Cat's Out of the Bag: Fed's Own Research Predicts QE 2 Failure

According to a new research report issued by the Fed, QE 2 will do nothing to stimulate the real economy. The report titled, "Would QE2 Have a Significant Effect on Economic Growth, Employment, or Inflation?" investigates the possible benefits and consequences of QE 2. What is interesting is that the report contradicts the Fed's public statements that QE helps the economy. The report says the only possible gain from more QE is a few basis points drop in treasuries (optimistic case 20-40 bps). This may benefit corporations who are loving ZIRP because it reduces their borrowing costs to almost nothing. For example, we have seen recent bond issues by blue-chip companies like J&J and IBM close at 1.00% for 3-year paper. While a boon for corporations, low borrowing costs will do nothing to encourage them to hire more workers. The report notes that unemployment would not be materially reduced because it is likely a structural problem--that is, a mismatch between the skills of the unemployed and the skill needs of employers. Money printing will not solve this problem. Furthermore, the report postulates that the entire employment situation in the US has changed over the last 10 years. The trend of jobless recoveries will now become the norm, rather than the exception. If true, this would be devastating for the long-term health of the US economy.

Will QE do anything to stimulate capital spending? Of course not. The report states that historically, interest rates have not been a determining factor in capital spending.  Capital spending is primarily driven by the economic outlook and final demand. Right now corporations are uncertain about the economy and will not be committing to major projects until there is greater visibility. The trigger would be a strong increase in final demand, but that seems unlikely with high unemployment.

So the major question remains: why is Bernanke and the Fed continuing to print money? For people like me the answer is clear: debt monetization. America, for all practical purposes, is bankrupt, so the only way to pay the bills is to print money. Establishment economists and pundits will disagree and regurgitate the Fed's propaganda that they are only trying to stimulate the economy-blah blah blah. These panglossian fools really believe that the Fed is not permanently monetizing the debt. Eventually, they will see their folly, but not until it is too late. Some of the smarter ones are starting to see the light like Ambrose Evans-Pritchard, who recently wrote an article apologizing for defending the Fed's money printing. He now sees what the Fed is doing. The Fed's goal is to debase the dollar and artificially prop up nominal asset prices. This course of action, according to the Fed's distorted logic, is what helped the US economy recover from the Great Depression. Bernanke noted in a speech that the massive 75% dollar devaluation of 1933 was critical because it reduced debt in real terms and created strong inflation. According to Zimbabwe Ben, this is the solution to our problems, regardless of what he says in the media. He knows perfectly well that QE does not help the real economy. His only goal is to inflate away America's massive debts (government, consumer, real estate, etc.). He can't publicly announce this policy, so he masks it in positive statements like the Fed will take action to support the economy by printing money. It sounds much better than the reality: the Fed is deliberately stealing your wealth by reducing the purchasing power of the dollar. A statement like that would wake the sheep from their slumber and lead to revolution. The first action would be to storm the New York Fed building.

Black Swan Insights

Related Articles:
Bernanke Explains How To Escape The "Liquidity Trap"
Is The Fed Really Out of Bullets?
Ambrose Evans-Pritchard: "The Fed Is Out Of Control"
The Federal Reserve's Plan To Destroy the Dollar


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