver futures contracts they had no intent to fill, but did so to force silver prices down to their benefit.

The suit was filed on behalf of Carl Loeb, an independent investor in silver futures and options, by Seattle-based Hagens Berman Sobol Shapiro LLP, a class-action and complex litigation firm.

"The practice of naked short selling has long been a serious issue on Wall Street," said Steve Berman, co-counsel and managing partner at Hagens Berman. "What we know about the scope and intent of JP Morgan and HSBC's actions in this short-selling scheme dwarfs any other similar attempt to manipulate a commodities market."

Ragnarok's picture
Hagens Berman Sobol Shapiro: JP Morgan and HSBC Face RICO Charges in Silver Futures Class Action Lawsuit



Rainman's picture

Jamie , let me introduce the Hunt Brothers. Same old schemes keep popping up with different players. Enron played a similar game with electricity futures, only going the other way. The commodity pits are the "other" ponzi.....all thanks to CFMA.

Maybe this is why spot gold hit the skids today.....the sound of RICO going off can really scatter a herd. 

MeTarzanUjane's picture

When are they going to file RICO charges against Ben Shalom for manipulating..... (fill in the blank).

TuesdayBen's picture

O/T: Hillary, Obama both out of the country

1) Simultaneously out of country

2) BO has huge contingent, 3,000 people, huge security, a ship, etc.

3) Right after the US election

THE THEORY: Israel ready to hit Iran nukes.  Netanyu advises.  BO asks them to put it off til after election to avoid turning a big loss into a devastating loss.  The man w/ the Israeli sounding name, Rahm, has been wanting out, decides to split before the attack.  BO/Hillary want to separate themselves from Israel's aggression, to appear to have not had foreknowledge, so plan to be overseas.

Alright, tear this shit theory apart.

redpill's picture

I think they've already loaded the nuclear fuel into the reactor.  It's too late.


New_Meat's picture

Maybe have loaded fuel, not excessively dangerous until it has been run for a while (even you could hold unirradiated fuel for a while without needing the red pill).

Osirak reactor e.g.


SEAD would be a bitch, though.  And the trip is kinda long.

- Ned

NotApplicable's picture

How about I add more instead? Allegedly Rahm holds a dual citizenship with the US and Israel. I say allegedly, because someone in Wikipedia tried to discredit the idea via implication without actually stating it as untrue. (aren't words fun!)

So, I'm going to assume it's true. And if so, he for sure would not want to be an active part of the admin during such a time.

I'm far from trying to predict any action though, as there's no telling info from disinfo these days. It's all one big fictional storyboard, designed to confuse while stoking fear. It's kind of like the contrarian take on Goldman Sachs advice. You never know when you've been double-duped, so either way your actions become their fodder.

Shameful's picture

I strongly doubt that Israel or the US will do anything without some trigger event. Whether that trigger be real or some false flag don't know. But I do know it would be hard to sell a direct and "unprovoked" attack on Iran.

I'm not expecting anything now. The man is taking a lavish vacation on the taxpayers expense. Why look beyond that? I know if I could spend 200 million a day of other peoples money I would party like a rock star.

still kicking's picture

Have you ever been to India?  I couldn't spend $200 million in a year there, there isn't enough shit to buy, the only thing that even remotely costs close to what it does here is liquor and my liver can't handle $200 million worth.  What the hell are they spending that much on?

New_Meat's picture

going into the 2012 election fund, you know all of that Republican "foreign money" thingie.

StychoKiller's picture

Like a real rock star, the President has a large entourage going with him.  Gun Oil and ammo for the Secret Service, food for the press corp, etc; it all starts to add up.