A thought provoking blog on the current eurozone woes and QE3 courtesy of Trendwatch

INSANITY! That’s how I describe the Federal Reserve’s third round of money printing (QE3).

Frankly, I’m not able to make a judgement on whether Fed chairman Ben Bernanke himself is insane or not. Maybe he really is. Or maybe he’s just deluded. Or maybe he knows that QE1 and QE2 didn’t work, therefore QE3 is one last desperate double-or-quits throw of the dice. 

Let me just remind you what he’s doing. Having expanded the Fed’s balance sheet by $2.3 trillion with QE1 and QE2, he’s now going for broke. Every month, the Fed will spend $40 billion to buy mortgage-backed securities from the banks, which the banks presumable can hardly wait to dump.

It will do this every month at an annual rate of $480 billion forever, or until the unemployment rate comes down, whichever is the sooner. 

He claims that QE1 and QE2 made the economy a lot better than it would been, had he not fired up the printing presses. After dumping $2.3 trillion dollars into the economy, he claims to have:

1. Raised America’s output by 3% and 

2. Created 2 million jobs.

Leaving aside the question of how he could possibly have worked that out, let’s assume he’s right.

1. To boost America’s total annual GDP by just 3% – a growth rate that falls back towards 1% as the money taps are turned off – he had to create new money equivalent to around 15% of America’s total annual GDP. Can someone explain how is that a rational economic policy?

2. Let’s do the maths on the cost of job creation. $2.3 trillion of money printing has allegedly created 2 million jobs. So the cost of creating each new job is: $2.3 trillion / 2 million = $1.15 million per job! 

Madness! 

Thanks to QE3, the above costs are set to spiral up and up and up…

Think about how the Fed is using using its newly minted money. It’s using it to buy up the dodgy debt of the banks. The banks then hoard much of the money to prop up their stretched balance sheets, and to satisfy the banking regulators. The rest is used by the ‘casino’ divisions of the banks for speculating on global markets. So very little money actually escapes the banks’ clutches and flows into the real economy.

There must be a better way, and it isn’t difficult to see one. As the excellent Daily Reckoning observed last week, if instead of gifting the money to the banks, Bernanke gave it to the people, then every household would have received a cheque for $17,500. Chances are that would have given a far bigger boost to GDP

It’s difficult to square Bernanke’s claims with what has been going on outside his ivory tower. For example:

1. The median incomes of working-age Americans are lower than in 2009. Bernanke claims working-age Americans are better off because of him.

2. The total number of Americans with jobs is lower today than it was at the end of 2008.

3. Manufacturing activity in the US has fallen for 19 straight months. There has been no net improvement for 4 years. Not much sign of the Bernanke effect there.

4. More and more of America’s leading companies are reporting falling earnings.

Back in the 1930s, top economist John Maynard Keynes said (only half jokingly): 

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well tried principals of laissez-faire to dig the notes up again… there need be no more unemployment and… the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is”. 

His point? That to lower unemployment, governments need to increase deficits to finance public works programmes so as to get people back to work. In the 1930s, that was what happened, especially in America, where the government financed massive projects such as the Hoover Dam on the Colorado; then the world’s biggest engineering project. It got hundreds of thousands of people back to work, although it took World War 2 to complete the return to full employment. 

In that sense Bernanke, with his massive deficit spending, is surely a Keynesian to his bones. 

But what Keynes would surely never have advocated is creating a massive deficit and then handing the money to the banks. How is that ever going to create jobs?  

America’s infrastructure (roads, bridges, ports and so on) is falling apart. That’s where the money should be going – not to the banks. 

In my estimation, Lord Keynes was perhaps the greatest economist who ever lived, not least because, in the aftermath of the First World War, he was so disgusted by the impossible war reparations demanded from Germany by the allies that he resigned from the Treasury: 

“The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,—abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilised life of Europe”. 

With amazing prescience, he foresaw that it would end in yet more war: 

” If we aim deliberately at the impoverishment of Central Europe… nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing.” 

I wonder what he would have made of the current convulsions in the eurozone. With supreme irony, this time it’s Germany demanding the “impoverishment and degradation” of millions of human beings in counties such as Greece, Spain and Portugal”. Thus without the need to fire a single bullet, Germany has again come to dominate Europe, while perhaps sowing the seeds of the decay of civilsed life in great swathes of southern Europe. 

Meanwhile,Ben Bernanke and his predecessor Alan Greenspan long ago sowed the seeds of destruction in America, the triumphant architect of victory over Germany 67 years ago. Those seeds have germinated and have now turned into vigorous saplings that are well on the way to coiling themselves around America’s neck and suffocating this once-great nation in an impenetrable forest of debt. 

Rob Cullum, Trendwatch