QE to infinity creates devaluation and hyperinflation

As expected, the US Federal Reserve on Wednesday announced that it would be implementing another round of "quantitive easing" (QE 4). This is a policy of printing money into the system by buying up both mortgage-backed securities and US Treasuries. The Fed said it would be spending US$45 billion per month buying Treasuries on the long-end of the yield curve and another $40 billion per month purchasing mortgage-backed securities. This QE will continue until unemployment falls to 6.5 per cent.

By printing $85 billion a month, the Fed's balance sheets will swell to $4 trillion over the next year. The latest QE4 announcement shows that efforts so far to resort to monetary tools to prop up employment do not work. So what is the guarantee that further monetary easing to the extreme will work magic?

Both the UK and Japan have failed to jump-start their economies through money printing. The Bank of England has so far implemented $598 billion in QE operations in the UK. It has announced that it will not continue its QE measures, and it is replacing its governor with a Canadian. Given the size of the UK's GDP of $2.43 trillion, the QE is equal to more than 20 per cent of the GDP. Unemployment in the UK now affects 2.53 million people.

This lends further weight to evidence that GDP is generated by output in goods and services - not by money printing.

Japan is going to hold an election this Sunday. It is expected that the new government will encourage the Bank of Japan to embark on further monetary easing to weaken the yen and stimulate the overall economy. Japan's economy fell 3.50 per cent in the third quarter of this year, creating nervousness over whether the downward trend, which started in the 1990s, can be reversed. Yet still Japan will continue to print money. It started doing so years ago, to flood the system to create competitive devaluations.

The European Central Bank has already discussed the possibility of resorting to negative interest rates, to part from its own QE version, to reverse the economic downtrend within the euro zone.

In effect, we are seeing all the four major central banks of the world trying to save their countries' economies via QE of different sorts.

If QE does not create economic recovery or improvements in the labour market, why do the major central banks insist on implementing it? The answer is that they have no choice but to keep the music going. If they stop, the whole financial system will fall apart.

For the US, the Fed has its own reasons for embarking on QE. First, it is now snapping up 70 per cent of all US Treasuries, issued to finance the deficit and repay the old debts. Without the Fed's involvement, the US Treasury Department would have run out of the means to raise debts, as other investors and institutions have been shying away from US Treasuries. This is likely to create a government bond market bubble.

Second, the derivative market of $700 trillion, dominated by a handful of US financial institutions, is in need of fresh liquidity to keep the system afloat.

Third, interest rates might soar if the bond market bubbles go bust, further handcuffing the ability of the Fed to intervene in the monetary system.

As we are about to enter 2013, the money printing machines of all the major central banks are unleashing massive liquidity, which has created competitive devaluations and which could also trigger global hyperinflation. Money printing always ends in an ugly scene. But it is a big wonder why central bankers have committed themselves to do the unthinkable.

Latest stories in this category

• QE to infinity creates devaluation and hyperinflation


• As expected, the US Federal Reserve on Wednesday..


• Asean: avoiding another South China Sea storm


• Revenge killings perpetuate violent cycle in the..

We Recommend

• Opposition cries foul over ex-PM on state TV


• Group to seek probe by Ombudsman, anti-graft..


• NBTC probing live TV broadcast by Thaksin


• Richest stockholders linked to govt, PM

Comments conditions

Users are solely responsible for their comments.We reserve the right to remove any comment and revoke posting rights for any reason withou prior notice.

Article source: http://www.thethailandlinks.com/2012/12/14/qe-to-infinity-creates-devaluation-and-hyperinflation/