Ben’s Friend: QE IV Is Coming!

Quantitative Easing III, the much-talked-about “QE-Infinity” initiative announced in September, is still so new that it barely shows up as a blip on a chart of the Federal Reserve’s monetary base.

This $40-billion-a-month, mortgage-backed-securities-buying program is not yet a pimple compared to the metastasized monetary malignancies that were QE I and QE II.

And yet, it looks like QE IV is already on the agenda at the central bank’s monetary policy-making arm, the Federal Open Market Committee. After all, the Fed’s “Operation Twist” — the $45 billion-a-month swapping of short-term securities for longer-term debt — is set to go away at year-end.

As Bush White House economic adviser Lawrence Lindsey said, “At $85 billion a month in purchases, the Fed is buying the entire deficit.”

What would happen if we “just” went back to the Fed buying $40 billion in securities a month? According to the man who many say has a direct pipeline to the inside thinking at the Fed, we might not have a chance to find out.

What’s the Fed’s Next Move?
Find out from the ‘Real’ Chairman!

The Wall Street Journal’s chief economics correspondent, Jon Hilsenrath, is thought by many to have a pretty good pipeline to Ben Bernanke and others at the Fed.

In July — weeks before QE III was announced —Stephen Roach, Yale professor and former chairman of Morgan Stanley Asia, assured Bloomberg TV viewers that it was coming, quipping,

“They [The Fed] have gone about their usual pre-FOMC leak frenzy where they talk to this reporter and that reporter. Jon Hilsenrath is actually the chairman of the Fed. When he writes something in the Wall Street Journal, Bernanke has no choice but to deliver on what he wrote.

“…The point is, when they plant a story in the Wall Street Journal, and this story has been planted. Jon Hilsenrath is the weed that grows … the guy has a perfect track record …”

Now in a Nov. 28 piece headlined, “Fed Stimulus Likely in 2013: Bond Buying Is Expected to Continue in Effort to Spur Slow-Growing Economy,” the Fed’s go-to journalist suggests that the central bank intends to kick its money-printing machinery into overdrive in 2013 with QE IV.

The column can be read to telegraph that a “go” decision could be made at the Fed’s next meeting on Dec. 11-12, with Hilsenrath describing it as a “critical issue” on the agenda for the meeting:

“The most pressing (issue) is whether to move forward with bond-buying programs in which the Fed is accumulating immense stockpiles of long-term mortgage-backed securities and Treasury bonds. The bond-purchase programs are meant to drive down borrowing costs, and in turn boost the prices of assets like stocks and homes, and stimulate hiring, spending and investment.

“The Fed signaled strongly in September that it was inclined to sustain these programs. And markets have anticipated some combination of bond purchases will continue next year. Several Fed policy-makers have suggested in recent interviews and public speeches that they support more bond-buying. At their meeting next month, officials will debate extending the programs and hear staff presentations on their impact.”

That’s pretty definitive in the view of experienced Wall Street hands like Dr. Ed Yardeni, the president of Yardeni Research, who was among the first to correctly identify it as QE IV.

His reaction to the WSJ column noted that, despite the Fiscal Cliff, Washington will continue to run “insane” deficits and that “the Fed and other central banks will continue to enable this insanity by purchasing lots of U.S. Treasuries.”

Consider the historical blow-off inflations from France during the Reign of Terror, to Weimar Germany, and the more-recent episodes in banana republics.

Those who have studied them have often wondered how a little inflation … just a bit of money-printing … only a modest amount of debt monetization … ever gets out of hand and becomes a currency-collapsing event.

In such episodes, it generally turns out that the monetary authorities have believed … until it’s far too late … that they could rein in the destructive forces they unleashed.

They can’t.

Can the Fed Ever Return the Monetary Genie to the Bottle?

The results of money-printing binges can be delayed. A reckoning can sometimes be put off for a while. But it is magical thinking to believe that the Fed can buy $900 billion of toxic mortgage securities from the influential banks and $1 trillion in U.S. government bonds, with money it has created of thin air, and that there will be no economic consequences.

Only in Washington — and in certain Princeton and other academic economic circles — can such fantasies be entertained.

Speaking of Washington, now that we know about the monetary authorities’ magical thinking, what about the fiscal authorities and their fantasies?

I’m sorry to report that they are every bit as dangerously unhinged from reality.

Exhibit A would be Tim Geithner. The Treasury secretary recently appeared on Bloomberg TV urging that the statutory ceiling on federal debt be eliminated entirely.

“The sooner the better,” said Geithner.

Oh, my!

Got gold?

Yours for Wealth and Liberty,

Charles