QE2: Bernanke Cuts Geithner Off at the Knees

The Fed’s announcement of $600 billion of intermediate and long Treasury purchase, informally dubbed QE2, teed off a peppy rally in stocks, and led to further weakening of the dollar. These trends were already well in motion thanks to the central bank’s winks and nods that it was going to embark on another round of bond purchases.

This move looks to be bad economics, or at least bad at achieving the Fed’s stated aim of lowering unemployment and promoting growth. The first round of QE did not arrest falling housing prices (although they have stabilized in some markets, there is still a large overhang of shadow inventory, both of delinquent borrowers where the bank has not yet seized the house, as well as owners who would like to sell, and will try to do so if the housing market in their area were to improve (and note some of these potential sellers will relent if they perceive prices are not going to rise any time in the foreseeable future). Nor did it help unemployment (one month of improved hiring was not sufficient to budge unemployment levels). As one wag remarked, “The Fed has found another string on which to push.”

Some have argued that QE2 is another sop to the banks, but that does not make sense. Moving out the yield curve in bond purchase will lower the interest rate differential between the banks’ super low borrowing costs and the interest they earn by parking the proceeds in Treasuries. If the aim were to help banks rebuild their balance sheets, the central bank would want to create a steep yield curve, one with a considerable difference between short and long-term interest rates, as Greenspan did in the wake of the savings & loan crisis. So the aim of “flattening” the yield curve is not to help banks earn easy spread income. It instead appears designed ot encourage investors to take “risk on” trades, in the cheery assumption that real economic activity will follow.

But this logic is spurious. Lower cost funds or investment capital will not lead entrepreneurs to gin up new projects. Business opportunities develop out of opportunities in the real economy; the cost of funds can operate as a constraint, but with interest rates low as it is, it seems highly dubious that a further discount on the cost of money is going to make much difference to businessmen (and it’s also worth noting that lower the rate on Treasuries does not necessarily improve availability of credit to small businesspeople).

However, one clear and immediate effect of QE2 has been to sour relationships with our major trade partners. The Fed announcement produced swift denunciations from foreign finance authorities, who correctly anticipate that a further round of Fed easing will fuel a dollar carry trade, with destablizing hot money inflows chasing the highest returns in foreign markets. China, Brazil, and Germany were quick to attack the program and some emerging markets have started restricting currency inflows. Charles Dumas of Lombard Street points out that the impact on China will be particularly acute:

In this dollar economy, China is heavily undervalued (though nobody can assess by how much) and the US is overvalued. The Fed’s newly created liquidity could in effect “flow downhill” to the undervalued portion of the dollar economy. Already overheated, inflationary China will get a much larger dose of cost-push inflation in food and energy than the US.

Food is one third of China’s CPI, versus 14 per cent in America. This makes the recent 20 per cent rise in food commodity prices more important. Meanwhile, China’s competitive leg-up vis-à-vis Japan, Korea, Germany and others will be exacerbated by a further 5 per cent trade-weighted devaluation (in line with the dollar) – a currency impact that is likely to take effect much more quickly than any benefit from devaluation to the US. So higher Chinese inflation arising from QE2 is a double-whammy: demand-pull as well as cost-push.

Food inflation is a charged political issue in China, and the officialdom is particularly sensitive to any foreign measures that might undermine their legitimacy at home.

The bizarre element of this move is its timing. The QE2 launch will hopelessly undermine the US position at the G20 meetings this weekend. Geithner had been pushing for the idea of having an agreement that countries running overly large trade surpluses seek to rein them in; no less that the Financial Times’ Martin Wolf thought it was a sound idea. We were skeptical because even though this sounds good as an international trade motherhood and apple pie statement, without any real penalties, it’s mere showmanship. However, the plan had a few wrinkles that make it seem a tad more substantive. For instance, 4% of GDP was proposed as the limit of reasonable trade imbalances; persistent results above or below that range would trigger negotiations on how to bring it back into line.

What is going on here? Bernanke, Geithner, and Paulson famously worked fist in glove throughout the crisis, but they seem badly out of sync now. The ill timed Fed move means that QE, and not any US initiative, will be the focus of the G20 sessions. China is using it as an excuse to torpedo the Geithner proposal:

Cui Tiankai, a deputy foreign minister and one of China’s lead negotiators at the G20, said on Friday that the US plan for limiting current account surpluses and deficits to 4 per cent of gross domestic product harked back “to the days of planned economies”.

“We believe a discussion about a current account target misses the whole point,” he added, in the first official comment by a senior Chinese official on the subject. “If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing.”

China’s opposition to the proposal, which had made some progress at a G20 finance ministers’ meeting last month, came amid a continuing rumble of protest from around the world at the US Federal Reserve’s plan to pump an extra $600bn into financial markets.

It’s a bit disingenuous for China, which has a pegged currency and currency controls and more than a few state owned banks, to lecture the US about a planned economy, but America has made such a botch of this situation that China doesn’t need to make a credible argument to win allies.

The US has managed to isolate itself, and for no good reason. Geithner peculiarly tried to negotiate with China bilaterally over its peg against the dollar, when many other emerging markets were also suffering as a result of China’s peg. QE2 has flipped a situation where China could have credibly been depicted as the bad actor to one where the US is the troublemaker.

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  1. IF

    Point for China. There are different degrees of economic planning. And prescribing to stay on the long term exponential is one of them.

    1. Paul Repstock

      Why are we supposed to believe that China would not prefer to return to a “Planned Economy”??

      Allowing companies like Walmart unfetered access to Chinese markets is not that much different than allowing the British opium traders in.

    2. World Political Economy

      I don’t think the Fed really considered the international political consequences of QE2. And, the question is, why should it? That’s the job of the Treasury and the Executive branch of the government. The Fed is first concerned with the national economy. Yes, there are international consequences, and they may be political, but the Fed has to concentrate on the national economy. And, the state of the national economy right now suggests that we need QE2. That’s the reason Bernanke is doing QE2. We need to fight deflation and the way to do that in a free capital mobility environment is to devalue currency. This may create a problem for the dollar and we should be concerned about the implications for the global economy of a devalued dollar.

      But, I hardly think the Fed was thinking about the G20 meeting when it decided on QE2. It’s up to the executive branch to handle the G20 meeting. Bernanke had to do what he did because the economy required it; regardless of what the executive branch might have desired.

      An important question going forward over the next decade and more is how much are we going to encounter beggar-thy-neighbor policies and to what extent this is going to have an impact on international politics. The Fed’s QE2 is a symptom of a problematic international political economy rather than something we can blame as a cause of problems in the world political economy. The G20 countries might use it as a way to focus the agenda on the U.S.’s selfishness, but the real problem, and the one that they’ll ignore, is how to cooperate in the international economy when so many national economies and their governments are struggling. The problem is that more and more nations are looking inward nationally, as well as regionally.

      1. THE FED

        The FED is primarily concerned with international capitalists, bondholders, and those who possess wealth. Those are its shareholders. That is it’s constituency. That’s why you got TARP and the multitude of backdoor bailouts putting nearly 10 trillion on the line. The FED rescued these PEOPLE, not the national economy which was peripheral. That’s why, in fact, Paulson lied about the target of TARP and “changed his mind” a week later. It would have been far less expensive and better for the U.S. economy had the international capitalists, bondholders and equity holders lost some money in 2008 and reset. The banks could have all been kept standing with fresh capital, no holes on their balance sheet, and forward looking with a far different version of TARP.

  2. Andrew not the Saint

    It’s so laughable hearing all these semi-truths, lies and hypocrisies being told by various world politicians. What really gets to me is how come that billions of people can swallow such crap.

    “Don’t believe them, don’t fear them, don’t ask anything of them.” Aleksandr Solzhenitsyn

    1. Paul Repstock

      Absolutly true! These people are not working on our behalf. Now the problem arrises; ‘How to convince them that we will nolonger sign their paychecks??’

  3. Swedish Lex

    Meanwhile, Germany tries to create the euro 2.0 by preparing to evict the Club Meds and letting the currency spike.

  4. nilys

    QE2 seem to do three things:

    devalue the dollar – increase competitiveness of the our imports

    decrease the real wage – inflation in commodities/products, higher profits, while wages remain the same, the labor market clears – competitiveness of our imports goes up

    flush “money bags” out of the treasuries and into productive investments – “money bags” are forced to put it into the stock market, “emigrate” and hope for better abroad in the face of increasing capital flow restrictions or watch it erode through inflation. QE2 is not a friend of the wealthy. Watch the wealthy attempting to forestall QE2 through harassment of the FED by the Republicans and a vilification campaign in the media.

    Obama is in Asia right now for the next 9 days to lobby for opening of markets to American companies. If things go well, by the election time he will take credit for engineering an export-driven recovery. People will not be better off than now, but at least they will be employed.

    QE2 has been under discussion and in works for many months now. I would guess Geithner got at least a wind of it, why he chose to continue on his path, who knows. Maybe it’s a part of a two-prong good cop-bad cop strategy, with the FED being a bad cop swinging the big keyboard.

    1. Paul Repstock

      You are certainly right that QE II is no friend to the “Real Wealth” of America. (By Real Wealth, I mean the prudent savers who bought the conservative story of the sanctity of the nation and the morality of saving/hard work and all that.), I don’t mean the Wall Street fat cats or corporate shysters. Those people would never touch a bond with less than a 10% yeild! The $600 billion has actually come as a relief to many people as thay had expected worse..(They will get it) Note that the door as left open to ‘adjustments’.

      This secondary betrayal is as predictable as the apple pie/home ownership betrayal. These now much poorer people ill be chased into the waiting arms of the Bankers with their sligthly better term deposit and locked in rates…LOL I personally find it difficult to differentiate between mattress money and 1.5% locked in. Atleast ‘Mattress money’ has liquidity. Fear not. When the banks hold all the money, private as well as public at low interest rates, Then they will start lending if the Fed money can shake loose enough demand/inflation to allow a modest profit….Say an interest rate of about 12-15%. This would equate to a ‘modest profit’ of about 500% after costs.

      At that point we are all consumers, because certainly none of us can afford to be savers.

    2. Jan Smith

      Not maybe. For sure, Geithner is offering the carrot, Bernanke is wielding, initially, a small stick.

      It took them a while to figure out that the American economy, and hence the other 3/4 of the world economy, will not recover until much of the American external debt has been paid down.

      But now they know it, and we should be pleased that they’re so far ahead of most of the grandstand economists, who persist in calling for a larger fiscal stimulus (likely only a temporary fix)and, worse, continually forget that the American economy is not closed.

      1. DownSouth

        Jan Smith,

        I don’t recall those who are calling for more fiscal stimulus ever having said the debt overhang doesn’t require a solution.

        Bernanke, Geithner and Summers are not opposed to stimulus, it’s just that they favor monetary stimulus over fiscal stimulus. The difference is that monetary stimulus is trickle-down stimulus, whereas fiscal stimulus is trickle-up stimulus.

    3. sgt_doom

      Of course it’s a sop to the banks and to say otherwise is completely disingenuous.

      They will use this for further speculation, plain and simple.

      Sure Obama is supposed to have signed an anti-proprietary trading act, but did anyone bother to read the actual legislation?

      Evidently the banksters haven’t and the Obama administration sure isn’t about to enforce any laws on the books against them, as neither is our criminal congress.

      The American worker is permanently screwed.

  5. /L

    Chinas trade surplus result in piles of low yielding dollars, to what use?

    China one can maybe understand, wanting to develop as an industrial nation. But Germany, Japan and so on are modern developed industrial nations. Why are they such die hard export surplus nations depriving their citizens of the potential economic wellbeing and affluence?

    Barneke, Geithner and the current economic administration might not be in the best interest for the American people but when the world, China, EU and so on wine about US dollar policy it’s plainly ridiculous, they have for decades totally relayed on the Americans as consumer of last resource, refused to develop end expand their domestic markets in the hope of export led growth and hope to avoid inflation.

    EU:s austerity nonsense in these times of global crisis is close to criminal conduct, a mercantilist greed that have no excuse in one of th richest parts of the world.

    Chinas trade surplus with US is overstated. A few years ago a iPod did cost about $150 to produce some $4 was added in the assembly line in China, albeit the final product is shipped from China. More than 60% of Chinas export sector is direct investment, in 2008 the difference between GDP and GNI was larger than the current account surplus. 95% of the Chinese super rich did get rich on businesses targeting the domestic market not as export moguls.

    This die hard obsession with export led rowth how god is it for the people?
    Net export and unemployment (Sweden)
    Export % GDP (Sweden, Germany, Japan, China)
    export per capita in constant US$ unemployment (Sweden)
    export per capita constant US$ (Sweden, Germany, Japan, China)

    1. brazza

      I find this line of argument lacking in moral and intellectual integrity. The USA has held all the cards since Bretton Woods. It has frittered away its advantage by promoting a culture of consumerism fed on easy credit and augmented by incessant marketing conditioing … for decades hooking its citizens on the drug of easy-come, easy-go, to the point where visiting the mall is pass-time and entertainment.

      The rest of the world (operating on different cultural traits) never totally drank the cool-aid, and found these shallow values increasingly distasteful. Since the crisis, the emperor has no clothes. We don’t want big Macs. We prefer home cooking.

      Recently, US policy does a 180 degree turn, wishing its economy to be export led, no longer believing it can squeeze more growth from internal consumption. So … as your citizen grows increasingly schizoid, receiving the mixed messages: “Keep spending, but save more!”, you try to export the problem to the rest of the world – your whole foreign policy no longer even attempting to hide its rapacious servility to economic interests.

      From this side of the pond, dear L, you sound like the spoiled brat who was used to bully its way around the playground, and is now smarting from being scorned by the little girl in the red smock.

      1. DownSouth


        It is not /L’s, but your apologetics that lack moral and intellectual integrity.

        You try to frame this in a nation vs. nation framework. You conflate the interests of rank and file Americans with those of America’s financial overlords. You conflate the interests of rank and file Germans with those of Germany’s financial overlords.

        Thus you, as an apologist for Germany’s financial overlords, engage a campaign of demonizing “deadbeat nations” while your partners in crime across the pond, the apologists for America’s financial overlords, engage a simultaneous campaign of demonizing “deadbeat homeowners.”

        This is a beguiling message. It appeals to people’s innate sense of patriotism and nationalism. It appeals to the dishonest pretension that the inequalities of institutionalized privilege are due to the virtues of thrift and diligence, and that the poverty of the workers is due to their laziness and their improvidence. And it’s a hypocritical self-deception that’s as old as the hills. “[T]he lower classes, instead of being industrious, frugal and orderly (virtues so peculiarly becoming to their station in life), are becoming idle, improvident and dissolute,” wrote Jonathan Boucher, a priest of the Anglican Church and one of the more prominent of the Tories in pre-revolutionary America.

        So as an alternative to your fraudulent nationalistic framing, I suggest this from the Mexico Solidarity Network:

        The neoliberal model represents a globalization of class alliances. The wealthiest 5 or 10% on both sides of the border, those who control the economies and political systems, have more in common with each other than they do with their fellow citizens, and the resulting neoliberal policies reflect their interests. The elites enjoy increasingly strong institutional links, while the rest of us are left with less democracy, fewer economic options, more repression, increased poverty and less sovereignty.

        1. DownSouth

          And by the way, if I’m not mistaken /L does hail from your side of the pond. He’s just not a corporate shill like you are.

          1. Siggy

            I’m uncertain as to who is shilling what. What I see is a lame attempt to devalue the dollar and thereby reduce the living standards of the US. The impact on the mercantilists will be that the dollar balances they hold will be worth less and and they will be induced to dump those balances.

            There is a labor cost arbitrage that supports the mercantilist policies of China. That’s the target. Repudiate the debt held by China by devaluing the dollar. That’s why the Chinese and their brethern mercantilists are upset.

            What should be happening is that the living standards of the mercantilists should be rising and our should be following. The contest is which movement will be the largest, theirs or ours.

            In light of this one should be curious as to what has created this disparity in living standards. Mostly it wasn’t really created, it existed circa 1946 but has actually beemn made larger by political choices made here and abroad. We have become more socialist in our society whilst the Chinese have become more capitalistic. Notwithstanding its population, China remains a poor place and in that a very dangerous place.

            QE2 will not accomplish anything other than a devaluation of the dollar and the question to be considered is will that accomplishment be more of a ratification of a market reality or a self induced and woven hairshirt.

            Liked this your recent effort, just the right amount if citations and they do have bearing and merit. Say 7 marks out of 10.

        2. brazza

          … shrill vitriol, bud; I see no point here except a gush of erudite sounding maxims, and a bunch of insults. Again … I would humbly suggest lowering your tone and taking a long hard look at your own national realities. Don’t assume the USA has any God-given right to a sense of superiority. Question whether your premise is based on that now defunct notion of American exceptionalism. Drop the insults, lower your heart-rate, drop your assumptions of your interlocutor’s allegiances (I’m exceedingly non-corporate), and stick to cogent arguments. For the time being, all that comes across is blah blah blah, rant, blah blah, insult, rant.

          1. DownSouth

            Ah yes, feign indignation over some alleged violation of tone or form and forget about substance and content. That’s the perennial refuge of someone whose argument has no basis in candor or morality.

            And your hypocrisy knows no limits. “The rest of the world (operating on different cultural traits) never totally drank the cool-aid, and found these shallow values increasingly distasteful,” comes the insufferable chest thumping. Then in almost the next breath you turn around and admonish us: “Don’t assume the USA has any God-given right to a sense of superiority.” Talk about self-righteous piety!

            Oh well, nice try. But everything is not about “us” vs. the United States. (And I wonder, does “us” include Club Med, or does “us” include only those wise, hardworking and virtuous northern Europeans?) No, it’s about the rank and file of all countries vs. the criminal international banking cartel, the ones you run interference for. That’s where the real battle lines are drawn.

          2. brazza

            DownSouth … seriously, wtf is your point? I stated an opinion on the issue. What is yours? Take your USA cap off – this is a global, planetary issue. I can see European, Chinese exaggerations and faults. At issue in this conversation however are Geithner, Bernanke and American strategy. A harangue on German mercantilism is not germane and I suggest that any argument that seeks to shift the focus of responsibility away from the USA itself is misguided if not dishonest. Don’t drag this any further South …

          3. Doug T

            Where you may not see it, DownSouth correctly spots hypocrisy here.

            You write: “I find this line of argument lacking in moral and intellectual integrity … From this side of the pond, dear L, you sound like the spoiled brat who was used to bully its way around the playground, and is now smarting from being scorned by the little girl in the red smock.”

            And there are the three fingers pointing back: “…I see no point here except a gush of erudite sounding maxims, and a bunch of insults.”

          4. brazza

            Again … what is your point with reference to the argument? “Hypocrisy” is not germane, its an empty defense. For the last time – you are arguing from a geographically biased self-interested perspective at a time when we, as a planet, cannot afford it. If the ECB had the same potential for creating global chaos, trust me I’d be on their azzes. But we are at a juncture where USA policy makers have chosen confrontation as a means to avoid facing factual domestic issues. If you should agree with that assessment and support it, then I have nothing further to discuss with you.

          5. DownSouth


            The point is that you are appealing to xenophobia, group conceits and egotism to make this a contest between the United States and Europe. Or in other words, you are inciting cultural animosities, hoping the rank and file will be swept away by these rather than a judicious weighing up of how their material interests will be affected by all this.

            The point is that everyday people on both sides of the pond need to stay focused on the fact that this is not a contest between Europeans and Americans, but a contest between rank and file Americans and an American criminal banking class, and between rank and file Europeans and a European criminal banking class.

            The point is that the relevant questions for the everyday person on both sides of the pond are these:

            1) What impact will monetary stimulus (QE2) or its opposite, monetary tightening, have on a) economic growth, b) employment, c) balance of trade and capital flows, and d) debt overhang?

            2) What impact will fiscal stimulus or its opposite, austerity, have on a) economic growth, b) employment, c) balance of trade and capital flows and d) debt overhang?

            3) How will each of these affect me and other people just like me across the world?

            4) How will each of these affect the criminal banking class of my country and around the world?

          6. Doug T

            I don’t disgree with your criticism of the US at all, but DownSouth is right that (you’ve framed it in a divisive and adversarial way that’s counterproductive and diversionry.

            I think most posters here are equally critical of US double standards. I was only addressing your own provocative tone (of which you may not be aware”, that DS correctly notes is divisive and diversionary in “wtf” “spoiled brats”

          7. Doug T

            … Sorry, inadvertently posted a garbled message before finishing.

            Meant to say that your words: “wtf”; “spoiled brats”; “shrill vitriol; bud”; “Drop the insults, lower your heart-rate, … blah blah blah, rant, blah blah, insult, rant” — intentional or not are as equally diversionary and distracting as what you see in others. Your message gets lost in your attitude.

            Few here take exception to America’s manifest double standard or arrogance, but DownSouth’s basic points are right on target, when you seem to want a soccer riot.

          8. DownSouth

            And maybe I should have included another question between 3) and 4), because there is another set of policy options available:

            3a) What impact will intervention/regulation of trade and capital flows, or the lack thereof, have on a) economic growth, b) employment, c) balance of trade and capital flows, and d) debt overhang?

          9. Anonymous Jones

            “’Hypocrisy’ is not germane, its (sic) an empty defense.”

            Seriously? Does someone who understands the meaning of the word “germane” not understand the relevance of hypocrisy?

            Hypocrisy is always a relevant inquiry into an advocate’s real (not professed) beliefs. How can you possibly not understand that?

            I mean this in the nicest way possible, “Just take it easy, Champ. Why don’t you stop talking for a while? Maybe sit the next couple of plays out.”

          10. brazza

            Dear DownSouth:

            I’m not appealing to xenophobia, and I hardly imagine that these words are read far and wide. It is my humble opinion I’m sharing just because … I have one. Because recent events make me concerned, deeply concerned, that we are headed for extremely difficult times. I don’t wish you nor your country any harm, quite the contrary.

            I see your population lost in a trance, while your elected officials become puppets of special interests. That would not be so serious if we were discussing my own country, Berlusconi’s Italy, since we can at best threaten the world with a bowl of overcooked spaghetti. However, your country happens to control more than half the world’s nuclear arsenal, so your chit affects me and everyone else. I’m asking you to please fix it rather than plaster the world with it.

            Believe me I’m no capitalist kingpin, corporate lackey, or political automaton. I’m just a concerned citizen who reads, tries his damnest and hopes for the best as he recognizes this moment as a key juncture in world history.

      2. /L

        Well there can be plenty to say about different aspects of USA, militarism, imperialism tea-party nut bags and so on but still it’s not all what USA is. Some years ago before the crisis I talked to an immigrant from Iraq, Kurdistan or something like that, we soon come to the favorite subject of current economic affairs in the nation, then he complained how unfortunate he was ending up in Sweden his brother, cousin or whatever the lucky fellow have managed to get to USA and he was doing so good over there.

        Over here right wingers believe US is the neo-liberal paradise and leftists think it’s some sort of hell on earth for workers.

        If one try to have a more nuanced image of the life of Americans ill guess Elisabeth Warren on “Collapse of the Middle Class” is a good start, according to her research the “hell bound” consumerism ended around 1970. And in my opinion Warren is as smart and intelligent as they can be over there. James K. Galbraith’s “What Is the American Model Really About?” could be a read for European leftists.

        rhe foundation of today’s problems (albeit this is Australia it’s pretty generic for OECD), they is why this graph looks like this (US numbers).

        Jürg Bibow have a few words on the “thrifty2 Germans, Suffocating Europe

        The real irony in this German tragedy is that German beggar-thy-neighbor policies have effectively forced a fiscal union upon Europe. Or, rather, if not a fiscal union, a general default it will be. The point is that Germany’s notorious trade surpluses vis-à-vis its European partners must by necessity have a financial counterpart. In one way or another, German banks financed the country’s export successes by lending to today’s crisis countries. They did so as willing borrowers were hard to come by at home when the country – duped by its own political leadership and powerful export lobby – prescribed itself a decade of belt-tightening, flat real wages, and flat consumption growth, that is. Public celebration of repeated wins of the world export championship title made the duped Germans even feel good about it.

        BTW all export led growth depend on internal consumption, in another country, if there is no one that have a lively internal economy there can be no export led growth in another country.

        1. DownSouth


          Inequality and the export-led growth model are as inseparable as fish and the water they swim in. As Reinhold Niebuhr explains:

          When governing groups are deprived of their special economic privileges, their interests will be more nearly in harmony with the interests of the total national society. At present the economic overlords of a nation have special interests in the profits of international trade, in the exploitation of weaker peoples and in the acquisition of raw materials and markets, all of which are only remotely relevant to the welfare of the whole people… [T]he unequal distribution of wealth under the present economic system concentrates wealth which cannot be invested, and produces goods which cannot be absorbed, in the nation itself. The whole nation is therefore called upon to protect the investments and the markets which the economic overlords are forced to seek in other nations.
          –Reinhold Niebuhr, Moral Man & Immoral Society

          And as Niebuhr goes on to point out, emotional appeals to patriotism and national pride are some of the most effective ways to trick the whole nation into protecting the special interests of the economic overlords. “The man in the street, with his lust for power and prestige thwarted by his own limitations and the necessities of social life, projects his ego upon his nation and indulges his anarchic lusts vicariously,” Niebuhr explains. In addition, “Altruistic passion is sluiced into the reservoirs of nationalism with great ease.” The “capitalistic overlord” who “controls the organs of propaganda” is thus able to “manufacture the popular emotion” that is “required for the support of his enterprise.”

      3. sgt_doom

        “It has frittered away its advantage by promoting a culture of consumerism fed on easy credit and augmented by incessant marketing conditioing … for decades hooking its citizens on the drug of easy-come, easy-go, to the point where visiting the mall is pass-time and entertainment.”

        Gee whiz, brazza, thanks for repeating those Koch and Peter G. Peterson talking points perfectly.

        You really have them down pat, too, huh?

        Negative, sonny, “it” or the financial-intel complex which actually runs things at the highest level (individuals like Koch, Peterson, his daddy David Rockefeller, etc.) have been restructuring North America into the capital center or the Switzerland of the Western Hemisphere, while dismantling the entire American economy, just as they did to other economies around the world.

        Good luck to the rest of us!

        1. brazza

          Listen bozo … I’ve never heard of the dudes you are quoting, far less taken lessons from them. I’m writing it the way I see it. I’m no economist and don’t presume to have all the answers. What I expect is for you to cut the assumption that you can impose your views on me, or tell me who I am or how to think. At this time (and for several decades) the USA has demonstrated nothing but greed and excess to the the rest of the world. In spite of this the USA has lost no opportunity to pontificate in smug self-approval. You seem to be capable of little self-analysis yourself. So … you should not be surprised if my opinion of your culture has suffered somewhat. The bellicose, confrontational edge in recent monetary policy decisions shifts the picture from merely aggravating, to distinctly dangerous. Time you quit using assuming the world is your playground and you begin to make some constructive changes to your system, starting by your democratic process which has been usurped by your financial interest groups. Until you demonstrate such willingness the change, you will continue to receive my scorn.

    2. brazza

      In my view the schizophrenic message to US consumers I alluded to above, is reflected in diverging strategies between Fed and Treasury. In truth, the whole US strategy today could be summed up by wanting to have its cake and eating it. Geithner can’t rant against currency manipulation and controls while Bernanke devalues the dollar with impunity any more than the US consumer can maintain its standard of living and save at the same time, with its currency debased in a net-importing country deliberately targeting inflation!

      When is the US actually going to recognize its frantic schizophrenia and begin to face the issues?

  6. attempter

    It instead appears designed to encourage investors to take “risk on” trades, in the cheery assumption that real economic activity will follow.

    Where they’re not conscious gangsters, these corporatists really are congenitally incapable of even thinking in any terms other than setting up extraction tollbooths and hoping for trickle-down.

    They regard society itself as nothing but an extraction mine for financiers, and humanity as an ore, and the best we can ever hope for under their thumb is that they try to be careful with the extraction equipment so as not to damage the vein. And they usually aren’t even that careful.

    They’re objective enemies of any alternative way of thinking, let alone doing. Is a critical mass of human beings ever going to realize that we have no future in a world dominated by these cadres, that there can be no “reform”, and that we need to rid ourselves of them completely?

    …..a further round of Fed easing will fuel a dollar carry trade, with destablizing hot money inflows chasing the highest returns in foreign markets. China, Brazil, and Germany were quick to attack the program and some emerging markets have started restricting currency inflows….

    The Fed’s newly created liquidity could in effect “flow downhill” to the undervalued portion of the dollar economy. Already overheated, inflationary China will get a much larger dose of cost-push inflation in food and energy than the US.

    Food is one third of China’s CPI, versus 14 per cent in America. This makes the recent 20 per cent rise in food commodity prices more important…..

    Food inflation is a charged political issue in China…

    But not in America, of course.

    Any animal with the power to resist understands its interest enough to respond with violence when another animal tries to steal its food.

    But there’s one creature too stupid to understand what to do when the scavenger-predator speculator comes along.

    (The movie has Patton saying “when you reach into a pile of goo that a minute ago was your best friend’s face, you’ll know what to do…” Apparently not.)

    I still can’t get over how in every other context everyone is so quick to identify a terrorist, but I can constantly read bland accounts of currencies “coming under attack“, and no one ever draws the obvious conclusion.

    Even Goebbels wouldn’t have dreamed brainwashing could accomplish such inverse miracles.

    1. Yves Smith Post author

      While I don’t disagree with your comments on food inflation in America, please revisit headline. This post is about the weird Fed/Treasury dynamic and how the Fed has completely undermined Geither, and even Obama, as Ed Luce points out in the FT). This post is not about every conceivable thing that is wrong with QE2 (that list is far too long for a single post).

      1. Larry Signor

        “This post is not about every conceivable thing that is wrong with QE2 (that list is far too long for a single post).”

        Quite right, Yves. The immediate problem is the seeming dissociation of Fed and Admin policy. There seems to be little coherence in these policies.

        1. Ignim Brites

          One has to wonder whether or not Bernanke really had a choice after basically telling the market way back in August that QE2 was coming right after the election. What would have been the market reaction if they had postponed the announcement? Besides does anyone really take seriously any proposal to deal with the balance of payments deficit? This has been discussed and lamented for 40 years. Geithner’s proposal is so superficial it has all the earmarks of a PR stunt for the financial press.

      2. attempter

        Too off-topic? I guess I lost sight of the infighting or lack of coordination among the criminals.

        I suppose if Geithner and Bennie disagree on something, by now neither sees Obama as a higher authority. It’s the state of nature.

      3. i on the ball patriot

        Money policy is food policy, even more so in an unsustainable world.

        The “weird Fed/Treasury dynamic and how the Fed has completely undermined Geither, and even Obama”,or, “the immediate problem’, is a function of a government that is non responsive to the will of the people.
        I believe like nilys above that there is a good cop bad cop element to it, both for the homeys in each nation state and for flexibility in the tight little G 20 scam.

        Global leaders faced with unsustainabilty can war with each other for resources, not really a viable option in this nuclear age as they, the individual leaders would be toast and they know it, or, they can scam and starve their own populations in a concerted global herd thinning effort with the lesser and more controllable risk of dealing with unruly populations on home turf.

        Food and energy are key issues driving policy.

        Deception is the strongest political force on the planet

    2. Toby

      Good post attempter, with this paragraph really standing out for me:

      “They regard society itself as nothing but an extraction mine for financiers, and humanity as an ore, and the best we can ever hope for under their thumb is that they try to be careful with the extraction equipment so as not to damage the vein. And they usually aren’t even that careful.”

      I keep coming back to Jared Diamond’s observation that civilizational collapse is helped along by a collective inability/refusal to recognize that the very dynamic which propelled society to its ‘peak’ needs to change. ‘Strengths’ become ‘weaknesses’ as circumstances change, but the mythologizing of the paradigm renders clear perception of this nigh on impossible. Right now it seems the only things which will not be addressed are the very things which must be.

      1. attempter

        I don’t think anyone among the elites has any wider or deeper horizon than his own personal career of maximizing personal wealth or power, either as a player or as a flunkey. In addition to being sociopaths and in many cases sadists, they’re all monomaniacs.

        1. sgt_doom

          Having come into contact with more than several billionaires over the years, including several former directors of the World Bank, I truly thank you for stating this and completely concur, attempter.

          They absolutely illustrate the sociopath aboard the lifeboat who ships away their side in the hopes they may one day sell those wood chips for a profit, forever oblivious to their boat group’s demise.

        2. Toby

          I imagine that’s true, and am not surprised by sgt_doom’s anecdotal confirmation, but the mess we’re in is of course far more complex than mere sociopathy. Something about the system is ‘happy’ to let sociopaths rise to the top, take the reins, and lead us where they will. Furthermore, not only sociopaths are supporters of those myths—like The Invisible Hand and The Free Market, woven and nurtured over the centuries—that keep the system unquestioned and (mostly) unopposed.

          1. Toby

            One last thing, ‘the elites’ is a term that can catch a broad number of people. It’s highly unlikely that all are sociopaths, or that none deeply ponder life, the universe and everything.

          2. attempter

            Something about the system is ‘happy’ to let sociopaths rise to the top, take the reins, and lead us where they will.

            Yes – capital.

            As for whether or not any of them ever as a hobby ponders the universe, it clearly doesn’t affect their actions. So it would be just a meaningless subjective mood, not a significant element of character.

    3. purple

      Food inflation is measured to the median in the US, it will cripple the lower wage classes for whom it makes up a much higher % of income.

      Just another form of class warfare, or perhaps this is warfare between nationalist elites in which the poor are trampled or cannon fodder. Disgusting.

  7. RueTheDay

    “Some have argued that QE2 is another sop to the banks, but that does not make sense. Moving out the yield curve in bond purchase will lower the interest rate differential between the banks’ super low borrowing costs and the interest they earn by parking the proceeds in Treasuries.”

    That would be true if QE2 were targeted at long term Treasuries. It is not.

    See: http://www.federalreserve.gov/newsevents/press/monetary/monetary20101103a1.pdf

    1.5-2 years: 5%
    2.5-4 years: 20%
    4-5.5 years: 20%
    5.5-7 years: 23%
    7-10 years: 23%
    10-17 years: 2%
    17-30 years: 4%
    TIPS: 3%

    They’re targeting the middle of the yield curve, not the long end.

    1. Ignim Brites

      Thanks for the clarification on this point. The question is whether or not this will nevertheless force down long term rates too or whether long term rates will go up in expectation of inflation. The second question is: Which result would the FED prefer? Since the goal is to increase inflation you would think that the FED expects long term rates to go up.

  8. drfrank

    If the Chinese agreed to Geithner’s proposal, the Fed might be less inclined to unilateral “easing.” The coming G-20 meeting might be more interesting than predicted. Lula and the newly elected Dilma are going. Not enough attention is given to the ways trading partners will find a way around the consequences of the Fed’s strategy. From Argentina: for the first time the Chinese have agreed to buy fresh meat from Argentina; they are buying tripe, which is wasted in Argentina but considered a staple in China. To be sure, the rest of the world has plenty of reason to decry the US exporting inflation when there are already too many dollars in circulation outside the US. I can’t find a rationale for QE2 except fear that prices of risk assets and housing in the US would fall without it, with an adverse impact on aggregate demand, in turn the key to capacity utilization and improved employment prospects. In Fed speak, this comes out as promoting investment and asset prices, etc., since previous experience with negative utterances suggests that it has its own multiplier effect.

    1. The PolyCapitalist

      “I can’t find a rationale for QE2”


      I disagree with your point that if China had played ball when Geithner recently proposed the reserves cap idea, then QE2 may have looked a little different.

      QE2 was fully baked possibly as far back as June, but certainly well before Geithner first proposed the reserves cap idea:


      I also disagree with Yves characterization that Ben cut Tim off at the knees. I think the timing of QE2 strengthens the U.S.’s negotiating position. Based on their recent actions, the only thing the Chinese seem to understand is action, not words. Here’s a good piece for more on this theme:


      1. Doug T

        “I also disagree with Yves characterization that Ben cut Tim off at the knees. I think the timing of QE2 strengthens the U.S.’s negotiating position.”

        Thanks, I thought the same, but assumed it was my own ignorance in finance or MMT. It does indeed seem that Benny’s printing is the big stick behind Timmy’s otherwise hollow pleas to revalue the renminbi (or yuan?).

      2. Yves Smith Post author

        Recall I used to do M&A, so I have a lot of experience in negotiations involving either two principals (buyer and seller) or two interest groups (multiple parties on the buy or sell side, such as founders raising capital). The sort of negotiations I was involved in are VASTLY less fraught that multilateral negotiations. More complex negotiation settings are eve more less likely to come to a deal that two party deals, hence the need for even greater care to negotiating strategy and tactics.

        The Fed move was criminally destructive to the US position.

        QE2 fatally weakens the US negotiating position, because it was done unitlaterally and hence in bad faith. It was VERY powerful as an threat, a sword of Damocles hanging over any negotiations.

        But it is NOT a negotiating tool once implemented. First, the Fed cannot withdraw it as a reward for compliance/cooperation by our trade counterparties. It would confuse the markets (that’s considered to be important), would show the Fed to be carrying the Treasury’s water and hence not independent (it’s one thing to be quietly in synch, another to be openly working in tandem) be a tremendous loss of prestige to the US (Bernanke has even made public statements as to why QE2 is necessary, he can’t climb down having put such a big and visible stake in the ground; plus central banks are supposed to conduct “steady” and clear monetary policy).

        One of the MOST important things in negotiations is maintaining an atmosphere of trust and working towards common goals. Every negotiating guide ever written stresses that. Lose it and you have no deal. They are hard enough to reach even when the principals really do want to reach an agreement of some sort but have issues on each side.

        I’ve seen people walk from deals that really made sense over far smaller bad faith moves than this. Our trade partners all had and have plenty of “national interest” reasons not to cooperate on coming up with a better compromise between national interest and joint interest in the international trade arena. We’ve sent the EXACTLY WRONG signal by implementing QE2, namely, that we believe in a double standard, the US can act unilaterally in a major way that actually will damage other countries, but still wants everyone else to act cooperatively on trade measures that will damage them short term even further.

        1. The PolyCapitalist


          Thank you for your response. I’m a big fan of your work and blog so please take my comments with all due respect.

          I think your reply contains a lot of good points in the abstract. Your suggestion for how the U.S. should proceed is impractical and, frankly, not in touch with at least the public facts of the present situation.

          In terms of QE2 being “unilateral” as you say, I have not seen any evidence (nor do I expect to due to Fed secrecy) which allows me to conclude that there wasn’t in fact some form of tacit agreement on the U.S. moving forward with QE2 by at least some of the world’s other leading central banks and/or governments.

          Which countries probably didn’t acquiesce to the Fed? Officials from ones who appeared to publicly cry loudest in the press about QE2, such as China, Germany (surprise surprise) just happen to run large trade surpluses and hold significant foreign currency reserves.

          But if indeed QE2 was unilateral I’d ask does QE2 represent the proverbial throwing of the first monetary policy stone? I’m not so sure.

          My Exhibit A would be China’s managed exchange rate, which has been in existence for years and led to the accumulation of massive foreign exchange reserves over that time. The U.S. has tried many different negotiating strategies over a long period to get the Chinese to budge. This negotiating effort has been met by almost complete resistance.

          As noted in Professor Baruma’s project syndicate piece, at present time China’s actions suggest it is not interested in ‘negotiating’. Rather it is interested in flexing its newfound muscles. The reasons he sites are nationalism and revenge on the part of China’s communist rulers.

          On your point about how QE2 is “NOT a negotiating tool once implemented”, your logic isn’t compelling. The Fed could withdraw it for any reason it wants, and the FOMC statement left the door wide open (and I would even say the market is expecting) QE2 tinkering. The $600 billion amount is considered by Goldman’s Hatzius, etc. as simply the opening QE2 bid on the way up into the trillions. The Fed could adjust it downwards as well.

          On your “It would confuse the markets”, I would say that QE2 has a number of people in the markets plenty confused judging by the incredible amount of conflicting noise and comments from Gross, Krugman, Grantham, Buffet, DeLong, etc. Has there been in recent memory another Fed move which generated as much conflicting discussion? I also think you overestimate how well people understand the topic of quantitative easing to begin with. Glen Beck made use of a puppet show as he attempted to explain it to his viewers this week. By simply introducing quantitative easing at least some confusion is probably unavoidable.

          On Bernanke not being able to “climb down having put such a big and visible stake in the ground”, he may not have to, or have a choice. The composition of the Fed’s board is changing, and while he’s gained some doves a number of regional hawks are also joining soon. Unmistakable, broad inflation could also call the FOMC’s QE2 hand.

          My main point though is I just don’t see how the U.S. has a double standard here given the history of China’s managed currency policy, as well as apparent unilateral action on the part of other central banks to weaken their currencies (e.g., BOJ).

          I’d also add that I don’t see why Geithner can’t play good cop to the Fed’s bad cop at the G-20. Previously it appeared that he successfully positioned himself in this role while Congress was contemplating legislation to label China a currency manipulator. Perhaps you have a connection to Geithner and possess more information than I do here?

          In closing and for what it’s worth, on a personal level please know that I’m no QE2 fan. I just recently relocated to London and I’m already getting a lot less for my dollar!

  9. Glen

    Both Geithner and Bernanke must feel somewhat blindsided by the American public and world’s reaction to their efforts. The midterm shellacking of Obama and the Democrats because of the shitty economy, shitty economic policy, and a long term forecast of more shittyness has penetrated even Ben and Timmys normal unshakable faith that they, like Blankfien, are doing God’s work, saving the world, and are thus beloved by all. Too late, they are starting to realize that everybody hates them, is blaming them as part of the cause and not the cure, and their legacy is going to be as part of the wrecking crew rather than the saviors of the world.

    Maybe that’s put them a little off their game.

    1. Glen

      But then again, Geithner is everybody’s butt boy, Wall St, the TBTF banks, China’s, etc. Maybe it was just Bernanke’s turn to tell Timmy to drop his pants and grab his ankles.

  10. Matt

    Someone has to borrow or create money to buy the Treasuries funding the US deficit. Is not the only money the Fed creates banknotes? US banks are creating the money and depositing it at the Fed or increasing their holdings of Treasuries beyond 600 Billion. Maybe there is some institutional memory in the banks of being caught with long term Treasuries when yields rise. More plausible is that banks would rather the FRB hold Treasuries. I don’t think Bernanke is driving the bus any more than Geithner is. But if he is driving, I suspect his route is already planned for him.

  11. marc fleury

    I was wondering the same thing, the timing wrt to G20. One conclusion is the one you draw, complete incompetence.

    But let’s assume for a second than they are synchronized ON PURPOSE. Then you reach different conclusions.

    With respect to trade partners
    1/ QE2 is a defacto devaluation of the dollar.
    2/ QE2 lowers the amount of debt outstanding, aims straight at the balance of payment, forces CN out of debt assets. Expect them to buy up physical assets next.

    So, Geithner floats the GDP plan to restore balance of payments, it is a head fake. Bernanke delivers the real plan. We go into the G20 with the effect of surprise. The message is clear: “we are not negotiating, we can do this on our own and aggressively. So instead of all us nodding and smiling with the Chinese guy laughing to himself about how smart he is and making a mockery of this meeting by putting out empty statement to the press, here, done deed. Deal with it”.

    So everyone is around the table, quite in shock. The US has planned this for the past 2 month. I remember thinking in August that the timing for QE2 was odd. Why now? stocks were tanking for sure but it wasn’t bad enough to warrant a QE intervention ala QE1 (market stability). This has fueled a massive speculative rally that does nothing but boost wealth effect. So I don’t think it is a happy ‘coincidence’ that makes them all look like fool. I just believe this is the opening salvo in WW4: the financial cold war. It starts with currency terrorism, will be followed by commodity raids, waves of protectionism and god knows what next.

    In this reading, the US of A has declared war on the rest of the world and blaming China all along. What better moment to do it but the week before the G20 to completely take control of that meeting. Better to do it that way than use hot weapons in a coup d’etat, no?

    Also, this has been quite in the open since the end of August. There were a bunch of clues along the way. Couldn’t be clearer actually. So who is fool? Did every trade partner just wake up to the implications of QE and MMT?

    But there is the adage that “never assume malice where incompetence will do” which would bring me back to your interpretation.

    1. marc fleury

      pursuing the war analogies: this is a financial Pearl Harbor done by the USA on China.

      The USA needs to get out of the debt trap. It could be done on purpose. At least in this case the authorities are quite “smart”.

      The alternative is too depressing, means complete desynchronization and incompetence.

      It is the answer to this that is going to be interesting. I expect Euro blow up next and CN retaliation DURING G20. The race to the bottom has started in earnest.

      1. Yves Smith Post author

        Possible but not likely. The Fed is full of monetary economists. Read Bernanke’s 2002 speech on fighting deflation. He’s simply executing on a playbook he devised LONG LONG ago. And his rationale has nada to do with trade and the dollar, this is strictly a domestic point of view.

        Similarly, an ex Fed colleague says the Fed really does not give much thought (as in any) to the trade sector. Its models do not even account for our sustained deficits properly (they treat them as temporary and hence to be ignored). If they cared about them, they’d be modeling to incorporate them.

  12. F. Beard

    Business opportunities develop out of opportunities in the real economy; the cost of funds can operate as a constraint, but with interest rates low as it is, it seems highly dubious that a further discount on the cost of money is going to make much difference to businessmen … Yves

    Everyone keeps saying that consumer debt is the problem and why shouldn’t it be? If one does not borrow the temporary money (credit) the banks create, then one risks being priced out of the market by those who do borrow.

    So bailout the population and slap leverage restrictions on the banks to prevent a recurrence of the problem.

    Who would need temporary money (credit) anyway if the economy was flush after a massive bailout of the population? And with permanent leverage restrictions, we would only have to do it once.

    Let’s get it over with.

  13. Yearning to Learn

    Two thoughts.
    1. It seems to me that Q.E.2 helps the PAST issues with bank balance sheets and not future issues. Banks awe not lending much so who cares about the spread between where they borrow and lend? Instead think of all the garbage held on their balance sheets valued at 100% of par. Dow Q.E.2 not help with all of that?

    2. I agree with one of the above posters… where was the Treasure Sec the last 2 months. Clearly he knew about this program. Thus we are left with the idea that the US is now tired of useless G20 talk. Drop the dollar until China cries. force it to break its peg.

    The gov is incompetent but not that incompetent

    1. Yves Smith Post author

      I wrote how even the cap idea as presented was inept:


      And Geithner was lecturing everyone (really China) on the dangers of beggar thy neighbor currency policies. I wrote about that in June, but he was on that theme all the way through October. That speech is utterly at odds with QE2.


      Sorry, the evidence on the ground points to inept.

      1. Glen


        I don’t doubt your analysis, especially given knowing that historically the Fed did not model trade imbalance issues, but could we be seeing the start of the unintentional central bank interaction which precipitates a crisis similar to that discussed in Liaquat Ahamed’s “Lords of Finance”?

        Wouldn’t this be an area Bernanke has studied at length?

  14. Jackrabbit

    Some have argued that QE2 is another sop to the banks, but that does not make sense

    As described by Rue the Day above, the Fed is targeting the middle of the curve. Banks get a capital gain. Plus they are the middle men in these transactions.

    Increased bank earnings make it easier for them to raise capital – and at much better valuations.

    There may be other ways that banks can game QE too. To my mind, QE2 only makes sense if the banks get a boost (and then Geithner is on board too.)

  15. Siggy

    So long as we have high unemployment, our national ability to consume will be impaired. It is also relevant that we should examine just what portion of income should allocated to pure consumption. 70% of GDP is probably too high, 65% might be a better ratio. Saving needs to be higher, but to get to that you have to make saving a good choice with stable purchasing power. QE destroys purchasing power, QE is not a good choice. Can you do a bad to create a good?

    Helicopter Ben and Timorous Timmy are not speaking to each other. It’s not funny and its deadly serious that systemic lynchpins appear to be at cross purposes.

    1. Give Sympathize Control

      “So long as we have high unemployment, our national ability to consume will be impaired.”

      To me, this is the heart of the matter. Or at least the extension: “So long as we have insufficient wages.” I don’t know much about economic theories, but it seems obvious to me that if a person’s income is insufficient to afford the goods and services he needs and/or wants, then either 1) he does not purchase some goods and services, 2) the prices of those goods and services must decrease to the point where the person can afford them, 3) the person’s income must increase, or 4) he must borrow money to purchase them, or some combination of those options, depending on the severity of the insufficiency.

      The problem is not lack of demand. And there’s probably plenty of money already in “the system.” It’s just not in the right pockets, which depresses the whole system. It seems the elite have the same lacking math skills as the peons: They’d rather have 90% of a pie with area 1 than 80% of a pie with area 2 or 70% of a pie with area 3, etc.

  16. Joel

    I dont think they are cross purposes.

    Looking at chart of how the Fed balance sheet will change as a result of QEII it appears that it is heavily focused on dealing with MBSes.

    On the international front, it appears that QEII is an attempt at shaking off all the USD pegging countries. In that sense, this is a replay of 1968 ending of Bretton Woods.

    At G20 Geithner is good cop, Bernanke is bad cop.
    In tandem, the US is telling G20:
    “Either accept the 4%, or you will suffer – first inflation on the inflow, then collapse on outflow – for trying to undermine US exports/jobs. If you don’t like it, then go ahead and dump USTs, Fed will buy them back ourselves. Fed already owns more USTs than China. Worst case we get a bit of higher interest rates and a stock market collapse propels the risk funds back to USTs.
    Surrender Dorothy!”

    1. marc fleury

      I think that is exactly right. It is a f* you to everyone ahead of G20. It shows a massive display of aggression and determination to retire the foreign debt.

      I blogged http://www.thedelphicfuture.org/2010/11/new-cold-war-qe2-and-g20.html

      I don’t see a way out either. This marks finance as the new battle front. Next round is on CN. Next salvo: china. Dump UST. The net result will be increased poverty in the US… the end of ‘cheap china’.

      1. Joel

        Hi Marc, thanks for the validation of my contrarian understanding of general orientation.
        I think charley2u has it right also.
        However, this is not the end of ‘cheap china,’ unless there is a corresponding trade war, in which case, there are plenty of billions of ex-peasants literally dying for the opportunity to be wage slaves in global south cities all around the world. Walmart and Apple will switch to buying from suppliers from wherever it makes sense. Malaysia, Vietnam, India, Philippines, Ghana, Kenya, South Africa, Egypt, Cuba, etc.
        However, it will mark the beginning of more serious strife in China as well as everywhere else.
        Fed is able to make QEs of up to 100T without causing inflation in US because of latent overvaluing of risk assets, eg real estate and stocks, but also because of massive amount fo liquidity that will ultimately evaporate from ~$1 Quadrillion in derivatives (notional value), which is really a form of insurance, so maybe only 10% of real value will evaporate under cascading default of counterparties.
        I short, because there is already widespread latent bankruptcy throughout private FIRE sector worldwide which itself created far more money than the central banks combined, there is also a latent massive liquidity crisis.

        At some point of course after it has hoovered up USTs and GSEs and all other forms of loose private debts the Fed may be abolished, and perhaps Rand Paul is part of the overall plan.

        But the Eurozone, Japan, China, etc will probably have collapsed before this, so any new system will reflect the relative strength of all attrtitioned forces possibly through something like SDRs.

        The US is in very powerful relative position globally and it’s own people, especially Boomers and Xers, don’t have the historical perspective to appreciate it because they thought themselves immune from all pain and focus on their loss of inflated asset values instead of the fact that their military, culture, language, intellectual property and technology rules the world.. They worry about hyperinflation of commodities and USD crash, yet US plus Canada and other loyal satraps, cannot be starved or embargoed into submission. For example US only gets 12.5% of it’s oil from Persian Gulf, whereas EU gets 25%, China 50%, Japan, 85%. US can feed itself, China cannot.
        The US main challenge in this crisis will be domestic stability, and how it will navigate the path towards the historic necessity/inevitability of unifying at least the north american continent if not the western hemisphere as well as key allies in asia and africa into a single polity. UK had to create the Commonwealth. US will have to do something even more sweeping; and it’s population, especially the muscular and sharper younger generations of Gen X and Gen Y, is already far more multiethnic in composition, outlook and capability.

        1. Externality

          So the plan is to devalue the assets and savings of average Americans to save the bankers, dissolve the US, and create a North-American superstate run by self-appointed elites and the international bankers? Do the elites plan to even ask the American people whether they want to dissolve the United States?

          Who would benefit from this? Goldman Sachs? The neo-conservatives? Certainly not the American people.

  17. Groucho

    Helicopter Ben and Tiny Tim are on the same page……the idea was to show the Chinese some muscle before the G20 meeting. QE2 is all about cutting the rmb/dollar umbilical cord. It has nothing to do with domestic policy.

  18. charley2u

    Step back and look at the long view:

    After 1945 the dollar is set as the the equivalent of gold…

    After 1971 the dollar replaces gold

    By 1980s nations are funding US consumption of their output by extending dollar denominated credit to the US

    With QE2 the US is funding its own consumption by printing dollars itself

    QE2 implies that all other currencies are irrelevant…China’s peg is meaningless, and is its currency

  19. Don

    If this is intentional nation on nation financial hardball, whats the remaining distance to dropping the quill in favor of the sword?

  20. Yearning to Learn

    I agree. Trade war is increasingly likely. I also disagree with the assertion of a poster above. The US is in a relative strong position now… bit i am not sure about the longer term (fifty plus years) is our infrastructure sufficient for an energy constrained world? The suburban and exurban sprawl model may not have been a great idea for our metro areas.

  21. Paul Tioxon

    This is strictly a political act. Yves, your analysis tells me that the QE2 has no direct domestic economic consequences that will make a difference in job growth, balance sheet repair for banks or business enterprise formation in the real economy. Your next point is that the biggest direct effect will be on our trading partners, especially China. You further point out that China sees this like a neon billboard in Times Square. And they complain that the Fed move harkens back to planned economies. This is along the lines of knowing that someone is married, but asking if they are “married” to marriage.

    The foreign nationals who are the new technocrats of the emerging Chinese global juggernaut are schooled in the financial theory and practice that you skillfully unmask in Econ. I doubt that Chinese trade negotiator is trying to penetrate the mind of the American public by decrying a “slippery slope to socialism” via planned economies. I doubt that the Chinese Communist Party and its handful of top leaders, and their immediate cadre having a penetrating cultural appreciation of American power. They have their Marxist lineage and they have they Global Elite with commensurate advanced degrees. And they put what the understand in the service of what they really believe and that comes from the CCP. It is all planned, all of the time. Out the barrel of a gun. Bernanke seems to talking to the Chinese directly in a language they understand. The popular narrative that is fed domestically to the American public is not the story. The consequences here are secondary and not intended, but are known. What is not known is that QE2 seems to be primarily crafted almost to the day of a G20 summit and has everything to do with keeping China in its place.

  22. Groucho

    Hot wars, cold wars, currency wars….they all have similar strategies and developments. As we saw in recently in japan vs china, strategic plans are well developed in china. They say the best defense is a good offense: expect china to come out swinging post G20.
    Since the Bernanke put has the US treasury market covered, that is not a fertile area for attack by the Chinese(except for massive purchasing dollars, driving down the rmb, and saying fuck you to Tiny Tim)
    Their attack will be centered on accelerating currency swaps with other trading partners and fast tracking the development of the new alternative trade system.
    An announcement about Taiwan may be in the cards as well.

  23. Paul Tioxon

    Oh, I’m sorry, consistent with this story line, The President is in India selling the Indian Air force avionics technology from Boeing. The People’s Army of China see this in no way connected to the complete disruption of the G20 conference. Other important trade talks as well as political ties will be consolidated in the wake of this trip.

  24. Matt

    QE2 is only the direct outcome of the US deficit since 2008. Someone has to buy Treasuries. Someone has to create the dollars to buy those Treasuries. Normally the banks create the dollars. I keep asking myself why the FRB would be holding more Treasuries, why not the banks. In 2008 the FRB had 800 Billion in Treasuries. Maybe this is looking ahead to one or more big US banks going under and they want those banks holding as few Treasuries as possible?

  25. lark

    Geithner’s proposal to the G 20 is just more of the same mush that hasn’t worked for the past 6 years. It would delay adjustment for another 6 years. Toothless, bureaucratic, and a waste of time.

    Bernanke is right to base the timing of QE2 on what works for the American economy – actually, on that basis, he is already late.

    China is an obstructionist, not a negotiating partner. Anticipation that they might actually agree to meaningful change at the G 20 as a reason to forestall meaningful change here is a non-starter.

  26. craazyman

    Geithner’s idea isn’t bad. And is that Cui dude lightheaded from too much karoke and beer? A command economy? I bet the guys in Treasury were laughing their asses off at that one. And this guy is the lead negotiator. I guess China doesn’t have any plan — that would be a command economy — so he just shows up and says whatever he thinks. ha ha.

    It’s like karoke. If we go to their karoke show and sit there and listen to them (i.e. buy their exports), then they have to come to ours too at some point (buy our exports). At some point, they have to show up when we’re at the mike singing that Bill Joel Uptown Girl voice over. That’s why Uncle Ed’s watercolors are in the den. It’s not that he’s Picasso, but he is your Uncle Ed. Everybody has to have a chance to sing if we all want to get along.

    So they tried to buy our oil company and they got slapped. And some of our psychos are out trying to sell parking meters and highways. That’s ridiculous. That doesn’t count. All that does is throw more dollars into the stagnant pool, into the black hole.

    Frankly, I don’t know what they could buy from us that they couldn’t make for themselves. But if they have to buy something to stay inside the 4% zone, I’m sure we could figure out something. Anything reasonable, but it’s not obvious. Maybe Uncle Ed’s watercolors. Ed could be a genius!

  27. Hugh

    If there was going to be international cooperation, we would have seen it by now. The meltdown happened more than 2 years ago. I think this is a case of everyone talking their book. Dollar devaluation is the ultimate beggar thy neighbor strategy. It out-Chinas China on the currency front.

    Also given commodity inflation in this country (against the broader background of deflation), I’m not sure it will be just the Chinese who are sensitive about food prices.

    Finally, the October jobs report was not that good as I lay out here:


    (sorry to blogwhore). While the Establishment survey showed an increase of 151,000 jobs, the Household survey showed an increase in unemployment of 76,000 with a further 254,000 workers being defined by the BLS out of the workforce, for a total decrease of 330,000. We had one good number in October but the overall picture got decidedly worse.

  28. Jackrabbit

    The Fed has taken pains to say that they want to be cautious, and Geithner has said that the US does not want to devalue the dollar. It seems to me to be a rather comical fantasy that they would a) work at cross purposes, and/or b) attempt to fool the world about their intentions for the dollar with what would soon become a transparent good cop – bad cop routine.

    So what does QE accomplish? The announced amount of QE2 will improve TBTF bank profitability, take some pressure off by raising asset values a bit, and overall position TBTF banks to raise additional capital by mid-2011. Thus, it is the US public that is fooled because QE2 can’t ever be sufficient to solve the economic problems but it CAN be a big help to TBTF banks as part of the continuing back door bailout.

    This is consistent with Geithner’s oft-stated position that the solution to the risks posed by TBTF banks is additional capital (not breaking them up or curtailing their operations). It is also consistent with, and at least a partial response to, the banks insecurities related to FinReg’s resolution process.

    Lastly, the Fed and Tsy have done everything they can to save the banks yet they remain under stress. Meredith Whitney is expecting 80,000 layoffs.

  29. Thomas Barton, JD

    Perhaps this weird Fed/Treasury dyanmic is evidence of chaos inside our financial system. Many commentators have said that we are in uncharted waters and perhaps some want to turn hard to port whilst others say hard to starboard and still others say We are but Ireland writ Large, full ahead on the starboard prop and full reverse on the port prop. I wish I could make sense of the New York Fed lending its name to such a poorly mounted enterprise against BofA. Questions with no answers until the main engine lets loose with a bang, or is it a whimper of four to six more years ?

  30. Paul Repstock

    There are multiple agendas running here. At least two main ones; The National Security/Dominance agenda, and the Economic Singularity. I’m not sure which camps to place the Fed and Treasury in, perhaps the each have a foot in each camp, perhaps they just pay lip service to the Nationalist Camp while they are in fact directed by the Singularity. In any case, Messers. Bernake and Geither are not in control of their own destinies, never mind ours. They are the messengers.

    In the minds of the Economic Singularity camp, China and the rest of the cheap labour pool have served their purpose, those people now present a threat. They wish to cash their paychecks (Make a demand to purchase real assets as opposed to fiat currency and low interest bonds)

    One result of QE II would be a rollback of the purchasing power of those ‘paychecks’. Real asset purchases within the United States and Europe would appear contrary to the interests of the Singularity. It is not possible to maintain a Feudal system if the group does not own everything.

    Another result of QE II (Remember that we have not yet seen the end result of QE I ), would be extreme instability in the developing world. Countries like China and India may indeed have lots of internal demand already, but their real growth engines are still the cheap labour which has allowed them to earn hard foreign ‘multiplier’ income. QE II if carried to it’s logical conclusion will destroy that advantage. The populations of those countries are so dependant on growth that any deflationary move will have immediate and severe consequences. Who is more “consumerist”? The person who wastes income on discretionary/frivolous goods or the person who is forced to spend every available dollar/Yuan on food. This may suggest an even darker purpose to QE II: It may place many ordinary people in the West in a similar position. Inflationary pressures may leave us living in large circumstances (homes and consumer goods which have no resale value), while being unable to afford basic necessities.

    An interesting sidelight is that the US has not even started to play “Hardball”. Two US corporations control over 40% of the world’s food supply (with that food supply operating currently on a 25 day window) and secondly that the United States through their military presence in the Middle East have the ability to cut off nearly all of the oil supply to East and South Asia.

    The point of this exercise is not global dominance by the American Nation State, but rather Global Dominance by the Western Corporate State. The American national security mindset is merely the handiest, easiest to control tool, in furthering this goal. If China does not rein in it’s growth and place it’s people under the corporate debt yoke, then Mr. Bernake will hand them a civil war.

  31. skippy

    We all know what happens when the drug dealer starts consuming his own product (cough…Tbills) even after cutting it with QEII. The highs come in shorter durations and the need for more product more often, this is exacerbated by diminished business from traditional buyers.

    Skippy…we might as well give the car keys to Gary see:


  32. Jackrabbit

    Krugman says QE is not Currency Manipulation He has previously talked about his hope that the Fed would be very aggressive with QE.

    I think there IS a currency effect (that’s manipulation, isn’t it?) and an inflationary effect but, like the wealth effect that the Fed is hoping for, they are muted at first because they are indirect.

    I think its wise for the Fed to proceed cautiously because, like many others, I think QE becomes counter productive long before it reaches a size that can fix the economy. It may well be counterproductive from the start because it allows, perhaps encourages, Congress to ignore the problem or enact austerity measures that make it worse.

    And, as outlined in earlier comments, I think the Fed is taking these risks largely because whatever the benefit to Main Street, QE2 will help the banks.

      1. Paul Repstock

        Just how is increasing the supply of an already overabundant currency not manipulative? There could nolonger be any effect from lowering the Fed Funds rate from 0.25%, so the only devaluation tool left was to increase the money supply. And one of the few viable targets (currencies which are not already debased to zero), is the Chinese Yuan or RMB.

        This is all so sad. Mr. Obama is using money owed to China, to build a proxy military counterforce in India. The thinking may be that these Asian Giants will either maul each other out of existence, or at minimum become locked in a military standoff which ruins their economic engines.

        1. Jackrabbit

          I think Krugman can say this because its not a *direct* manipulation – like printing money and giving to people to spend would be. The full effect is delayed.

          The Fed is hoping that the wealth effects take hold well before the currency and inflationary effects catch up. Apparently they believe that they can reverse QE2 before the ill effects catch up.

      2. DownSouth

        Jackrabbit said: “…QE becomes counter productive long before it reaches a size that can fix the economy…”

        But can QE, or any monetary policy as far as that goes, “fix the economy”?

        I think Keynes would argue it cannot. From today’s Links:

        11. The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor. …

        However, there’s the contrarian view, also to be found in today’s Links:

        My point is that far from needing to bring fiscal policy into the picture, monetary policy could go it alone.

        So I guess when Krugman says QE “also increases domestic demand” (in the link you provided), that puts him in the latter camp.

        And we all thought Krugman was a Keynesian! Apparently he’s come more under the influence of Anna Schwartz and Milton Friedman than anyone thought.

        1. Jackrabbit

          I don’t think the Fed is claiming that QE2 can save the economy. They are being very cautious and saying only: we will do what we can.

          I think a lot of people are misunderstanding QE2 and misinterpreting the Fed’s intentions.

        2. /L

          They are hardwired that fiscal policy is bad and monetary policies is the only thing to use. And if they do after all use fiscal policy it is preferably used to increase companies’ profits or maybe lowering payroll taxes. Usually with the intent that this will increase investment in new/more capacity. But the other effect could be deflationary if it’s used to lower prices. But it’s all possible secondary effects. The problem is obviously a demand problem and business only invests in new capacity if they see a chance to sell the stuff. The idea that increased profit by government actions will create investment and more people get jobs and this will increase demand is pretty farfetched assumptions in this situation.

          They will do everything they can however farfetched to avoid dreadful things like direct public spending or putting increased demand directly in the hands of ordinary people, especially poor people.

          But as Winston Churchill said: “We can always trust that the Americans will do the right thing, after they tried everything else first.” ?

          Dean Baker have calculated that the federal stimulus after subtracting the state and local government budget tightening – amounted to about one-eighth of the private demand that our economy lost from the bursting of the real estate bubble.

          Without much protest the USA government can create $600 billion out of thin air to buy financial assets, of course it could have created $600 billion out of thin air to build and repair necessary infrastructure that would have benefited the next two generations of Americans. The potential inflator effect of such a move in the present situation is slim.

          Comment on bilbo.economicoutlook:
          It’s interesting how when the CB wants to purchase a trillion or so of securities, then there is almost no political opposition either from the media, or from mainstream economists, or from the punditry at large. There is no government budget constraint when there is a chance of raising asset prices. The wildest schemes with 9 zeroes are quickly adopted without much fanfare other than “will it work?” Everyone intuitively understands that the CB can make as much money as needed.

          But when it comes to investing in real resources, or paying for social security, or healthcare, then suddenly we have a budget constraint. Then, we are broke and need to borrow from China. The same economists who enthusiastically speculate about spending trillions on purchasing equities in the hopes that maybe someone will get hired from this become hard money men when congress, rather than the central bank, does the spending. Fiat money for troubled assets, gold-standard for troubled lives.

  33. Jackrabbit

    Some things to consider:

    * The Democrats still control both houses of Congress.

    * The Financial Industry got both houses of Congress to pass HR3808 (the foreclosure Notary “fix”) on a voice vote/acclimation weeks before the mid-terms.

    If more fiscal stimulus were deemed crucial to the economy, why wouldn’t Obama get it done? Instead, the Fed is forced – FORCED! (where have we heard that before?) – to engage in QE2.

  34. Benedict@Large

    Bernanke is simply telling Congress, either you act or I will. And you won’t like it when I do.

    I suspect that Obama is well aware of this, and is in agreement. There is next to zero chance that anything he can do on trade in the next year (before the 2012 election heats up) will pull the economy out of the ditch, and so O (with B’s help) is trying to force Congress into doing their job by putting additional stimulus on the table. Should Congress do so (say, with a major infrastructure program), I have no doubt that we will hear no more talk from the Fed about playing games.

  35. James Clark

    Could somebody please break down for me and explain Charles Dumas’ analysis of how QE2 will impose both cost-push and demand-pull inflation on China? I read the article that the quote is excerpted from in the Financial Times, and was honestly baffled by it. Thanks.

    1. Paul Repstock

      Don’t be embarrased by your confusion. I know just enough economics to know that it is entirely theoretical. I didn’t find the article so I cannot comment on it or the author. However, in most cases economists rely heavily on abstract models and baffle gab. If Mr. Dumas runs true to form for his profession, he could not give a cogent explanation in terms that laymen might understand.

      The simultaneous existence of the two inflationary forces you mention would suggest to me that China’s economy was self sufficient, in which case we wouldn’t be in this mess.

  36. /L

    I believe Krugman was the one of the prime fellows that advised Japan to engage in QE in the late 90s. BOJ increased the cash in the banks from ¥5 trillion to ¥35 trillion. It didn’t have the claimed effects, Japan was still deflationary and so on. How it affected currency exchange rate I don’t know. But of course Japan is always very “special” as others that defy the “logic” of main stream economic theories.

    The basic problem that have created the present situation is that real wages haven’t followed productivity increases, people can’t afford to buy what is possible to produce, too much have been diverted to the few and too little to the many. Filling bank coffers with cash will not do anything to alter that. The idea that people should borrow on their home to fill the gap was and is pure deluded lunacy.

    The problem is that the few that have benefited from the neoliberal era act short sighted, they will act as the monkey and the nut in the box. They wouldn’t want to be parted from a single dollar even if the world collapses around them. And they will of course have economic “science” that supports them.

    Some time ago one could read in NYT:
    Companies Borrow at Low Rates, but Don’t Spend
    As many households and small businesses are being turned away by bank loan officers, large corporations are borrowing vast sums of money for next to nothing — simply because they can.

    Companies like Microsoft are raising billions of dollars by issuing bonds at ultra-low interest rates, but few of them are actually spending the money on new factories, equipment or jobs. Instead, they are stockpiling the cash

    The Fed’s low rates have in fact hurt many Americans, especially retirees whose incomes from savings have fallen substantially. Big companies like Johnson & Johnson, PepsiCo and I.B.M. seem to have been among the major beneficiaries.

    Corporations now sit atop a combined $1.6 trillion of cash, a figure equal to slightly more than 6 percent of their total assets. In the first quarter of this year it was 6.2 percent of assets, the highest level since 1964

    If Microsoft had needed cash, it could have pulled some from its operations abroad, but “borrowing new money on the debt markets is now cheaper than bringing its own money back from overseas,

    So Bernanke believe even cheaper borrowing will create jobs?

    Is there a new Keynes, FDR etc on the horizon that will save capitalism this time or is it more like the fall of the Roman Empire and we are entering thousand years of dark ages, the millennia of tea party lunacy? The Roman Empire did have pretty high standard in many things, construction, health care, art and so on and all did fall in oblivion. Construction did retard significantly, health care retarded to pure idiocy and art to resemble pre civilization carvings on cave walls.

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