In a month of grand measures, Ben Bernanke came out of the monetary closet and announced a string of homeownersexually-stimulating parties by buying up $40 billion of MBS a month.
The key points:
- Of $40 billion worth of mortgage securities
- Every month
- From now
- Until the crisis is over
- And beyond, because
- “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens”.
This is in addition to:
- Operation Twist’s purchases of $667 billion; and
- A de facto commitment to holding interest rates constant until 2015.
All this is Ben Bernanke’s way of saying “I don’t give a foxtrot about inflation”.
Which is also a way of saying to the world “if you want to maintain the value of your dollar investments, then best you soak up the extra liquidity once the Americans are done stimulating themselves with it”.
Unlike Europe, America has made absolutely no commitment whatsoever to sterilise this printing of money*. Mainly because Europe’s objective is to prevent countries from going into default through high borrowing costs; whereas the US approach is to get some economic upswing before the elections in December.
In my head, I have an Austrian gentleman, from his school of economic thought, saying:
“Ze principal flaw in ze Keynesian school of thought is ze idea zat long term full employment can be achieved through constant increases in Aggregate Demand.”
Which is an elegantly Austrian way of saying:
- you have a Central Bank that starts to buy things; so that
- there is more money released into the economy; so that
- people have more money to spend; so that
- they feel more comfortable spending it; which, in turn,
- increases Aggregate Demand; which, in turn
- incentivises firms to hire more people to meet that demand; thereby
- reducing unemployment.
But the problem with all of this is that you cannot control what people spend money on. So instead of buying just the one car that he needs, a gentleman buys three cars (a Chevrolet by day, a Mustang by night, and a fancy italian one for his garage). This increases employment in the car sector.
But eventually, even this gentleman will stop buying cars. At which point, there is less Aggregate Demand, so employment will start to fall in the car sector.
At which point, the Central Bank steps in and starts to increase the amount of money around because they want said gentleman to buy more cars in order to get more jobs going in the car sector again?
Sounds like mass delusion.
*Sterilising money supply – when the Fed/ECB increases purchases, it also increases the amount of money that gets deposited with it (ie. by increasing capital requirements (either legislatively or through incentivising interest rates) for the commercial banks, who have to lodge a portion of the deposits received from the public with the Fed/ECB).