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The Real Cost of Quantitative Easing

Posted by Larry Doyle on November 5, 2010 9:49 AM |

Life is ultimately a matter of perspective.

Two people can look at a situation and see decidedly different things. Having been traveling for the better part of this week, I got home late last night to check on how markets closed yesterday. When I saw that equity markets rallied 2 per cent, commodities rose a like amount, and bonds also increased in value, I was not surprised but I was not thinking that I had reason to be cheerful either. I merely raised my eyebrows and went to bed knowing full well that to many people in our nation, these market movements would have little to no impact on their daily lives and immediate futures.

Am I being excessively pessimistic in my assessment?

I will let others weigh in on that, but from my standpoint I believe our markets have lost so many participants over the last twelve to twenty-four months as to render them less meaningful in our daily lives. Our central bankers clearly feel differently. I guess that is where this ‘perspective thing’ comes into play. That said, as I have always maintained, ‘the market is the market’ so I take neither pleasure nor pain in thinking of the major tidal type movements within our markets during this period.

While markets gyrate and escalate, let’s keep our heads and once again navigate the global economic landscape. To that end, we need to go overseas in an attempt to provide a wider angle view of Mr. Bernanke’s quantitative easing experiment. The Financial Times provides two exceptionally interesting perspectives on this topic. The other day Harvard economist Martin Feldstein weighed in that while quantitative easing may move markets, it will not truly move the economy. The FT wrote, QE2 IS Risky and Should Be Limited,   

The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy. Although the US economy is weak and the outlook uncertain, QE is not the right remedy.

Like all bubbles, these exaggerated increases can rapidly reverse when interest rates return to normal levels. The greatest danger will then be to leveraged investors, including individuals who bought these assets with borrowed money and banks that hold long-term securities. These risks should be clear after the recent crisis driven by the bursting of asset price bubbles. Although the specific asset prices that are now rising are different from last time, the possibility of damaging declines when bubbles burst is worryingly similar.

The problem now extends to emerging markets, a group not directly affected in the last crisis.

Speaking of emerging markets, what do representatives of those nations have to say about our central bank’s experiment and its impact on their markets? Let’s go overseas once again as the FT writes, Backlash Against Fed’s $600 Billion Easing,

The US Federal Reserve’s decision to pump an extra $600bn into the economy has galvanized emerging market central banks into preparing defensive measures and sparked criticism from leading global economies.

The Fed’s initiative, in response to rising concern about the weakness of the US economy, has fuelled fears of a sharp drop in the dollar and a fresh flood of capital inflows into emerging markets.

China, Brazil and Germany on Thursday criticised the Fed’s action a day earlier, and a string of east Asian central banks said they were preparing measures to defend their economies against large capital inflows.

Guido Mantega, the Brazilian finance minister who was the first to warn of a “currency war”, said: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter.”

Mr Mantega added: “You have to combine that with fiscal policy. You have to stimulate consumption.” Germany also expressed concern.

An adviser to the Chinese central bank called unbridled printing of dollars the biggest risk to the global economy and said China should use currency policy and capital controls to cushion itself from external shocks.

Interesting perspectives? Exceptionally so. In an attempt to incorporate these views into those solely focused on our markets, I am compelled to address what I view as the real cost of the Fed’s quantitative easing program. What is the Sense on Cents perspective of that cost? It is actually very simple. It’s called credibility.

Tim Geithner, Ben Bernanke, Barack Obama, and our future central bankers and political leaders have significantly less credibility and leverage on the global stage. When they try to address an undervalued Chinese yuan and any other perceived economic imbalances, they should be prepared for a large middle finger salute in return.  

This reality is merely another step in the ongoing ‘Prisoner’s Dilemma’ that is our global economic landscape.

Credibility is a close cousin of integrity. Losing credibility and integrity are exceptionally steep prices to pay for  future generations in our nation.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • KD

    LD….figured you would appreciate this comment sent to me by one of the smartest guys I know….sent it back on Tuesday of this week…
    “yep…this is a huge inflection point…I really think we are at a historic moment…Bernanke abuse of the dollar’s reserve status will force the world to change in dramatic fashion…he’s keeping the domestic economy on life support, but at the cost of a greatly diminished status sooner rather than later and this is because the political system has NO appetite for hard choices…global reserve managers voting with their feet”

  • Sean

    Rember this short-phrase when it comes to our financial-markets and especially China’s: crackup-boom. With high frequency trading now making-up 75% of all stock-market trading combined with the Fed’s QE & POMO-activity, is it wrong to ask if we’re even really operating within a free-market economy anymore, or is this just a government managed economy by the Fed and its primary-dealer financial institutions? Will our economy be able to withstand the next cyclical recession, or will it completely collapse at that point? Perhaps that’s why all-of the QE out of the Fed, they already know the answer to that question and cannot afford to allow the economy to print a negative quarterly GDP number, just-like China. How is it possible that China has been able to report 8%-13% GDP growth year-over-year every-single-year since 2000 with no significant pullbacks? My fear is that we’re all about to find-out the hard-way just how !@#%ed-up our global economy really-is.

  • Bill

    The Fed mandate to achieve full employment should be abolishd, with a charter limited to concentration on management of the dollar to achieve monetary stability and a stable currency and function appropriately and responsibly as a lender of last resort in financial crises.
    Wonder how many other central banks have a mandate to achieve full employment.

  • fred


    How exactly does QE work? I assume the Fed goes to primary dealers and buys T bonds, bills, notes. But what about price, do they pay par even though securities may be valued less than par? How about MBS securities, can the fed buy those and if so, how about pricing?

    If the Fed buys securities at par that are valued below par, isn’t QE just another bank bailout?

    Why not just purchase the securities at the regularly scheduled auctions at some median price or the price paid by the public, this would seem be more aligned with the public interest rather than big banks, wouldn’t it?

    Just a thought…
    Nowhere within the institution of gov’t is the public interest more vulnerable and also more abused than in Fed activity with primary dealers.

  • LD


    To the best of my knowledge, the Fed will call on primary dealers and ask for offerings of selected securities. Typically the dealers will know when the Fed is coming into the market so they can “set up for the trade.”

    Yes, from the taxpayers standpoint it would be far better if the Fed merely purchased the securities at issue, that is during the auction process, but that may be deemed disruptive to the normal course of business. Although, I do not know what is normal anymore?

    How have banks been able to have ‘perfect quarters’ in terms of daily positive profits? QE has a lot to do with it.

    Your intuition is accurate…again.

  • fred


    Another thing that bothers me to no end is the fact that the gov’t never negotiates favorable terms with recipients of public money or gov’t aid.

    As a fiduciary, the gov’t represents the good of the people, not foreign entities, corporations, large institutions, or special interests.

    At best, whether its the Iraq war, “too big to fail”, or farm subsidies, we the people, are expected to be grateful if we come out even close to whole, WHY?

    I’m not greedy, how about insisting on a reasonable rate of return!

    So Mr or Ms gov’t employee, the next time you get involved, remember who you represent and ask a simple question, WHAT WOULD WARREN DO?

  • LD

    There is a reason those in government are NOT in business. They would be bankrupt quickly.

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