Former White House chief of staff Rahm Emanuel’s greatest contribution to American politics may turn out to be this bit of wisdom: “You don’t ever want a crisis to go to waste.”
The world has had its far share of major crises over the past month, so we can count on governments not to let all this global pain, suffering, strife, and turmoil go to waste. Tumult in the oil-rich Middle East and earthquakes and tsunami in Japan are laying the groundwork for the next wave of quantitative easing: QE3.
Few things are more politically convenient and economically disastrous than governments printing easy money. Yet that’s what we can expect during the next few months. In his first memorandum since being appointed chief economist at Denmark’s Saxo Bank, Steen Jakobsen says we should expect an alarming divergence between the behavior of private investors and consumers and the actions of their G20 governments. Investors across Japan and the Middle East are retrenching, essentially increasing what Jakobsen calls their “home bias.”
Their governments, as well as the United States – the destination of much of their investment yen and riyals – will use such retrenching as a reason to create more and more paper money. “The price for this live version of printing Monopoly money is to distort the price function of most asset classes,” says Jakobsen. “Eventually [such printing] sets up the day when the gravity of insolvency outweighs the short-term gains offered by low rates.”
You would think we would have learned by now that massive liquidity injections aren’t the cure-alls they were described as during the early stages of the global economic crisis. America justified racking up trillions of dollars in debt in order to “stimulate” the economy. More than two years later, the economy is still waiting for that jolt while the nation sinks deeper into debts it won’t be able to repay.
The Federal Reserve’s second round of quantitative easing (popularly called QE2) is slated to end at the beginning of this summer. Jakobsen predicts that the Fed and the White House are already laying the groundwork for QE3 in a scenario that he likens to the feeling you’d get if you watched the trailer for “Lethal Weapon 25.”
To be sure, the initial effect will most likely be what politicians who influence monetary policy always desire: An upswing in the stock market, lower interest rates, and inflation kept at bay. But the political expediency of taking advantage of natural disasters and Arab revolutions won’t eliminate the long-term effects of pouring more easy money into an already deluged system. Says Jakobsen: “The high levels of unemployment, rising financing costs, and the unwillingness to deal with de facto insolvency is, unfortunately for incumbent politicians, now a reality for their voters.”
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