Niall Ferguson and that British penchant for understatement hit Ben Bernanke right in the quantitative easing:
If the Fed’s mandate were to juice the stock market, Ben Bernanke would get an A. Since the last Jackson Hole meeting a year ago, the S&P 500 is up nearly 22 percent. But since the Fed’s mandate is to achieve price stability and full employment, the grade is B- at best. True, inflation is—officially at least—around 2 percent. But unemployment is stuck at 8.3 percent. If I’d bought assets worth nearly $2 trillion, I’d be a tad disappointed by that.
Ferguson also mentions that figure I keep allowing myself (forcing myself?) to forget, that QE1 & QE2 led to a “threefold increase in the monetary base.” When that money starts to shake loose, to move around, to pick up “velocity,” as the economists say, that’s when the trouble begins. Bernanke — or his successor — will have to very quickly Hoover up those two trillions of dollars, before they bring back double-digit inflation.
The trick is in execution, and what it will mean for our future borrowing costs.
The Bearded One has been “twisting” short-term Treasuries at a super-low interest rate for long-term Treasuries at also super-low interest rates. Should job growth ever return, he’ll need to sell those back to the public, to suck the excess cash out of the system.
But how effective will his Hoovering be? That’s an awful lot of debt to be auctioning off, at a time when Congress will probably still be borrowing a third to a half a trillion dollars a year. Who will buy up Bernanke’s low-interest, long-term Treasuries, while the actual Treasury will be auctioning off shorter-term notes at higher interest rates? The Fed will have to offer steep discounts to secondary buyers — limiting his ability to protect us from a nasty bout of inflation.
I’m reminded of Princess Leia’s complaint under heavy fire from Stormtroopers in the Death Star’s detention block. “This is some rescue! You came in here, but didn’t you have a plan for getting out?”