Money Printing is “wealth creation through value destruction”

Excerpts from a great piece by Jon Markman, published by MarketWatch:

The basic problem of QE is that it is not being honestly explained by Fed officials. They are trying to describe it as normal — one called it little more than a 75-basis point rate cut.

The truth is that QE is the subprime of monetary policy. It’s a last-resort borrowing option with a balloon payment you hope will never come due. It provides the money for a spending spree on non-productive assets — the government equivalent of a new kitchen and speed boat — but not the means with which to pay it back. QE cynically creates a false sense of national wealth that will later be yanked away like a foreclosed home in the California desert.

One of my sources in the fund management world used to describe the securitized mortgage market that underlay the mid-2000s housing bubble as “gilded assets, fraudulently conveyed.” He meant that the securities were pieces of junk “gilded” with shiny paint to make them look attractive — and then sold to fund managers under a deceitful narrative.

This fund manager called me again this week to argue that QE is much the same: Fake money wrapped in a lie that the effort will help the U.S. create jobs. The manager argues that there is no independent academic or practical evidence that this is true, but the Fed and the Administration keep repeating it because they have run out of other options.

If war is ‘’diplomacy through other means,” paraphrasing Von Clausewitz, then you might say that QE is wealth creation through value destruction.

But if something cannot happen, then it won’t. What is happening instead is QE is being thrown for a loop by two other unwelcome events.

First is the renewed debt crisis in Europe. Fears on the continent have led investors are dump euros and buy dollars. That’s exactly the opposite of what the Fed wanted and expected.

Second, a key stated reason for QE was to lift U.S. inflation expectations. This has worked faster than Bernanke expected. Since credit hates inflation (lenders don’t want to be paid back with cheaper money), investors have gotten out in front of the Fed and sold government, corporate and municipal bonds like mad. And what happens when bonds go down? Their yields go up.

This is a problem because when a country’s bond yields go up, they attract overseas investors who must buy dollars to acquire them. This is another force pushing the dollar up — and since a rising dollar has typically catalyzed a decline in stocks in the past few years, we have another highly destabilized element in the domestic economy.

QE has essentially created a Catch-22, which is appropriate I suppose. The Fed wants U.S. investment confidence and equities to go up. But its action perversely pushes up the value of the dollar, which has a repellent effect on stocks!

I know — this makes my head hurt too. If I had to guess, the cycle will break when anger over QE2 is so intense that Fed governors start to make comments that lead market participants to believe the total effort might amount to less than $600 billion — a huge contrast to current expectations that it could exceed $2 trillion.

Money printing to lower the value of the dollar is being offset by the flight to the dollar because of the Euro crisis, and is causing smart investors to sell government debt because they do not want to be paid back in dollars worth less than the ones they loaned the States and cities.

Add to the government debt sell off the inflationary impact on commodity prices, and that money printing is really just allowing investors to use access to cheap dollars to invest abroad — which is now widely understood — it is all combining to make a mockery of the Fed’s claim that it’s printing money to create jobs. For example, here is what Bloomberg reported a few days ago:

“I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an Oct. 19 speech…

Fisher said “far too many” large corporations told him that “the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad.” He didn’t name the companies.”

Another interesting and alarming data point raised by Markman is that the market expects the Fed to print $2 trillion — not the widely reported $600 billion.

It’s the new Obama-Bernanke stimulus that could trigger a huge municipal and state funding crisis.

A crisis which is being rumored to be solved with — you guessed it — printing more money by the Fed and handing the newly printed dollars over to, oh, I dunno, say Philadelphia which just had it’s financial rating lowered.

You have to wonder just how desperate the Fed is, and for what reasons, that they are printing so much money and taking such a risk with the world economy.