This is a big deal: The Federal Reserve announced this afternoon that it would pursue a third round of quantitative easing, known as QE3. And unlike previous rounds, this one has no predetermined end date.
Boldfaced emphasis added by me.
If you have not been exclaiming HOLY SHIT!!111 all day, you haven’t been paying attention.
“This is a big deal” is perhaps the understatement of the decade, if not century.
This is the NGDP play mentioned at Business Insider on September 2 (Forget Bernanke: A Paper At Jackson Hole May Have Changed The Future Of Economics)
What Woodford concludes is that the Fed ought to say this:
We are going to keep rates low until the blue line comes back and touches the red line.
It’s not that the Fed will keep rates low until the economy improves, or unemployment falls below 6%, or until inflation really starts picking up, it’s only that the Fed won’t ease up on the gas pedal until the economy is fully at its full output potential. The idea is that the Fed is sending a huge signal to businesses: We’re going to keep money cheap for a long time, even once the economy is gaining steam, so that if you’re in the game then, you’re going to make huge profits. All uncertainty about when rates are raised is taken off the table, and the Fed maintains all the credibility in the world, so long as it just sticks to that goal.
Italic emphasis in the original. Boldfaced emphasis added by me.
So we have gone from The Bernanke Plan to The Michael Woodford Plan.
Neither one of these is going to work.
All the money is going to flow to the same people who gobbled up QE1 and QE2.
Did any of you see that money? Was your life “eased” by it at all?
Charles Hugh Smith has a piece of the puzzle here: What Will Be Scarce: Liquidity and Reliable Income Streams
What will be scarce is income, not commodities. The corollary is equally profound: All the capital that has been sunk into pursuit of commodities and ownership-model assets such as homes and vehicles is in danger of becoming trapped capital. That is, if there is little demand for commodities and resource-intensive ownership-model assets, there will be little demand for these capital-intensive assets.
Boldfaced emphasis in the original.
Can you not be a capitalist pig and still experience “trapped capital”?
I want all of you to pop over to this post: Why Your “Collectibles” Are Worthless
I highlighted collectibles there. But any asset you own that you think you ever might be able to sell is frozen capital too.
Just look around your house or apartment. What do you own? Some of you must have already thought, “Well, if things go bad, I can always sell this large-screen TV.”
You’ll be glad to list it under Free on Craigslist just so it doesn’t get dumped at the curb when you have to flee the landlord or a repossessor because you can’t pay the bill.
This is something millions of people already know. The ones living in shelters or under bridges or, if they’re lucky, from couch to couch with family and friends.
What you own cannot be converted to cash quickly or with any satisfaction. You will be lucky to get pennies on the dollar — because you’ll be selling to other people who have only pennies, not dollars.
Another reason why QE3 will fail is noted by Smith here: Now That The Easy Stuff Has Failed, All That’s Left Is The Hard Stuff
Each fiefdom will fight to the death to protect its power and share of the swag, right up until the moment the government declares bankruptcy, the account is emptied, and the checks bounce.
Check out the patent battles between Apple and everyone else. That kind of fighting would have been unthinkable in the days of the Apple II and IBM PC. Patent a pull-down menu? Patent Undo? Patent a scrollbar? Anyone who had even mentioned that would have been laughed out of the room. Not even Bill Gates in his greatest monopolistic fantasies ever envisioned patenting the hell out of everything.
Fights like that will increase and get worse as the economy continues to strangle everyone and cash gets both scarcer and more precious.
But here is something everyone is missing. Smith says there won’t be a shortage of commodities. Even if that is true — and I don’t think it is — it doesn’t follow that they will be affordable.
Each fiefdom will fight to the death to protect its power and share of the swag
Boldfaced emphasis added by me.
Rents never dropped in Manhattan even after so many people fled after 9/11, according to the record books. Landlords did off-record deals — a free month here or a two free months there — while preserving on the record books the “market value rent” of their apartments. Rents never fell. So where was the “invisible hand” of the “free market” to be felt or seen?
When gas prices receded, did any of you see a corresponding drop in food prices? Down ten percent? Down fifteen percent?
I don’t know about the rest of you, but since 2008 I’ve seen food prices at least triple. This through a combination of raised prices and shrinking packages. The fiefdoms do not want to give back the extra loot they have gotten.
If you extrapolate from current increasing food prices, you reach a scary future where what you’re used to buying in a supermarket is just too expensive to even produce.
Who is going to be able to afford a three-dollar can of tuna fish? An eight-dollar gallon of milk? Milk is already more expensive than gas here, with $2.39 for a half-gallon of milk versus $4.33 for a gallon of gas!
If you think I have a solution, right now I don’t. I just know that everything they’ve tried and that they will in desperation try — such as idiotic debt forgiveness — is not going to work.
But that idiotic debt forgiveness loops me back to the title of this post: Free Debt For Everybody. So, yeah, if you want to be a pig and place a huge bet on debt forgiveness, start running up those bills.
But if you bet wrong, don’t come crying to me.