Saturday, 6 November 2010
QE2 explained well by Bernanke
Banzai (zerohedge) sees quantitative easing QE2 as new disaster and hopes taht we will get a cover of Time that could be explained as a contrary indicator.
The resistence against QE2 is huge and there is a seemingly never ending wave of new stories that the world will perish and that we will end up in an inflationary hell.
Still the markets reacted favourable om the gospel of QE2 while almost nothing new news was added by the Fed.
Jim Bianco thinks that the clear and loud explanation of Bernanke in the Washington Post explains the favourable reaction of the markets:
"This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion".
So the Bernanke put is now really formalised.
I think the positive reaction of asia did help the markets also. Asia/ Latin America (!) cry wolf and want promises of the US that they will not continue with more QE2, but in their heart they know better. When they really want to export so much to the US they must carry the losses like a man on their dollar currency reserves.
Will QE2 become a kind of Titanic as more and more people believe? Defintively not when that QE2 is not becoming too big. $600 billion is almost nothing for the size of the US economy and will not lead to a measurable rise of the inflation.
The balance sheet of the Fed will then remain smaller than that of the ECB and that bigger balance sheet is not yet leading to hyperinflation in Europe. When QE2 will rsie above $1500-2000 billion, then I start to believe you will see somewhat higher inflation because of too much QE2. However, i think that $600 billion will be about enough to get the economy growing fast enough to get lower unemployment rates. So we are going more into the direction of Goldilocks than Weimar.