Ben Bernanke, the Apprentice-Sorcerer

Let’s take a long look at the Fed’s Quantitative Easing, or QE, that we’ve been talking about regularly, to really appreciate its importance and meaning. By looking at this graph, we can see its implementation after the crisis hit, on September 15, with the Lehman Brothers bankruptcy. Prior to that date, the Federal Reserve held around $500 Billion in Treasury bonds, and today, it holds around $2 Trillion of them, an increase of $1.5 Trillion. The Fed wasn’t holding any mortgage-backed securities (MBS), and it now holds $1.2 Trillion of them. Since the crisis started, the Fed has thus acquired from the federal government (Treasury bonds) and the banks (MBSs) a total of $2.7 Trillion of assets (1.500 + 1.200).

The Fed’s actions have insured that the State could continue borrowing at a very low rate (a little above and sometimes below the inflation rate) and that the banks could get rid of their toxic real estate debts which are filling their balance sheets. The initial bet was that, with recovery happening, this buyback program would be stopped without any consequences... but there is no recovery happening!

As we know, these $2.7 Trillion asset buybacks were made possible by the creation out of thin air of that amount, with the « monetary press ». $2.7 Trillion without any real counterparty asset, based on neither any goods or services... in other words, counterfeited money made legal because it’s issued by the central bank. At first, the Fed was explaining that its interventions were sterilized, in that an equivalent amount of money was frozen (with banks increasing their deposits at the central bank). That has never been credible and, today, the Fed isn’t even talking about it anymore.

Just like the « Apprentice-sorcerer » in Fantasia, where magic brooms are multiplying and getting out of Mickey’s control, those $2.7 Trillion are seeping through the economy and creating bigger and bigger bubbles, notably on the Dow Jones and the Nasdaq, but also outside the United States. With all the leverage on financial products, this $2.7 Trillion becomes a much larger sum... Bubbles are getting bigger, prices do not correspond anymore to the real economic conditions, they become erroneous and provide false information, which make even less possible a real economic recovery. On the contrary, those monetary manipulations have the makings of a new crisis.

And this race is gathering momentum. The third QE plan, started in December 2012, amounts to $85 Billion a month ($45B for Treasury Bonds and $40B for MBSs), or exactly $1.02 Trillion a year. By comparison, the U.S. GDP is a little over $15 Trillion... So the Fed’s interventions are big enough to influence the whole of the economy. For the moment the Fed is barely keeping the economy afloat, and Bernanke can’t even taper these monetary injections, as he had promised. Just as it is with drugs, the addiction is very strong, which will make a return to reality that much more violent.