A new meme is spreading in financial markets: The US Federal Reserve is about to turn off the monetary spigot. US Printmaster General Ben Bernanke announced that he might start reducing the monthly debt monetisation program called ‘quantitative easing’ (QE) as early as autumn 2013, and maybe stop it entirely by the middle of next year.
He reassured markets that the Fed will keep the key policy rate (the fed funds rate) at near zero all the way into 2015. Still, the end of QE is seen as the beginning of the end of super-easy policy and potentially the first step toward normalisation, as if anybody still has any idea of what ‘normal’ was.
Fearing that the flow of nourishing mother milk from the Fed could dry up, a resolutely unweaned Wall Street threw a hissy fit. So far, so good. There is only one problem: It won’t happen.
Now, I am the first to declare that the Fed SHOULD abolish QE. Not in autumn of this year or summer of next, but right now. Pronto. Why? Because a policy of QE and zero interest rates is complete madness. It distorts markets, sabotages the liquidation of imbalances, prohibits the correct pricing of risk, and encourages renewed debt accumulation.
It numbs the market’s healing powers by enabling more ‘pretend and extend’ in the financial industry. And it adds new imbalances to the old ones that it also helps to maintain.
This policy may have prevented, for now, debt deflation. But maybe debt deflation is what’s needed.
[Ed. note: Debt deflation is the idea that the market contracts and corrects itself as the overall level of debt decreases.]
QE is nothing but heavy-handed market intervention. It is destructive. It doesn’t solve the underlying problems. It creates new ones.