Guest Post: QE Is The End Of America As We Know It

Tyler Durden's picture

Submitted by The Paper Empire

QE is the End of America as We Know It

Each time we begin to approach the end of an announced QE
period, the nervous jitters of financial markets start to set in. Will
Bernanke continue with QE(n+1) or won’t he? Now it’s true that
professional traders live and die by their ability to front run rumor
and perception, but for long term investors who fret over such
decisions, it demonstrates a fundamental lack of understanding of what
QE really is. To put it succinctly, QE is an economic deal with the
Devil. Once it is begun in earnest there can be no turning back. It
must be played to its ultimate conclusion.

In Bernanke’s 2009 interview on
60 Minutes, he suffered a momentary lapse into honesty and stated that
Quantitative Easing was effectively money printing. So why then the
complicated euphemism of Quantitative Easing? Because that is what
modern central banking sponsored economics is all about – the
intentional obfuscation of otherwise simple economic principles to cause
the eyes of normal people to glaze over. Once accomplished, the
central bankers (and their financial community brethren) are able to
pursue policies that greatly benefit themselves but are devastating to
everyone else.

Long term investors who worry about whether QE will continue clearly recognize the fact that everything is now correlated to the Fed’s balance sheet.
What they don’t understand is how QE is related to the larger economic
cycle and its mission of preventing economic recessions.

Keeping the tent inflated

Sometimes physical analogies are the most helpful in understanding
complex relationships. Let’s think of the economy as a large inflated
tent. The extent of the tent’s inflation is the health of the economy.
Under normal economic conditions the tent is fully inflated. In the
course of time, events take place that cause the need for a correction
to the economic system. New technology can come along which obsoletes
old industries, bad investments and debt must be liquidated etc. When
this happens a free market economy will correct itself. Capital tied up
in failed industries will be reallocated and invested in new
businesses. New jobs will ultimately be created and people will go back
to work. Of course this reorganization takes place over time and this
is what a recession is – a healing process for the economy. In our tent
we can think of this as a tear that forms in the fabric. While this
hole is being repaired, air escapes and the tent begins to sag a little.
The extent of the drooping is the extent of the recession. Once
fixed, the tent and the economy go back to normal.

QE is a wholly different method of keeping the tent propped up. It
does not repair the hole, but rather attempts to keep the tent inflated
by pumping more air in than is escaping through the hole. This is the
new money being created and pushed into the economy to offset the credit
destruction in the banking system. This is a dynamic process that must
be maintained. The catch is that the hole doesn’t just stay a fixed
size. The tear begins to lengthen allowing greater amounts of air to
escape. The economic tent begins to sag until the volume of air being
pumped in is increased to overcome the outflow. This is why QE can
never end. To stop now, with such a large hole, would result in a
severe and frightening recession. The tent would lose a tremendous
amount of air in the time it takes to make such an extensive repair.

This process continues until eventually the hole is so large that the
tent collapses around the massive flow of pumping air. This is the
ultimate fate of money printing as policy – a currency crisis – the
endless flow of new money loses purchasing power faster than it can be
created. We are left with an inflationary depression in which savings
are decimated and the standard of living of most Americans is
dramatically lowered.

QE is economic central planning

When an institution such as the Federal Reserve is allowed to create
as much money as it wants and do with it whatever it pleases, without
any oversight or transparency, then the free market and its self
correcting mechanisms no longer exist. How can capital from failed
business and banks be reallocated to more efficient uses when these
institutions are bailed out and not allowed to fail? Prices and
interest rates are the nervous system of a free market economy. They
are the feedback mechanisms that direct all of the individual
participants to behave in the most productive and efficient manner.
There can no free market when prices and interest rates are de-linked
from supply and demand. We are now a centrally planned economy run by
our central bank.

But here’s the really insidious part of QE that almost no one in the
general public understands: A free society cannot exist independent of
free markets. There is a disequilibrium that occurs between the two and
over time one will win out over the other. And so here we are, stuck in
a decaying economic system that prevents resources from being used in
their most efficient manner. We simply can no longer compete with freer
markets in other parts of the globe. We are saddled with the weight of
central economic planning much like the old Soviet Union was. There
will be no recovery and no rush of new jobs created. We will live under
the burden of a burgeoning Federal government that operates completely
independent of the will of its citizens. It is now beholden only the
money manufacturers at the Federal Reserve and will spend money as fast
as Bernanke can add zeros to its account.

The problems we are experiencing have been a long time in the making.
They began in earnest in 1913 with the formation of the Federal
Reserve. It’s taken several generations for the Federal government and
its central bank to usurp the world’s monetary system and as such few
have noticed. But what’s different now is that we have hit the knee in
the curve, the point at which events start to accelerate dramatically as
we approach the end of the line. Those who understand QE realize that
America as we knew it is already gone. Over the next decade the rest of
America will become painfully aware of that fact as well.

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FoieGras's picture

Japan started their QE campaign in the early parts of last decade. 10 years later their currency is stronger than before. How does the "QE = currency collapse" theory explain that?

Harlequin001's picture

It doesn't. They just printed upwards of 15 trillion yen and the yen didn't devalue. All this bullshit about a yen carry unwind, didn't anyone get the memo, there is no need to sell ANY yen assets because they just created 15 trillion brand new yen. Why sell assets at a loss?

The simple truth is that the forex markets are a sham, have been for many years. If the markets don't devalue the yen then Japan has an additional 15 trillion to go foraging for commodities and foodstuffs in international markets. That's increasing demand for all food products with higher food prices being paid by those poor bastards in the Caribbean that grow bananas for example, and anyone else who had nothing to do with the idiocy of building nuclear reactors on a seismic fault, but they'll starve just the same so that Japan can fund its restructure because they don't get paid in yen, or dollars or any other currency that is rapidly being printed.

If we don't get back to a gold based Fx system soon then these people will starve by the million and these riots, revolutions and insurrections will be coming to a state near you soon. Very soon. If anyone's going to die it should be the morons who build reactors in earthquake zones and then irradiate my kids from half way round the world.

The forex markets work by international agreements between governments to foment economic growth. They have nothing to do with fair value of a currency, which is why if you aren't a member of the clique that sets the exchange rate bands you get to pay higher prices as increasing quantities of currency at increasing rates start competing for goods needed by your own people. You get the riots whilst they get the food...

proLiberty's picture

"They just printed upwards of 15 trillion yen and the yen didn't devalue."


This is 'co-inflation'.  If the major central banks all inflate at roughly the same rate, their FX cross will remain the same but the nominal price of real assets like commodities will rise.

centerline's picture

I'd wager it actually works against them.  Debt saturation.  The system can't take any more.

ronin12's picture

Just think what will happen if there is a "one world currency".

duo's picture

I think gold priced in yen appreciated quite a bit in the last 20 years.

Jack Sheet's picture

Exactly. That is the point. As Doug Casey so beautifully put it, ALL paper currencies are circulating around the drain, just with different speeds and trajectories.

Zero Govt's picture

Harlequin  -   agree with everything you said, except, "The forex markets work by international agreements between governments to foment economic growth.." Firstly a nations currency may be 'printed' by their central banks but that's all they do control. Once it's out there they have no control whatsoever (Forex markets are too big to direct as every CB trying to control their exchange rates has been humiliated and ripped to shreds in every attempt).

Regards Govt "formenting economic growth" that is absolute and complete bollocks. The economy and international trade is entirely a private preserve/enterprise. The windbags of Govt have no influence where their economy is going, who the economy trades with and absolutely zero to do with growth. If you can give me one example of a politician encouraging growth I'll eat my sofa! Govt consumes growth, it has never produced growth in its Centuries of wealth destroying existence.

Govt follows the economy. Every Govt is a herd of nodding donkeys led by the nose on where businessmen and the economic winds blow these useless windbags (always has been, always will be)


Harlequin001's picture

Zero, I said they do it to foment growth. I didn't say it worked, and no I can't give you one example of any politician encouraging growth in anything other than military spending.

For what it's worth I do agree with your comments and I can see no way that it won't all fail miserably but until it does we have Japan printing yen and every other central bank of any worth buying it to stop an interest rate pop and a currency fail.

'Forex markets are too big to direct as every CB trying to control their exchange rates has been humiliated and ripped to shreds in every attempt...'

The BOJ seems to have done okay managing its currency for the last 30 years or so, so did many other Asian ones through the currency pegs, and yes I agree before you say it that they all ultimately failed, as we said they would, but there can be no denying that they did manipulate markets despite the forex traders for a considerable time. In the meantime prices are rising for others who do not have access to this new cash or the food that is purchased with it.

Not for much longer. No happy endings here, especially if you are poor and don't have access to central bank cash...

Djirk's picture

I am no FOREX expert, but one reason you can not compare the US and Japan's lost decade is the the Japanese corporations and consumers historically had a mucher higher savings rate than the US consumers and corporation. Therefore a much more stable capital footing than the US currently enjoys.



Thomas's picture

The other reason is that Japan has two lost decades and may be heading for a third.

Buckaroo Banzai's picture

Simple. The Japanese people save huge amounts of money even at .2%

Widowmaker's picture

Excellent point.  The US has lost (gave away) all savings to the dogs of incorporation colluding with promises of government.

Is it really any secret that civilizations like Iran (Persia) have been stockpiling gold?  

What the US measures in mere decades other cultures measure in centuries - a lesson pissed on and torn from the pages of history by the boomer/corporate generation. 

Boomers sacrificed sustainability of the entire American culture for themselves, if even through complacency.   Although it started in 1913, the accelerated shortcut occurred in 1963 when corrupt government steamrolled the public for private gain and truth died.   It has only gotten worse, and the real joke is that there are no more answers now than ever along the way.

Heads back in the sand while truth and wealth are replaced with lies and empty government promises.

duo's picture

Interesting.  You can draw all the lines you want on a map, but civilizations are what they are. 

The US is quickly approaching a country without a civilization (or multiple civilizations at odds with each other).  Japan is both a civilization AND a country.  Iran, if it were to shed some peripherial areas, could be in the same boat as Japan.


Doubleguns's picture

All of Japans debt is owned by Japanese and Japans corporations. They did not sell thier debt to China and other places around the world. They simply sold it to themselves which keeps their currencys strong. Their currency is so strong since is has not fallen as far as the rest of the currencys but it has fallen in relation to gold. All currencys have fallen off the clift, some just fall slower than others.  



off-the-record's picture

I think all of you can be right. However, I am not american and there are two questions that I wonder: If QEn goes on depreciating the dollar, how will the american society react when  emerging countries really start to buy american corporations? It reminds me Greenspan´s warning about proteccionism. And ... Do you think lawmakers could/will stop Bernanke´s QEn? Thank you.

Hacksaw's picture

While you have a legit concern, the real question is, what will be the reaction of America when they realize that organizations like the Chamber of Commerce are using money raised from foreign companies, some state owned, to lobby, run information campaigns for candidates, and otherwise influence governance in the U.S.? What happens when America fully fathoms the implications of such actions?

Absinthe Minded's picture

Like George Soros backing Obama.

Diogenes's picture

This already happened in the 80s when the Japanese bought Rockefeller Center, golf course etc.

There was  a lot of moaning and chewing in the press but the public didn't give a damn.

Eventually the Japanese sold a lot of these "gems" at a loss.

three chord sloth's picture

Currency strength/weakness is a relative function, not an absolute. When your currency strengthens it doesn't necessarily mean you're doing something right or good, it can simply mean you're doing less wrong or bad than the nations your currency is trading against.

Slim's picture

Similar to the recent US efforts what you have with Japan is a large increase in M1 and similar aggregates but no transference through velocity/multiplier out into M3 where that currency is put to use.  They are pushing on a string.  The only thing that has been done with the Yen is exogenous speculation via carry trade and assorted plays using their leverage. 


This is exactly what has happened with the USD in generating massive M1 increases to offset the crushing blow to velocity which is killing (and continues to kill) M3.  For what it's worth we still have no nearly filled that hole and speculators are out with cheap money again driving up asset prices in liquid markets and illiquid also (via government constrained supply i.e. taxpayer funded banks extending crap loans to avoid taking pocession, increasing market suppy, and selling a property producing a less than desirable market comparable).

kaiten's picture

Let me guess. Deflation?

I mean:

inflation = currency depreciates

deflation = currency appreciates

pslater's picture

95% of their debt is owned by their own citizens.  This creates perpetual demand for the currency - until it doesn't.  The demographics of Japan's population (a shrinking and aging population with no meaningful immigration) means that the baby boom generation, which have been net buyers of JGB's for decades, are now becoming net sellers.  Lower demand for bonds plus record debt levels = higher interest rates.  As usual, the timing is uncertain but the outcome is not.

naughtius maximus's picture

I'm awaiting the answer, Foie. Hmm

ft65's picture

The snake eating it's tail!

BigJim's picture

The problem with using such analogies is that the author(s) never prove that the situations are analogous.

Why is the economy like a tent? Why does allowing the tent to deflate (a recession) somehow fix the tear, but pumping more air in does not? Why does the tear get bigger?

I'm not disagreeing with the general thesis (misallocation of resources due to artificially cheap credit money leads to increasing economic inefficiencies) and conclusion (dollar collapse), however I find analogies like the one written here seductive... but ultimately a bit hollow.

Slim's picture

It's a solid and well articulated point.  Analogies are powerful tools in that they set they establish a comparable framework.  Not refering to the anology in this article but I've seen relatively intelligent people be given an analogy and suddenly abandon any/all critical thought on a subject.  Interestingly the particular analogy I'm refering to was dead-wrong and not only had zero scientific support but was categorically disproven many times.  It was extremely hard to convince anyone to break that mindset once established and a number would defend into absurdity.


If I was looking to influence a group of people and sway them, the first thing I would do would be to frame an analogy with the second some kind of short/saying making everything seem black/white even if there was no base in that. 



tired1's picture

Perhaps comparson to livng organsms would be more appropriate.

breezer1's picture

what is there to add here?

westboundnup's picture

Aren't we 2 years and change into the so called "recovery"?   

Harlequin001's picture

Its like having a credit card, when you hit your limit, (and I mean the one where you spend all your money on repayments) you aren't going to suddenly start spending again because someone offers you another loan you can't repay. This is a long term bust, its hardly started and it MUST result in higher take home pay so that people can borrow more and re inflate prices. Inflation is a requirement if this money printing exercise is to succeed.

It is unfortunate that the higher rates that must inevitably result will bust everyone who is in debt long before this effect is ever witnessed leading to a total failure of the US, UK and European economies.

It will become clear by then that China and every other debt holder are no better off than any other Madoff investor sitting on a pile of defaulted paper.

John Law Lives's picture

Are you here to bash the site?

DavidC's picture

Fear mongering or giving the facts rather than a bullish sub set of them?

Give me realism over delusion any day.


Harlequin001's picture

Yeah, the sky is blue, which makes me wonder why I'm making so much money from gold and silver and not from real estate...

Perhaps there might be a cloud on the horizon.

Still some of us will plan ahead and some of you will get caught in the rain...

Life's tough.

primefool's picture

there is no "money" - not any more. What we have are electronic numbers - accessible with the right codes which enables humans in society to prosper or die . If your access is ever switched off ( "sorry sir your credit card was turned down", "to access your checking account please re-enter your password" etc) .

Those in power want ALL transations to be electronic - then they can lean back in their Laz-Boys with a large flat screen TV and a game paddle and decide who lives and who dies - just for sport.

Harlequin001's picture

and make a dollar for every transaction you carry out...Riiiiiiight.

Who's money is it anyway?

dwdollar's picture

"QE(n+1)"  LOL...

That made my morning.

falak pema's picture

Central planning in a country where the "central bank" belongs to the private sector. Strange capitalist mix, in this case its public sector led by their corrupt surrogate noses by the private kleptocracy, in moving to a totalitarian style regime/economy. In China it's the same BUT it's the central government who LEADS and the private sector who follows in their oligarchic power mix. Subtle difference in central planning..."modelomics".

Widowmaker's picture

Oil speculation already ended America as it was known.

Force delivery on contracts and gas would be near $2.25/gallon or less and QE would be much less necessary if at all.

One big heist on America including food and medical care too.  It's time to break up the corporations and enforce the law.  Paybacks will be a bitch.

Yen Cross's picture

She was an epiphany. Does any woman on this site dispute a Black Widow?

CH1's picture

"Enforce the law" no longer works. The banksters own the people who write the law. (As well as those who enforce it.)

It costs $20-200 million to become a Senator. Where do you think all that money comes from? And are we to fantasize that it comes with no strings attached?

cossack55's picture

If I am not mistaken and I will research this, the only two entities that are exampt from ALL insider trading laws is the US Senate and the Supreme Court.

Widowmaker's picture

The law exists in each person.   The choice to steal or not has nothing to do with bankers.

Incorporation provides the legal catalyst for immunity to every individual therein, and the laws of people don't apply (corporation's can't kill).

This is the method, and until individual accountability occurs for crimes of corporations the door is wide open by design.

In the US, government is incorporated.  No truth, no transparency and all about money instead of people.