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Is Ben Bernanke trying to export our problems to the rest of the world?
Bernanke says in a piece in Thursday's Washington Post that the Fed decided to buy $600 billion worth of Treasury bonds over the next eight months in order to bring domestic interest rates down even further and boost asset prices. He hopes to start a "virtuous circle" of more spending, higher incomes and expanding profits, he says, that will support U.S. economic growth.
Brief, sort of to the point
But while the United States has long been seen as the locomotive pulling the global economy behind it, a leading pundit says the Fed's latest move isn't likely to fire up the boilers in the U.S. What's more, the latest round of asset purchases risks putting the world's biggest economy on a collision course with other countries whose problems will only be exacerbated by QE2 outcomes such as a falling dollar.
Mohammed El-Erian, a top executive at giant bond investor Pimco, contends in a piece published in the Financial Times that quantitative easing will fail to restart domestic growth because it fails to address the real problems that are holding down U.S. employment and output.
Pimco has previously argued that the government needs to focus on making structural changes such as boosting investment in travel infrastructure, such as air and rail facilities, and focusing on building a sustainable energy industry. This, rather than expanding the monetary base, holds the key over time to creating good jobs.
"Liquidity injections and financial engineering are insufficient to deal with the challenges that the U.S. faces," El-Erian writes. "Without meaningful structural reforms, part of the Fed's liquidity injection will leak right out of the U.S. and result in yet another surge of capital flows to other countries."
Naturally, other countries aren't exactly head over heels in love with this idea. Weak recoveries in Japan and Europe are already buckling under the stress of appreciating local currencies, as the dollar's decline steepens. Nor are they liking the idea of more dollars sloshing around the globe in places like India, China and Brazil, where inflation is already a threat and likely to become more so assuming Bernanke & Co. keep driving down the dollar. It was Brazil, you'll recall, that got the "currency wars" ball rolling this fall.
And then there is the longer-term risk to the U.S. economy, which has gained so much through the years through the issuance of the world's reserve currency and the operation of its deepest, most liquid financial makets. El-Erian contends that these advantages will inevitably erode over the years that Bernanke continues his expansive monetary efforts, perhaps culminating in the long prophesied crisis.
What does Bernanke say to these arguments? Sadly, we have no idea, because his piece in the Post is brief and focuses on just one critique of QE2 -- that it will bring about an inflationary surge that the Fed will be powerless to stop.
Here's Bernanke's take on that argument.
"Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation," he writes.
"Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable."
But of course, the problem with that argument is that we find ourselves here, just eight months after the Fed stopped buying assets in QE1, discussing how we can speed up a recovery that is by the Fed's own assessment "disappointingly slow." So no, QE1 didn't result in higher inflation -- but neither did it help reduce unemployment.
As for El-Erian's other points, those are probably just as much the province of Treasury Secretary Tim Geithner, who is after all the guy who has contended he invented the strong dollar policy. Right now, he and everyone else in Washington is crossing their fingers that Bernanke's plan will create enough momentum at home to deflect the incoming brickbats from the rest of the world long enough for everyone to go back to business as usual.
But if it fails to do so, the weak recovery Bernanke is complaining about now is going to look like a picnic.
Greenspan said he was 70% right.. What about Bernanke?
Hey Bernanke, everyone has money problem, print out more and send checks to us.. Also, if interest rate is close to zero, WHY I CAN NOT GET LOAN WITH e.g. 0.5% INTEREST? WHy such loans only available for banks??? Unfair, period.
Financial engenering and old kynesian remedies are inadequate to solve an economic crisis which was in some measure caused by a similar "financial engenering" and printing money. The gobal economy is far different than it was last century. Present ferocious global competetion has to be met with effective domestic efficiency and productivity. We have been on the same track since the Hotel Plaza accord whcih was precided by James Baker (attorney at Law)who adviced to devalue our currency to balance the foreign trade.. 40 years of fail policies.
When speculators will try again to winn trillions $ against CNIO (California, New Jersey, Illinois, Ohio) as they have winned trillions Euros against PIIGS, then Bernanke is prepared to buy the CNIO bonds with QE2, and the speculators will be loosing instead of winning! Congratulations to Bernanke! Japan make hudges QE with 0% rate since 15 years, and the result is NOT a soft Yen, but a hard Yen, and NOT any hyperinflation but a price stability! You see that all monetarists dogmas are pragmatically lies!
I commenced my hoarding campaign this morning at Walmart.
Why are we still doubting Bernanke? Pimpco is usually right...however that was because we have been in the most lucrative bull market for bonds over the past 30 years. Bernanke is doing exactly what needs to be done. He purchased long-term treasuries, and sold short term. Now he is going to purchase back the short-term debt, and sell off the long term debt. This will syphon China's SSU savings glut that has drained the global economy dry lately. In the end when the hurricane settles, Bernanke will be sitting on the largest gold mine known to man and will have reinstituted a new form of gold and/or commodity standard for the Massive US money supply...actually it wont be just the US money supply...it will be the US portion of the global money supply as the global economy emerges.
Disolve the Fed.
what seems strange to me is that every move Bernanke has made in the last 3 years has made things worse. perhaps He just does not get it.. how can thoes of us on fixed incomes survive the falling dollar... we can not afford to even heat our homes this winter now. I think its time that oil return to $18 dollars a barral and a tuff energy policy instuted to bring things back in align.
Thank you, Ben. I look forward to paying even more for already over-inflated commodity prices.
I would suggest that the last paragraph is the most telling piece of Mr. Bernanke's comments yet not widely analyzed. I would also suggest that the Fed is communicating to the market that this problem is larger than what the Fed can handle but it will do what it is responsible to do. The market on the other hand appears to believe the Fed put (aka Greenspan Put & Bernanke Put) will work again. Mr. Bernanke statement appears to raise some doubts about this outcome and he is bracing the market for this possible outcome. He is asking for help from a variety of sources and one wishes him success. In time we will find out. Below is the last paragraph of Mr. Bernanke's op-ed piece of November 04,2010.
The Federal Reserve cannot solve all the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.
Bernanke is destroying our currency. When housing prices were going straight up in 2000, 2001, 2002, etc., interst rates were much higher than today. So CLEARLY, long term interest rates are NOT the problem. The globe is awash in cash, and Bernanke wants to put out the fire w gasoline. The whole concept of the Fed buying treasuries and mortgage securities is outrageous, and should be illegal. Please get rid of Bernanke!!!
King Bernanke is simply not very clever. If he was he would have noticed the credit-crisis/housing bubble forming and done something about it. These are not acts of God, they are man-made. King Bernanke is paid to understand the US Economy. But he is so stupid that he even denied there was a housing bubble, until it popped in his face.
Given the King's record, why is he still in power? Because the banks love him.
But don't try to read too much into King Bernanke's money printing solution. Its all he can do. He is dumb but in charge of printing money... so he pringts.
GoldmanSachs is selling stocks now... they bought them with free money from Bernanke before, now they are selling and making a killing!
What is the best placed country? 1) having 2 GDP debt for having constructed bridges, pierced tunnels, crated high speed trains, thorium surgenerators, fusion power research, satellite communications, high speed roads, hybride cars... 2) having 1 GDP dept for having payed billions bonusses to bangsters and having harmed millions moslims, instead of killing only Osama Ben Laden and Saddam Hussein as G. W. Bush had said? 3) having 1 GDP debt for having stupidely payed rents to dead peoples, and big salaries to 40% corrupt civil servants? You see that Japan with 2 GDP debt is better placed then 2) and 3) with only 1 GDP debt!
Bernanke is losing creditability fast. Remember we once thought Greenspan knew what he was doing.
The Fed policy to print more money is just one more example of why Americans have lost faith in the leadership. The emperor is wearing no clothes and everyone now knows it.
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