If it doesn’t cause any harm,well,…

Published: September 1, 2012 6:14 am
This article received : 26 Comments

…let’s carry on then with the same treatment. This is usually a classic when you have tried everything to cure a patient with standard methods and everything fails. Or even more extreme in the House MD variation on this theme :”If it works, we were right, if he dies it was something else”. But all in all, this was the message delivered by Ben Bernanke last Friday in his defense of recent monetary actions :“The cost of nontraditional policies, when considered carefully,appear manageable, implying that we should not rule out further use of these policies if economic conditions warrant”. Basically, Ben is still ready, willing and able to to fill the ammo and fire more grenades.

Let’s start with 3 bird eye view observations on this message. First of all, as a main line of defense, it’s rather poor I think. You usually justify something by stressing the advantages (proven if you please) instead of stressing the absence of disadvantages. Two and logically as is the case with our ill patient, it confirms how little economic science knows or can prescribe for solving crisis situations. Also to that extent, QE experiments are a “long shot”. And hence 3, is it really the case that so far this has caused no negative side-effects for the patient ?

The remaining other justification for Bernanke was the continuous high level of unemployment. Also the European release on Friday was not something to be cheerful about : 11% U-rate with 1 out 4 under age 25 out of work, in some countries even 1 out of 2. Here Bernanke has a point :“Long periods of high unemployment produce enormous human suffering and waste of human talent, and also risk causing structural damage on our economy which could last for many years”. Or to paraphrase Colonel Frank Slade in Scent of a Woman :“I have seen boys like these, their arms and legs ripped off. But there is nothing like a sight of an amputated spirit, no prosthetic for that”. Next question is do we solve this by QE ? Usually labor market evolutions are at best third round effects of some economic measure. Here it should come from lower interest rates, more business loans creating business and hence in the end new jobs. So far not much evidence on this even if we admit that labor markets usually react with considerable time lags (certainly in Europe due to institutional factors such as labor hording and hysteresis). Some might counter this by claiming that in absence of some measures, the labor market drama would even have been worse. May be, but nevertheless, I for one certainly respect the argument of a lost generation and trying everything to soften this, even if it involves nontraditional measures.

Now coming to the absence of negative side effects and managing things, or being in control of the situation. Recently we have been stressing that QE risks overkilling financial markets by destroying bank activity, exactly the opposite it is supposed to do (sucking out high grade collateral). I have 2 more things to add to that

1) In game theoretic terms, QE might be a panacea for others not to implement the necessary reforms or take the necessary measures to get the structural act together. So I hope that if in case of Europe it will be announced next Thursday, it will at least have some conditionality attached to it. Quid pro quo : “I, ECB, make life easier for you (governments and banks) provided you grow up and don’t become too dependent on me. Please confirm in written and signed”. That is probably in essence what Draghi and European politicians are discussing right now to convince the Bundesbank.

2) So far inflationary pressures/expectations are seemingly modest, with the exception of commodities of course. The only thing QE – or disguised QEs such as LTRO – has produced until now is securing some cheap refinancing for banks. In the case of LTRO it probably was necessary because not a lot of maturing bank bonds would have been rolled over to the same investors. Or in case that they did, probably at a funding cost killing financial markets and spurring a new liquidity crisis. So the extra money serving for the roll implies that this extra money not automatically ends up in the real world, moderating inflationary pressures. For now, that is. Once it has effect – through leverage – these price pressures caused by too much money chasing too few goods might create some problems in a couple of years from now. Quid next ? Do we dispose of a plan B or a nontraditional exit plan ? It certainly will be a nontraditional event in view of the trillions of $ and EUR which will have to be taken out of the system. But let’s have some Belpop history having the final word here : “I know the rules, I know the game, but I never played, played this game before”

26 Responses to “If it doesn’t cause any harm,well,…”

  1. Nacht Und Nebel says:

    This is my belief

    -asset inlation is not inflation but the bad speculator forcing poor children to starve
    -Herman will save me
    -The house prices in Germany are on the up because of demand and not because of alot of free money
    -Stock prices in America are high because of a fundamental sound economy not because of free money
    -QE wil solve the unemployment problem in the West
    -Ben will solve the mess created by Greenspan when he printed alot of free money .The remedy is :printing more free money
    -we have deflation because the banks are not lending money.Not because they know that lending money now will make them lose money in the near future because of asset and real estate bubbles.
    -negative interest rates are here for the greater good
    - we can tax ourselves out this mess if negative interest rates don’t help
    -we have learned our lessons from the past


  2. Nacht Und Nebel says:

    Heil,Ben,Herman and Elio,Heil


  3. Nacht Und Nebel says:

    and yes I to am a free love believer as long as it holds a little bit of quid pro quo

  4. Theo says:

    Central bankers are shitting in their pants… not because they are afraid the financial system will collapse, rather because they are afraid they will become irrelevant.
    Central bankers do whatever they can to release liquidity under any shape or form their mandate allows just to keep themselves alive !
    Even without liquidity, the financial system will survive (and I know this is an idea many cannot fathom at this point )… but CBs will not be part of it. And this is the whole point of releasing liquidity.

    Faced with shortage or even lack of money, societies start to organise themselves very quickly and they revert to a credit system which has existed for much longer than you might think… and one you never learn about in economics classes.


    This is also a threat to governments in socialist socio-economic model countries.
    A real free market of labor and skill gets established, which soon makes a mockery of governments supported labor market and kept in place by trade unions… and all the bullshit economic theories about the value of labor based on Marx musings.

    Let’s see the successes of dual mandate of CBs !
    Indeed, they are damned if they do, and damned if they don’t
    When you create a myth in order to control others… there comes a time when the myth controls you

  5. Theo says:

    btw I know the article talks about this as barter, but it is not. The barter economy is just another myth… very much like the lost and never found city of Atlantis

  6. Nacht Und Nebel says:


    Are you suprised by the actions of the Spanish?I am not but then again I am but a dumbass like most Spanjards.I can give you the definition of what money means to a dumbass.
    Money is a piece of paper that says You have worked X hours at X times the figure written on a piece of paper an hour.With that money I buy the things I need to survive Food Shelter and Warmth.If I work hard enough I will have some paper notes.left over that I will save for later.
    All these paper notes get collected and stored by the gaurdian .If the guardian of these paper notes store tells me that for the greater good he will print 2X the amount of the paper notes he currently has I can do but one thing and that is to ask for my paper notes back and to buy as many cans of Heinz baked beans and some fuel to heat me.
    You my friend are starving children says the guardian of the paper notes to me and you are getting rich on the back of the starving
    No I answer to the guardian I worked for that note X times.Yesterday I could buy x cans of Heinz baked beans for it.And now I still have the same amount of Heinz baked beans so I am not richer you made the rest that much porer.

  7. Theo says:

    @ NuN

    My inner macro goddess smirks while overdosing on divine Italian liquid produced from carbon dioxide ( bubbles ) using her carbon credit points

  8. Nacht Und Nebel says:

    Woke up this morning and it seemed to me,
    that every night turns out to be
    A little more like Bukowski.
    And yeah, I know he’s a pretty good read.
    But God who’d wanna be?
    God who’d wanna be such an asshole?
    God who’d wanna be?
    God who’d wanna be such an asshole?

    Well we sat on the edge of the river,
    the crowd screamed, “Sacrifice the liver!”
    If God takes life, he’s an Indian giver.
    So tell me now why, you’ll tell me never.
    Who would wanna be?
    Who would wanna be such a control freak?
    Well who would wanna be?
    Who would wanna be such a control freak?

  9. Nacht Und Nebel says:

    Well see what you wanna see. You should see it all.
    Well take what you want from me. You deserve it all.
    Nine times out of ten our hearts just get dissolved.
    Well I want a better place or just a better way to fall.

    But one time out of ten, everything is perfect for us all.
    Well I want a better place or just a better way to fall.
    Here we go!

    If God controls the land and disease,
    keeps a watchful eye on me,
    If he’s really so damn mighty,
    my problem is I can’t see,
    well who would wanna be?
    Who would wanna be such a control freak?
    Well who would wanna be?
    Who would wanna be such a control freak?

    Evil home stereo, what good songs do you know?
    Evil me, oh yeah I know, what good curves can you throw?

    Well all that icing and all that cake,
    I can’t make it to your wedding, but I’m sure I’ll be at your wake.
    You were talk, talk, talk, talkin’ in circles that day,
    when you get to the point make sure that I’m still awake, OK?

    Went to bed and didn’t see
    why every day turns out to be
    a little bit more like Bukowski.
    And yeah, I know he’s a pretty good read.
    But God who’d wanna be?
    God who’d wanna be such an asshole?

  10. Nacht Und Nebel says:

    Daniel read the paragraph
    He read until the words ran out
    It said we’re all in trouble now

    Poison in the juice carafe
    We drank until our thirst ran out
    Oh no, we’re in some trouble now

    Everyone wants to be a perpetual motion machine
    We all try harder as the days run out
    We all try harder as the days run out
    We all try harder as the days run out

    With your teeth to your lips
    And your hair to the ground
    Well, you hear the fish and they’re making this sound
    Saying, “we just want to go on walking around
    And feel what it’s like to fall down”

    Patrick ran the race
    Yeah, he ran until the tire ran out
    Oh no, i’m in some trouble now

    Tried to kick it over
    I tried until the juice ran out
    Oh no, we want more trouble now

  11. Nacht Und Nebel says:

    With your teeth to your lips
    And your hair to the ground
    Well, you hear the fish and they’re making this sound
    Saying, “we just want to go on walking around
    And feel what it’s like to fall down”

    I saw

    Everyone wants to be a perpetual motion machine
    We all try harder as the days run out
    We all try harder as the days run out
    We all try harder as the days run out.

  12. Christof says:

    About CBankers shitting their pants and being afraid of “noble metal”, probably. Is gold or a gold standard an alternative ? May be, but history shows that even these kind of regimes serve as a temporary panacea and usually don’t last long
    On dual CB mandates : i have always argued that the FED dual mandate was a contradictio in terminis
    A real free market, a threat ? A threat indeed, big question mark here is to what extend and how you define freedom
    Even without liquidity the system will survive ? No, and a free market without liquidity won’t survive. It might but you are gonna destroy some things you afterrwards might regret.

  13. Nacht Und Nebel says:


    The concept of freedom.Yes,there are two conceptsand they are based on religion.
    You,have the western kind,it is based on the concept of obligations.You must do this or face eternal damnation.
    And you have the eastern kind.You are free to choose but you are not free from the consequences of your choice.However when you have choosen wrongly you can always start again in your next life.
    Somehow I like asian concept of freedom better.

  14. Theo says:

    @ Christof

    I have commented before that we have a financial system in place which moves between alternate periods of fiat money and gold standard. Eventually either one collapses for the same reasons… as far as I can tell. The euro standard is a good example

    gold standard… dollar standard… euro standard… nothing wrong with establishing any type of standard. the problem as always is making sure the rules of the standard adopted are not broken … or stretched for political accommodation purposes. as it was the case in Argentina and now the euro zone
    A currency board system seems to work. Just as free banking in Sweden worked very well too.
    When forced to cooperate with each other in order to keep the flows in the financial system going, I’m sure bankers would find a way to do just that. The CB nannies are only busy changing soiled nappies and not encouraging the kids to develop their social skills. Keep them in a perpetual kindergarten of sorts.

  15. christof Govaerts says:

    I tend to agree with most of your last reply ; the currency board idea is probably also inspired by the successes of Hong Kong ? Mind you, they interfere as well, just ask the “smart” investors in 1997/98 who double played the the Hong Kong market by shorting stocks and shorting the currency : either rates had to go up to defend the currency peg which would have led to an equity correction, either the peg was given up. So they thought they had to win somehow. What they didn’t expect however that the HK Monetary Authorities started shoring up the stock market, at 1 point almost owner of 40% of the entitre market. In the international ranking of competitiveness and openness, HK droppped out of the TOP10, even Milton Friedman was furious. Currency boards do not guarantee political independence is the point I am trying to make here.

  16. Theo says:

    @ Christof

    Oh, I know very well what happened in Hong Kong in 1997/1998.
    Yes there were those in London and New York who thought they were very smart, trying to force HK to abandon the dollar peg… California economics professors are still trying to sell the idea to Honkongers that they should have dropped the peg back then.
    In the end, the HKMA did what they had to do to defend the interests of the people of Hong Kong, not the interests of some people in London or New York. The HKMA did it with the reserves they had, not with money they had to borrow or print ! In such a system there is no money printing !!! Like I wrote before, HSBC became a pariah and had to move out
    I don’t have to tell you who came out as a winner from that fight.
    It is the same now – lots of inflation from dollar peg
    A currency board is free from political intervention. The HKMA actions are not for the benefits of politicians, rather for those of the people. Whatever actions the HKMA took were also not dictated by any politician.

    But to answer your question – No, I wasn’t thinking of HK as an example.

  17. Nacht Und Nebel says:

    The Global Burn-outnomy of the Fed and the ECB.:

    The real impact of ECB policy is to subsidize debtors and starve creditors ( private investors and pension funds )of yield to keep the ‘debtmobile’ going , fueled with extra taxes.
    The result is that companies have lack of pricing power and will replace lost good quality free cash flow with more but lower quality free cash flow through acquisitions with free lunch money.
    Results companies are getting weaker in the future.
    Stock investors are going to pay the price twice when interest rates go up.because yiedls go up and the quality of earnings of the companies are lower
    Long term bund investors are going to pay the price twice when interest rates go up.Hot potatoing the banks and pension funds once again.
    In this game for the quest higher yield higher risk the pain will cause even more pain when the next down turn hits.
    The only way out is are lower taxes thus revenues loss for government meaning they will have to save.Impossible if you ask me even knowning that a balanced governmental budget would also mean healthy banks.

  18. Nacht Und Nebel says:

    Save the Rain Forest!! Stop using trees as money paper!

  19. Nacht Und Nebel says:

    Stop this madness!I do not want to see little wienered Jean Luc the plumber lookalikes running naked because they will lost their shirts while investing in flemish real estate.

  20. christof Govaerts says:

    I know curiosity killed the cat in the end but you are teasing me and I am anxious to know which CB example you had in mind. And to get this straight : I agree with what the HKMA did in 1997, not serving the opportunistic interest of some people in London or NY. And indeed it makes a difference whether you do it with fx reserves (which you earned) or by printing stuff out of the air

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