The unbearable lightness of QE in summer 2012 - the US, British and Japanese central banks out of the game
The unbearable lightness of QE in summer 2012 - the US, British and Japanese central banks out of the game (Excerpt)
As we had shown last January in the GEAB N°61, the US Federal Reserve is facing an unsolvable dilemma from now on, whether or not to launch QE3:
«Will the Fed have the means to launch a QE3? The answer is “yes” if one takes only the legal, financial and economic factors into account. The way the Fed works in theory allows it to freely take this kind of decision. But even under the conditions of a “traditional” decision, QE3 will not be a choice made with a glad heart. A new cycle of monetization will only be the product of a US sovereign debt downgrade put under the pressure of the credit rating agencies or investors. Will the banks agree to finance the Fed? Such a question is of little relevance. In an idling financial market, lending funds to the Fed will still be a good deal. Admittedly, interest rates are weak, but the risk is zero.
However, if one considers the question from the geopolitical and political angle, the answer is “no”. As the LEAP/E2020 team has already amply explained in preceding GEAB issues, the Fed’s decisional context is henceforth anything but “traditional”. The American central bank is horns locked with domestic political opposition and an overseas geopolitical opposition without precedent concerning the launching of a new, massive Quantitative Easing programme. These forces, in a context where Washington is already a paralytic giant in a decisional sense, can result in blocking Ben Bernanke and his colleagues’ attempt to launch out in a QE3 adventure, thus leaving the United States to continue its course of a drunken boat, leading to the 2012-2016 anticipations set out in the GEAB N°60.
The importance of the anticipation on the launching of QE3 set out above is that it helps to focus that 2012 will really be a year of major geopolitical swing: none the options available (QE3 or no QE3) to the American authorities make it possible to avoid the crash of the Dollar/T-Bond tandem any more. The doors of the world after the crisis will thus open at the end of 2012. »
The American, British (1) and Japanese central banks can only come to the conclusion that their massive liquidity injections haven’t created any growth. And that they cost their countries’ real economy increasingly dearly. In the United States, it’s nearing an additional $3 of debt to generate $1 of growth (2). Japan has stagnated for twenty years despite the overdoses of financial stimuli: and the Bank of England is under fire from increasing criticism for its inability to prevent the United Kingdom from falling back into recession despite its serial QE (3).
Little by little a growing number of political and economic leaders are coming to the conclusion that monetaro-financial stimulus measures have only one sure effect (4) : they always increasingly asphyxiate the real economy (5) in trying to save insolvent /unsavable banks.
The ECB is in a different category because it’s in the middle of the complex and chaotic process of the organization of Euroland’s economic and financial governance. However this process is only in its early stages and the limits and options available will develop in the next six to twelve months. Conversely the three other banks are well embedded in an established and very rigid system, therefore very predictable.
The lack of change since the beginning of the crisis in the chairmen/governor of the American, Japanese and British issuing houses, namely Ben Bernanke (in office since 2006), Masaaki Shirakawa (in office since 2008) and Mervyn King (in office since 2003) also distinguishes these three central banks from the ECB which changed president a few months ago. Without prejudging in the least Mario Draghi’s benefits in charge of the ECB, there isn’t any doubt that his three counterparts belong to the world of before the crisis. The September/October 2012 period should therefore deal a fatal blow as well to their shaken credibility.
The markets can always wait for QE and Twist operations with impatience (6). In the current world configuration their impact will be negligible since widespread confidence is evaporating and will continue to evaporate along with this summer’s heat (7).
As regards the United States and the United Kingdom in particular, which depend massively on external capital flows to balance their public and private finances (8), this situation will result in a sharp “economic collapse”; the real economy equivalent of the Lehman Brothers financial shock of September 2008 and in sum-total it will require London and New York bank rescue plans of at least 500 Billion USD which, this time, especially in the United States pre-election period, will leave the majority of the share and bond holders bearing the losses (9).