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| Who says the Dems don’t like money? |
But something happened last Thursday, during the testimony Federal Reserve Chairman Ben Bernanke gave to the Senate Banking committee.
Democratic senators questioned why Bernanke was thinking of tapering the bond purchasing programs of Quantitative Easing (QE). They wondered out loud if maybe QE should continue “until the economy further improves”.
In other words, the Democrats have finally realized that not only does QE mean they don’t have to reign in the deficit—QE also means that they can expand the deficit, confident that additional debt will be bought and paid for by the Federal Reserve. Confident that additional debt will be monetized by the Federal Reserve—because after all, that’s what QE is: Debt monetization, and everybody knows it.
Which means that the Democrats have finally embraced flat-out money-printing. That’s why the Democratic senators were questioning Bernanke’s talk of tapering QE. These senators and their Democratic colleagues are signalling that they want QE to not only continue—they probably want it to expand. They want to be able to continue with deficit spending—and they want the Federal Reserve to continue monetizing that deficit spending. All in the name of “reigniting the economy”.
It took a long time for them to arrive at this place. Before, all the Democrats cared about was deficit spending—they essentially did not care about monetary policy per se. Whenever they focussed on the Federal Reserve and its chairman, they ignored the monetary policy side of the Fed’s mandate and concentrated on the jobs creation side, or else the regulatory side. That is, they questioned how effective the Fed’s policies were in creating new jobs. And they grilled the Fed (cosmetically, in most cases) for not regulating and policing the banking sector enough.
But even though Quantitative Easing started in 2008, it seems as if Democrats didn’t really “get it”. They viewed it as a way to save the banksters’ collective bacon—they didn’t see it as the way by which the Federal government could go into limitless debt.
But with Thursday’s testimony, it’s clear like a bomb blast that the Democrats finally understand what QE really means: The Federal government can go into as much deficit spending as it wishes, because the Federal Reserve will be buying the bonds that finance this deficit spending by way of QE. And now that they understand this, they are all in favor of more of it.
This is the reason-why of the Democratic senators’ questions/comments during Thursday’s testimony: The Chairman of the Senate Banking Committee, Tim Johnson (D-SD) wondered whether it might be too soon to “taper off” Quantitative Easing. Senator Robert Menendez (D-NJ) later asked, “Isn’t it still way too soon to consider any kind of policy tightening?” Senator Chuck Schumer wondered aloud about more hawkish Fed board members, and how Bernanke’s departure next year would affect QE.
The upshot of all the questioning was that it revealed how the Democratic senators implicitly realize that it is the size of QE—and not the size of the deficit or the debt ceiling—that restricts how much the government can spend.
Democrats would probably deny and dismiss this characterization. They might well argue that their concern for the size of QE purchases is so as to ensure low unemployment. But QE does not affect unemployment directly. After all, it’s a bond-buying program. It affects unemployment indirectly—not to say circuitously—by providing price support to Treasury bonds, which thereby allows the Federal government to issue more bonds without fear of rising interest rates, and thereby have more cash to spend in order to soak up the unemployment by way of fiscal spending.
It is QE and QE alone that is providing price support to the bond markets, and ensuring that the Treasury Department has a buyer of last resort for all those bonds that it is issuing to cover the debt. At this time, QE purchases amount to some $85 billion-with-a-“B” per month—over a trillion dollars per year. Which is the lion’s share of the yearly Federal government deficit.
So Democrats might claim that they want more QE in order to get more jobs—but those jobs are by way of Keynesian-style Federal government deficit spending. Viewed this way, QE is Paul Krugman’s best friend: QE allows as much deficit spending as the Democrats or Krugman might ever want.
The B-story to this narrative is the coming nomination and confirmation of Ben Bernanke’s successor.
Anti-QE advocates, such as some Republicans and most clear-eyed observers of the state of the economy, have been nearly hysterical about how Quantitative Easing creates bubbles in equities and real estate markets, and sets the stage for a serious, perhaps catastrophic debasement of the dollar. These people (myself among them) want the next chairman of the Fed to get out of the QE business altogether, and deflate all these bubbles so that the economy might crash and reset in a more or less controlled manner, as opposed to a currency panic and collapse, which (from hard experience) is much, much worse.
But now, as Democrats come to see how useful QE is in expanding Federal government spending and thereby (in their eyes) “saving the economy”, they will insist on a new Fed chairman who will continue QE, if not expand it.
Enter Janet Yellin, the vice-chair of the Federal Reserve, and the odds-on favorite to be the confirmed nominee. She is famously dovish with regards to QE, concerned more than anything with full employment. If she becomes the next Fed chairman, she will certainly not taper QE, if unemployment levels are not to her liking. And if the situation continues to deteriorate, employment-wise, she will in all likelihood expand QE, so as to tacitly provide the Federal government with room to expand its deficit, confident that the Fed will buy up all those T-bonds it issues.
That’s why Janet Yellin will most definitely be the next Fed Chairman. Bonus for the Dems: She’ll be the first woman Chair of the Fed. But that won’t be the real milestone of Yellin as Chairwoman. The real milestone will be that she’s a QE-to-infinity-and-beyonder.
Anti-QE advocates always thought that the debate about QE-or-not-QE was a strictly economic debate: Technocrats on one side, technocrats on the other, like a super-nerdy version of dodgeball. But now with the Democratic senators questioning why Ben Bernanke is going to taper off QE, and whether he should continue it and/or expand it, the issue of Quantitative Easing has ceased being a technical, inside-baseball, What-would-Gary-Gygax-say debate, and become a political issue.
Now that the Democrats have realized how essential QE is to the continued Federal government deficits, there is no doubt as to what they are going to demand: More QE. A lot more QE.
The Dems won’t want QE-IV or QE-V, or (as I’ve called it) QE-∞—no, what the Democrats will want is Super-QE. QE-on-Steroids, QE-to-the-friggin’-Moon.
And to any anti-QE argument that Quantitative Easing might lead to a collapse of the dollar, the pro-Super-QE Dems will argue that, in five years of QE, there hasn’t been a significant rise in inflation—and therefore claim that the lack of inflation during the 2008–2013 period indicates that QE cannot cause inflation and thus the dollar cannot crash because of QE.
And if that weren’t bad enough, the more populist, more irresponsible, more war-mongering Republicans (“Paging Senator McCain!”) will agree with these money-printing Dems—and join the bandwagon of Super-QE. Because more QE means more deficits with which to pay for pork and prisons and wars, without the pain of raising taxes. Which is what McCain Republicans want.
So for a significant majority of the House and the Senate, more QE—Super-QE—is something that they will want: They will lobby the Fed for it, and ultimately vote for a new Fed chairman who will explicitly guarantee that QE will not only continue, but will be expanded. Which is what Janet Yellin tacitly promises.
Once the Democrats start to seriously push for more QE over and above the current $85 billion per month levels, it will only be a matter of time before the dollar is broken.
How will the dollar break? Simple: All that cash sloshing through the system because of QE will flow to commodities, sending them stratospherically higher, the rise in commodity prices cascading throughout the economy, until rising prices become a self-reinforcing phenomenon. And since the economy is too weak to apply some Volcker-style interest rate hikes, rising prices will quickly turn from ’70’s style stagflation to hyperinflation.
You think I’m smoking righteous weed when I say this? Think about it: Once the markets realize that Super-QE has been implemented, the rush will be to get out of every paper asset, and into hard commodities and precious metals. And that, as I have argued repeatedly, is when hyperinflation will take off.
Democrats have always been a little slow when it comes to economics. It only took them five years to figure out what Quantitative Easing really means. But now that they have finally understood what the MMT crazies have known all along, the Dems are going to ride that pony into the ground—and if that means ruining the dollar and thus breaking the economy, well . . . it was all done in order to “save the economy”.
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