Helicopter Ben and the (un?)intended consequences of his never ending money printing

The U.S. Federal Reserve Open Market Committee announced on Wednesday some important changes in terms of monetary policy. These policies are expected to help improve the economic condition of the U.S. economy but may as a side effect result in substantial harm for the European Union.

As the FED throws another package of $45 billion a month in securities purchases at the bond market, the U.S. dollar will likely remain under pressure and so result in substantial harm for countries exporting to the U.S unless their respective central banks don’t react.

Ben Bernanke, heading the Open Market Committee, announced the substitution of Operation Twist for a non-sterilised, open-ended operation that consists of buying $45 billion in Treasuries every month. Adding to the current asset purchase plan, started in September, the FED plans to buy a total of $85 billion per month in securities, in a desperate attempt to drive-down long-term interest rates and this way encourage spending, borrowing and investment.

Charles Evans

Chicago FED President Charles Evans has reason to be happy as his unorthodox ideas about setting targets for monetary policy was added to the FED policy statement and so now will be part of future policy.

The FED has assumed a target for unemployment rate of 6.50% as the trigger for interest rates to start rising again, and which the FED does not expect to happen until 2015. At the same time, the language used shows that the FED is willing to accept inflation of around 2.5% instead of the 2% target that has served for prior policy. This is clearly a change in the FED’s policy as it seems inflation is now the secondary target and the unemployment rate the first. This is a surprise as it is generally deemed the case that monetary policy can control inflation but not unemployment. The transmission mechanisms of monetary policy make it relatively ineffective, or at least not the best policy, to improve jobs conditions.

If the FED implements the $85 billion package throughout the whole of 2013, it will spend $1.02 trillion just in 2013 – a massive cash injection that cannot fail to debase the U.S. dollar. Obama also has reasons to be happy, as this dovish policy will help Government pay its debt albeit by “smoke and mirror” mechanisms. Europe and Japan however have reasons to be concerned. Poor old Portugal, Greece and Spain clearly need to rebalance their economies and traditionally exports have been a sure fire way out of recession rather than on internal consumption. “Helicopter” Ben and his money printing is only worsening their plight and his policies may in fact hasten the inevitable break-up of the euro…

Workers in Southern European countries have been experiencing massive cuts in salaries in an attempt not only to reduce government debt but also gain competitiveness. With the ECB conducting so called sterilised operations, the Euro therefore is expected to re-appreciate relative to the U.S. dollar and so all efforts in terms of competitiveness will be destroyed for the hard pressed workers of Spain & Greece… With unemployment at unprecedented levels in these countries, particularly amongst the youth, social uprising is also an inevitability and at some point the politicians will have to cut the shackles with Germany. The external effects of the FED are doubtless harmful and will have serious consequences through 2013 & 2014. As per our blog earlier on the black swan trade (here – http://www.spreadbetmagazine.com/blog/options-play-for-2013.html), perhaps it’s time to look at Put insurance?