Money is funny in Bernanke's World

The world awaits what its most powerful resident will decide. QE or no QE? QE, in case you've missed it, is short for Quantitative Easing, which is a fancy way of saying money printing by the central bank. Everyone is speculating on whether the Bernanke Fed will give the market a big cash fix.

Then again, it's probably a question of how much, not if. If bank analysts are right and the markets have priced in huge QE, you wonder where the market would go without it (down).

But hold on.

What can QE actually do? What is it trying to achieve? Let's walk through it. The Fed has short term interest rates at zero percent. They can't go lower, unless they go negative. Now the idea of paying people to borrow money sounds absurd (which is what having negative interest rates implies), even when the current environment of nominal rates below inflation is doing just that.

target="_blank">mises.org, "At the zero rate, the Fed has put itself in the position of a first-time water skier who has the tow rope pulled up against his Adam's apple." If you aren't familiar with the phenomenon, you should know it ends badly for the skier. They either fall backwards from the sudden lack of speed, or they get pulled forward for a face plant as the slack picks up again.

Which outcome – falling backwards or face plant – would you prefer to see? (Your editor has managed both in a single tumble.)

So if money can't be printed in the name of lowering interest rates, it will be printed in the name of... printing. How is that supposed to get the recovery going? Is it supposed to reliquefy the debt markets? Is it supposed to devalue the US dollar to spur exports? It all seems a bit of a punt and hope strategy. No real aim.

But even without aim, there is direction. And money printing always ends in the same way: inflation. The funny thing is that Bernanke has kind of skipped over the concept of using QE to get debt markets going, walked straight past devaluation of the dollar to spur exports (which is a politically sensitive topic right now) and actually stated inflation as the goal!

Yes, by decreasing the dollar's purchasing power, he hopes to get people to spend more. Does that make sense to you? Only if you're a Keynesian.

They think that the problem ailing the US economy is a lack of demand. Rising prices will spur people to purchase more out of fear from having to pay more tomorrow. Sounds like a wonderful way to run an economy.

The concept struggles in a number of ways. Our favourite is the idea of "sticky wages". Oddly enough, Keynes had to think of it in order to make his theory work, even though it argues against it just as much.

If wages are "sticky", meaning they don't change quickly, then inflation will be a huge burden for those stuck on incomes that don't change quickly. Prices will rise much faster than incomes. Income earners will have less purchasing power from their income and will be able to buy less, not more. Of course, the rich will be fine with their savings to spend. The poor will struggle the most.

Flash Crash 2

You may not have heard about it, but there was another flash crash. target="_blank">refusing to proceed with foreclosure evictions for Bank of America, unless the bank can prove the foreclosure was proper and legal.

And after having bailed out Bank of America (BoA) in an impressive list of direct and indirect ways, the Fed is now

What has us bothered about all this is where the suing will end. The homeowners will sue the banks, the mortgage backed security investors will too, but is the bank the end of the line? Maybe not, because the banks outsourced much of the legal work to people like target="_blank">This article suggests so.

In the right direction?

Labour market data from the US continues to look remarkably bad, despite being impressively fudged. US unemployment is back at 10% according to target="_blank">data is a joke and a large number of analysts have picked up on it.

If austerity measures play out favourably in Europe (although it's not working out so well in France at the moment), this will make things interesting in the US. It will be the Keynesians vs. the Tea Partiers with Republicans eager to not embarrass themselves. It should be good fun to see what policy comes out of that mess.

Treasury Secretary Timothy Geithner is a Pelican

Some would call him a goose. Either way, he is a complete plonker. "It is not going to happen in this country." Geithner told Silicon Valley business leaders of devaluing the dollar."

In this country? What on earth? Where will it happen then when the Fed revamps QE? And hasn't it been happening for years now anyway?

Secondly, Geithner is now at odds with most of the people who believe in him. A weaker dollar is supposed to spur exports for a US recovery. That is what Keynesians are banking on. But here goes Geithner again:

It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive," Geithner added. "It is not a viable, feasible strategy and we will not engage in it."

The whole world is engaging in it! And it has http://news.yahoo.com/s/ap/eu_france_retirement_strikes;_ylt=AtNqzDLi1SCepv_iXLnjT8qs0NUE;_ylu=X3oDMTJ0NjRlNmRtBGFzc2V0A2FwLzIwMTAxMDE5L2V1X2ZyYW5jZV9yZXRpcmVtZW50X3N0cmlrZXMEY3BvcwMyBHBvcwM4BHNlYwN5bl90b3Bfc3RvcnkEc2xrA2ZyZW5jaHJldGlyZQ--" target="_blank">tear gas featured. It may seem like nothing new, but the students causing the ruckus are protesting about something that won't affect them for about 40 years! And the retirement age is only being

On the other side of the channel, up to 500,000 public jobs are to go. UK government "departmental spending reduced by an average of 25 percent" and defence is facing some rather odd reshufflings, including an aircraft carrier which will immediately be target="_blank">demonstration of how government subsidies end. Having provided massive incentives to build solar power installations, the Spanish government is leaving its formerly prosperous dependents high and dry in the name of austerity. More than 50,000 solar power entrepreneurs got sucked in by the government's guaranteed above market price for electricity and now face financial ruin. "You feel cheated, we put our money in on the basis of a law," one says. Oops.

Correcting past politician's mistakes is something politicians rarely spend their valuable time doing. It's usually just more laws and spending. So the question is if modern politicians have the balls Lady Thatcher did. And even then, will austerity really work?