Back in 2002, Ben Bernanake, spoke at a gathering to commemorate 90th birthday of Milton Friedman, the dean of free-market economics. He referred to the seminal work of Friedman on Great Depression, which Friedman co-authored and said, “thanks to you, we won’t do it again.”
Big Ben tolled that he was sorry (he being in the Federal Reserve), that a depression occurred in 1930s and he will not let it happen again.
By not announcing a QE3, Ben Bernanke was simply keeping his word!
Yes, a QE3 would have ushered in an era of ‘super-uncertainty’, a tongue for depression.
The two rounds of QE or Quantitative Easing was a monetary stimulus initiated by the Federal Reserve at the instance of US government. Spawning billions of greenbacks, the Federal Reserve re-purchased US bonds from banks thereby injecting liquidity into the markets.
Rather than boosting investments in productive assets, the said money (being cheap) was actually invested in boosting consumption around the globe.
This ultimately led to a rally in commodities and equities starting 2010. With food prices shooting up, billions were dragged back to poverty. Social unrests marked the era as Arab Spring sought its soul.
But this prima facie unsustainable cycle ended with QE2 expiry.
QE3 and global hyperinflation
If Ben Bernanke had opted for a QE3, it would have kicked in a fresh cycle at a higher threshold. As experts at NIA warn, the world and US would slip into hyperinflation in dollar—the world’s reserve currency.
This anticipated rout in dollar value will spark another round of dollar sales starting from countries like China and India followed up by other nations. Result would be a monetary vacuum and a fiscal nightmare! Dollar would cook you food replacing logs and twigs, as they would be much more expensive to burn!
This global hyperinflation has not simply happened before and can prove to be something worse than depression.
We have seen hyperinflation in countries like Bolivia and Zimbabwe which made living a vegetative process. A global extension of the same...unthinkable; and that too if you care to live!
No doubt, Bernanke is farsighted and has not reneged on his promise.
What next
Ben has left the Federal Reserve rates untouched. But the decision was least surprising, given that there were nil alternatives. In fact I was surprised to see markets rebounding! My perception was that markets had already discounted the event.
The important thing is that markets felt some certainty after Tuesday’s Fed announcement; a date, a few statistics and some confidence as Bernanke announced he would spare rate hikes at least until 2013. May be that dose of certainty can be accounted for the rebound in markets.
But, with the rates down, a virtual, subdued QE3 would come into force. Credit would be cheap and banks would continue to lend. US would be identical to the proverbial frog in the boiling pot where temperature is raised one micro degree a time.
The resultant inflation would be exported and the Emerging Markets, the only ray of hope, would tighten credit situation, stalling growth.
Ben has only postponed a slow down by averting a depression.
Meanwhile, the European Central Bank is also taking the credit route. By buying into the debts of Italy and Spain, the bank is playing with fire. The credit scenario in Europe would be aggravated despite European Financial Stability Facility (EFSF) and to solve a credit crisis, a new deeper credit crisis would be created.
As published in:
http://www.commodityonline.com/news/Why-Ben-Bernanke-of-The-US-Federal-Reserve-stopped-short-of-QE3-41524-3-1.html
