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When you are in a (Jackson) Hole, stop digging

The Chairman of the Federal Reserve, Ben Bernanke, is due to speak in Jackson Hole, Wyoming, later today and according to some of the investment notes that I receive, he is expected to commit that central bank to a third round of credit creation from thin air, otherwise known in these mealy-mouthed days as “quantitative easing.” There are doubters out there about the wisdom, or lack thereof, of this. We can of course expect the usual devotees of hard money to scoff at this, but what intrigues me is how some economists in the commercial world are hostile. Take this from Steen Jakobsen , chief economist at Denmark-based Saxo Bank:

“When talking about the impact from Quantitative Easing (QE) one has to realise that most academic studies show that the biggest “impact” from QE on markets comes from the actual announcement of it rather than the execution of it. An analysis of the two prior QE introductions point to a 50 to 100 basis point reduction on bond yields and subsequent inflation of equities via “a feel good” factor – the so-called wealth effect.”

“But realistically, what has been the net impact of QE1 and QE2? Chairman Bernanke has used 3,000 billion US Dollars to create what? Nothing! Unemployment is still above 9.0 per cent, the housing market is still in a slump, and now the only successful thing going for the Fed is the stock market’s rise from the floor at 666.00 in March 2009. But now there’s talk of an interbank funding crisis and unrealised losses. It certainly smells like 2008, doesn’t it? Or what about August 2010? – Yes! It is almost a 100 per cent analogy to last year. It’s actually like watching the movie Groundhog Day.”

I like his final paragraph:

“There is another political theory stating that the best environment to create growth in is one in which politicians have no power to pass legislation (similar to the U.S. situation for now until the U.S. elections). Think about Clinton: he had a major “programme” coming in as President, yet failed to get anything whatsoever done in his eight years in the White House which then led to the biggest growth period in U.S. history. What does this tell us? Total radio silence works as the micro-economy – investors, consumers and companies – adjust their behaviour and consumption to the new reality and then start moving forward. The last thing that we need is “political noise” and promises of better days ahead with nothing to back them up.”

I can think of a good book on the collapse of paper money that I can send this man.

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11 comments to When you are in a (Jackson) Hole, stop digging

  • PeterT

    On the first point..Mohammed El-Erian (PIMCO honcho) expressed similar sentiments in the FT.

    On the last point…I used to have ambiguous feelings about political gridlock, since it made rolling back the state as difficult as extending it. Having witnessed the almost complete failure of the coalition government in the UK to honour its civil rights agenda – even on points on which they both agreed prior to the election! – I am a sceptic no longer. It is clear that rolling back the state is too difficult for mainstream parties, even if they have a majority and are, on paper, liberalisers.

  • As the famous saying suggests, I was inclined to attribute the first two rounds to plain old stupidity – but it is certainly difficult to do the same the third time around.

  • free

    Saxo Bank translated Atlas Shrugs to danish and gave it away as a promotion. A nice hard back version too. I have it.

  • Harry Schell

    I find it quite humorous, in a dark way, the meeting is in the idyllic resort of Jackson Hole. Commercial flights in and out can be had but are a little difficult, requiring a stop at a major airport and another leg in a much smaller aircraft, and present a rather longer journey for the august presences such as Bernanke.

    Or did Jackson Hole get picked for the regular trafiic of personal jet aircraft ridden by other glitterati, so the Fed chairman could fly in circumstances befitting themselves without looking as out of place or with too many media running around?

    At my current level of cynicism, I see no good reason for this meeting to happen in Jackson Hole, unless something is hoped to be buried there. Obama is setting a tone that is not to the good. The Chinese say a fish rots from the head down.

  • Eric

    I think it’s probably not a good idea to print money like this under normal circumstances, but I’m not sure this time around.

    No, not because I think it’s going to be good for the US economy. That’s just silly.

    The reason is China’s manipulation of the dollar/RMB exchange rate. China is buying up dollars in an effort to keep Chinese labor cheap and tempt international corporations to do all their manufacturing in China. That’s great for Chinese people, but it means higher unemployment in the US. Grumbling at diplomatic levels didn’t do anything, so the best response from the US might just be “Fine. You want dollars? You can have as many as you want. We’ll make more.”

  • What the United States does not need is another round of quantitative easing. What it needs is an nominal GDP or inflation level target, and for the Federal Reserve to do whatever is necessary to achieve it. If that means buying or selling a trillion dollars of assets, then so be it.

    Announcing a few billion dollars of asset purchases here and there does little to change expectations in the long run. People expect the increases in the monetary base to be temporary or offset by emergency policies like paying interest on excess reserve balances.

  • Laird

    You’re getting into deep waters there, Lee, and I don’t want to write many paragraphs addressing all the implications of those few sentences. But two quick points:

    (1) Setting a “GDP or inflation level target” won’t solve anything, because the government would merely manipulate the numbers (“falsify” is probably not too harsh a word) as it does already. Just like with unemployment, the “official” inflation rate is several percentage points lower than it would be if it were measured in the same way as it was just a few decades ago. GDP calculation is more a guess than a science, eminently susceptible to manipulation, and in any event it includes government spending so in a very real sense it grossly overstates the true production of the nation. They’ll redefine the goal line to suit their purposes.

    (2) The Fed presently has a specific mandate to manage the money supply to minimize both inflation and unemployment. (The Humphrey-Hawkins law.) Obviously those are completely inconsistent goals, so the law forces the Fed into a sort of schizophrenia which clearly serves the purposes of the politicians even though it’s antithetical to the interests of the rest of the country. (Shocking, I know.) So for it to focus on just inflation or GDP would require a statutory change which would be very difficult to achieve with the current government; the Fed can’t do it on its own initiative.

  • Laird, thanks for the tip. I looked up that law (emphasis mine):

    The Act’s sponsors embraced conventional Keynesian economic theory, which advocates aggressive government spending to increase economic demand. In particular, Keynesian theory asserts that the government can minimize the shock of business fluctuations by compensatory spending, intended to maintain or inflate investment levels by government spending.

    Consistent with Keynesian theory, the Act provides for measures to create temporary government jobs to reduce unemployment, as was attempted during the Great Depression.

    Somewhat contradictorily, the Act also encouraged the government to develop a sound monetary policy, to minimize inflation, and to push toward full employment by managing the amount and liquidity of currency in circulation.


  • Laird

    “Heh” indeed. (I’m glad I got the name approximately right; I was going from memory and too lazy to look it up.)

  • Paul Marks

    The people the Financial Times newspaper had writing against more funny money production (“Quantitive Easing”) were also Obama supporters – they just wanted Ben B. to be the “warm up act” for Barack Obama’s speech on more “fiscal stimulus” (more government spending on bridges to nowhere and so on).

    Most of the F.T. regulars are wildly pro producing an even bigger credit money bubble.

    Samual B. (the tosspot who has been campaiging for Britain to be in the Euro since at least the early 1990s) proclaimed last Friday (in the F.T.) that more QE (“thow the money from helecopters” he said – taking ideas that Milton Friedman rejected later in his life) was the only way to stop a Marxist takeover.

    Of course the real Marxists laughed about that – knowing that yet more credit money expansion (and the boom/bust chaos it spreads) aids their cause.

    And the “free market” Clive Crook (Crook by name, crook by nature) wrote in the F.T. on Monday that if a “small” amount of Q.E. did not work there should be a vast amount.


    I suspect that Sam B. is just an idiot (I met him at University College London back in the early 1990s, when he was already on his, above mentioned, Euro crusade, and he was an idiot then – and I doubt old age has improved him).

    However, Clive “free market” Crook?

    The failure of QE1 and QE2 just leaves him demanding a QE3 (and demanding that it be huge).

    He is not an idiot – he is corrupt (his name does indeed fit him well).

    Corrupt in the sense that he knows perefectly well that this extra money would not magically appear in the pockets of the ordinary population.

    The new credit money would (of course) go to the politically connected financial elite.

    The sort of people who buy lots of copies of the Financial Times for their company staff.