Is the Bank of England closer to launching another quantitative easing programme?
At the start of 2011, the British pound (GBP) was one of the best performing currencies supported, in part, by speculation that the Bank of England (BoE) would begin raising interest rates.
Ben Bernanke Conducts an Economics Demonstration….
Standing behind a lectern in front of a distinguished group of economists, Bernanke explains his maneuvers. He pulls out a good sized, clear glass vase and sets it atop the lectern, explaining, “This vase represents America’s monetary system. It seems empty but it is not. In fact it is full to the brim with air molecules. These molecules represent the Fed’s every day monetary function, creating money out of thin air and placing it in circulation. How much more monetary function do you think we could put into this vase?”
An economist raised his hand and said, “None I suppose. It seems the vase is pretty full of air right now.”
“Ah,” exclaimed Bernanke as he pulled out a bag of river stones. “But what if these river stones represented stimulus?” He neatly placed stones one atop the other till they filled the vase. “You see, we can fill this economy to the brim with stimulus and it does not overheat to create hyperinflation. But now that stimulus did not create the desired economic effects, is the vase full?”
A colleague raised his hand and stated, “It appears to be full but about to start emptying because the Chinese are beginning have stopped buying our short term debt.”
Bernanke determinedly remarked, “Yes but with unrest stirred up by an Arab Spring, a bit of European unruliness, and a horrific tsunami, we have a mixture for reserve currency absorption.” He then pulls out a jar of small round pebbles. “These pebbles represent Quantitative Easing.” With that, he pours the pebbles into the vase and begins to gently shake the vase letting the pebbles penetrate the crevices of the larger river stones until all have filled the empty spaces. “With quantitative easing, we are able to fill the longer tranches of debt, pushing out the treasury maturities beyond a year. Now does it look like our vase is full?”
“Seems so,” states a dissenting Fed board member. “The markets are now beginning to wane and more countries are beginning to question their holdings of U.S. dollars.”
“True!” exclaims Bernanke as he pulls out a pitcher of little steel BBs. “But what I have here is QE2.” With that, he pours the contents over the vase and gently shakes the BBs into the crevices between small pebbles and larger river stones, until the entire pitcher of BBs finds their way into the vase. “As you can see, I am able to push more and more of our nation’s debt into the out year treasuries, all the while propping up the markets, and yet we have no hyperinflation. Is the vase full now?”
“Definitely.” Remarks a marketeer as he reacts to Bernanke’s remarks that there will be no QE3 by pulling out of the market, sending it south. Sensing a potential slide into deflation, Bernanke reaches down under the lectern and pulls out a pitcher of sugary white fine Florida sand and begins to pour it over the vase, shaking the sand into the tiny crevices left in the vase, then waves his hand over the vase telling the market that interest rates will hover at zero for the next two years. “You see, I have more tricks up my sleeves. I call this Operation Twist. By this concurrent Fed and Treasury action, I can shove more and more of America’s debt way out into the treasury curve without hyperinflation.”
“But no one else is buying the debt and you are talking about creating even more debt by buying into the European’s crisis. Won’t this finally create hyperinflation?” shout the prime metal buyers as they watch the market tank and their metal prices dropping.
Ben Bernanke Conducts an Economics Demonstration….Pg 2 of 2
“Aha,” exclaims Bernanke gleefully as he pulls out his last pitcher containing crystal clear water which he promptly pours over vase and it seeps into the last known air pockets within the confines. “You see by packing the out years full of debt, I have effectively made more room in the early periods for a bit more room to conduct QE3. Call it by any name you want but the Fed will solidify Europe’s crisis and shore up America’s failing economy as long as I have space in the vase and the dollar does not hyper-inflate. To do otherwise would be to subject the banks to deflation and collapse.”
(Soooo…Europe may breathe a sigh as the can kicks further down the road, the markets may have a mini rally, the metals may trail off for a bit as other short term hedges seem a better bet, and then what? Your vase really does seem to be full now Dr. Bernanke.)
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