And That’s Checkmate, Ben Bernanke

Today the US Federal Reserve announced that it would be implementing QE 4: a policy of spending $45 billion per month buying Treasuries on the long-end of the yield curve until employment falls to 6.5%.

So between this and QE 3 which was announced just two and a half months ago, the Fed will be printing $85 billion per month.

First and foremost there is no evidence that QE creates jobs. Consider the case of the UK.

Since the crisis began, the Bank of England (BoE) has announced QE efforts equal to $598 billion in the UK. The UK’s GDP is $2.43 trillion. So the BoE has engaged in QE equal to over 20% of the UK’s GDP.

Despite this massive amount of QE, 2.53 million people are out of work today in the UK, up from 2 million at the start of the Great Crisis in 2007. Similarly, the UK’s GDP remains well below its peak.

In simple terms, QE fails to generate economic growth or jobs. End of story. The BoE spent 20% of the UK’s GDP on QE (a truly staggering amount) and more people are unemployed now than when it started. And GDP has yet to get even close to its pre-Crisis highs.

The same can be said of Japan which has implemented QE over 20% of its GDP. There, as has been the case in the UK, there is no evidence that QE has created jobs or even economic growth.

So the Fed is flat out lying in its claim that QE will create jobs. There is no evidence that this QE does this. So the Fed is announcing this new program for a different reason.

Regardless of the reasons, Ben’s got a major problem on his hands. That problem is the fact that Treasuries are on the verge of breaking their upward sloping trendline. If Treasuries begin to collapse at a time when the Fed is buying up over 70% of debt issuance, then the Great Treasury Bubble is finally about the burst:

If we take out this line when the Fed is buying as much Treasuries as it is, then it’s game set and match for the Fed. Take out this line and you’re on your way to ending the 30+ year bull market in bonds.

Which means:

1)   Interest rates will be soaring

2)   The $700 trillion derivatives market most of which is based on interest rates will suffer some systemic events

3)   The Fed’s interventions are finished

We’ll have to wait to see how this plays out, but we’re getting dangerously close to a US debt crisis that will make 2008 look small in comparison.

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Best Regards,

Graham Summers

 

 

 

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