Monday , 17 June 2024

QE4 Will Continue Until "The Cows Come Home & the Fat Lady Sings" But It Too Will Fail!

[The just announced] QE4 will see the Fed buying $85B per month in U.S. Tbonds and Fanny/Freddie bonds with newly printed dollars – essentially debasing the dollar by 1 $trillion per year. The cold reality, however, is that each time QE is launched we get less wealth-effect bang for the buck and more inflation and, IMO, by the time it’s switched off in mid-2014, we will have a real-world inflation rate of 5%+. (Words: 863; Charts: 2)

So writes Greedometer ( in edited excerpts from the original article* entitled Why QE4 Will Fail.
Lorimer Wilson, editor of (A site for sore eyes and inquisitive minds) and (Your Key to Making Money!), may have further edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

The article goes on to say, in part:

Operation Twist has been running since September 2011 and has managed to convert $667 billion of short term Treasury Notes into intermediate term Treasury Notes on the Fed’s balance sheet. You may recall Operation Twist was the Fed stimulus program wherein it sold $45B/month in short term Treasury Notes to fund buying of intermediate term Treasury Notes, thus avoiding new money printing and balance sheet expansion. However, since the Fed’s inventory of short term bonds (3 years and less) is now gone, it won’t be able to continue Operation Twist. Instead, it will use $45B per month in freshly printed dollars to fund its purchases of intermediate and longer term Treasury Notes. The Fed is also going to continue buying $40B per month in agency-backed mortgage bonds (what was QE3).

So in total, this new action (QE4) will see the Fed buying $85B per month in U.S. Tbonds and Fanny/Freddie bonds with newly printed dollars -essentially debasing the dollar by 1 $trillion per year. The Fed will continue doing this until:

  • The unemployment rate drops to 6.5%;
  • The inflation rate tops 2.5%;
  • The cows come home and the fat lady sings.

The Fed’s press statement had this comment included:

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

That last part – it turns out – is very important. Stock market perma-bulls (equity fund managers, for the most part) will point to this statement and suggest it means the Fed may further still enlarge QE4 to a QE5 in the future. I suggest that’s not likely what the Fed meant (but it is probably happy to get a free lunch from any over-optimism this generates).

Just as the U.S. Congress has the “fiscal cliff” as political cover for introducing unpopular yet responsible fiscal policy in 2013, the Fed needs cover too. It will come in the form of inflation.

The cold reality is each time QE is launched, we get less wealth-effect bang for the buck, and more inflation. The following chart makes this clear. (Note: I’m using CPI because everyone is familiar with it.)

(Click to enlarge)

So when might QE4 slam into the inflation wall (as all its predecessors did)? Probably early 2014 -but it could be as early as Q4 2013. QE4 is $85B/month — only slightly more than QE2’s $75B/month. Other things being equal, we should expect an even faster rise in inflation than shown in the figure above. However, there is likely to be a major body-blow dealt to inflation in Q1 & Q2 2013 as the sobering reality of tax hikes and spending cuts hits the U.S. economy. This will be a huge deflationary force -and the Fed knows it. That’s why it launched QE3 a couple months ago, and why it is expanding QE3 to QE4 now.

The Fed’s preferred inflation indicator is the Personal Consumption Expenditure (PCE) and, since the Fed does not want to take the blame for its actions causing food and fuel prices to rise, it strips that bit of reality out and uses something called core PCE. Here’s what core PCE has looked like for the past few years — and my estimate until QE4 is switched off. Do see a rather obvious problem?

(Click to enlarge)

(Side note: to those that are observant and inquisitive, you may wonder about the shading used to depict QE2, QE3, QE4 in the figure above. I deliberately chose a color that might be interpreted as golden by some (if you think QE is beneficial), and brown by others (like me). I love symbolism.)


I’ll admit that I’m cutting with an axe here, but the upshot is that by early to mid 2014, we’ll see QE4 switched off because 2014 looks like this:

  • A real-world 5%+ inflation rate
  • Stagnant income growth
  • $5/gallon gas
  • A mythical** 6.5% unemployment rate that is really 10% or more
  • Higher taxes and lower government spending
  • A Fed that is finally and obviously out of bullets
  • A new Fed chairman (probably Jeffrey Lacker — you saw it here first).

(**I specify a mythical unemployment target because 12-13 million Americans will have fallen out of the unemployment system, and out of the labor force without a job by 2014. The real-world unemployment and underemployment rate will still be north of 10%.)

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