QE 2: are we heading into dangerous territory? – 1357

17th August 2010

It is being dubbed QE2. Not the luxury liner, but quantitative easing round two.

By continuing to buy back mortgage debt the US has resumed a form of QE-lite; a move that many see as the US government trying to stave off the risk of a dreaded double dip recession.

One of the leading bears is Keith R McCullough, chief executive of hedge fund research firm Hedgeye. Writing in Fortune magazine ,  he says: "Despite the many differences between Japan and the US, there is one similarity that continues to matter most in the risk management model my colleagues and I use at Hedgeye, our research firm — debt as a percentage of GDP.

"Now that the US can't cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing — buying Treasury debt.

"And that could lead the country to the brink of collapse."

He goes on to say: "What's left if (or when) QE2 doesn't kick start GDP growth? Should we start begging for QE3?"

Debt levels could restrict growth

6 thoughts on “QE 2: are we heading into dangerous territory? – 1357”

  1. Vegetarian says:

    Whether the ECB will go bust is probably more a political & legal question rather than an economic question at present. If the ECB needs to be injected with around 50billion Euro to handle Greek default that is perfectly feasible from a financial standpoint for the Germans and other solvent contributors. If the bond defaults spread to Portugal and Ireland then it raises the required injection, say to 150-200billion. That starts to look more heavy duty but is probably still manageable. The scale of political backlash from electorates would determine whether or not the money was provided – i presume the alternative would be the end of the Euro? Or can they just print it? Given what has happened so far it would appear that Angela Merkel at least would rather take flack from her own voters than have Germany blamed abroad for a breakup of the Euro. Also on the legal side there was also plenty of talk last year about the illegality of the various bailout mechanisms (including ECB purchase of PIGS bonds) and in particular specific cases going through Germany’s constitutional court. However that all seems to have died away too. So it seems to me at present a political question of whether the Germans would be prepared to increase their own national debt to bail out the ECB.

    Given the programme of bond purchases hasn’t worked and left them in a mess, it will be very interesting to see if the ECB will buy up Spanish and/or Italian bonds if the market turns against these countries again. The scale of bond purchases needed for these much larger economies could then throw up potential losses dwarfing the numbers being discussed at present.

    1. An Irish default would not only make the ECB insolvent but in very short order some very, very large banks and financial institutions in the UK and EU as well. Ireland and her banks owe over $800 billion, much of it to foreign financial institutions. Being already overleveraged, this would make the Lehman meltdown look like a kid’s picnic in the park. The runs on the banks would be unimaginable. Greece is dangerous, but Ireland and Spain are potentially fatal problems. 

  2. James says:

    Kafka would be proud to have invented all of this.

    Everyone knows that the debt can’t and won’t be repaid by Greece etc. Then, all the politicians agree to pretend that this cannot be true. Once this pretence is accepted, the debt is worth 100% and so there is no problem.

    Meanwhile, back on planet earth, private investors spot the flaw in the above argument and remove deposits from banks and sell bonds.

    This now means that those same politicians, who unfortunately control our tax money, have a choice:
    1. They can admit the truth, that a lot of money has been lost; or
    2. They can instruct the ECB to replace the deposits and to buy bonds, certain that most voters will neither understand this chicanery.

    They choose 2 every time. In the UK and USA, it comes by QE, so pretty similar really.
    They then create a glorious circle where the ECB offloads to the (bust) central banks.

    Not one politician even questions how this is going to unwind.

    Every time someone sees that the emperor is naked, they create a further plan to obscure the truth. I look forward to seeing how the insolvent ECB is explainesd away, but explained away it will be.

  3. Ian_jones says:

    Nothing like printing money and then pretending you are not. The BoE and US fed admitted to QE even if they tried to pursuade people it wasnt printing money. I guess once inflation in the EU reaches the UK levels (20% gas rise and 10% electricity announced today) then they might understand.

  4. Jason Aris says:

    The worlds gone/going mad, I think we are reaching the end game and when it goes the fall-out will be beyond anything we can imagine. In some ways I don’t blame the Greeks for their tax avoidance I am reaching the same conclusion myself. I pay tax for the things I need and see, not to bail out bankrupt instititions (either directly or via QE) so that they can go on a rampage forcing commodities, etc out of reach of people and earning astronomical bonus’s for it.

    Is this all a response to ‘peak oil’ with the self styled elites grabbing and cornerning as much of these commodities as they can at the expense of the rest, shades of 1776. 1789 and 1917 I reckon.

  5. PaulSpain says:

    You might want to start having a look at Spain as well,right little can of worms emerging there it just seems a matter of time till they go under have a look at this for example !!

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