Is November 3 the planned kick-off day for QE2?

By October 24, 2010Economics

There was an interesting read on ZeroHedge a few weeks ago. The article made the case for announcement of a $3 trillion wave of Quantitative Easing starting on November 3 — the day after the US mid-term elections, and also the date of the next meeting of the Federal Reserve Board Governors. Since this provocative article was published, other estimates for “QE2” have been as high as $4 trillion and even $7 trillion. In other words, the public policy debate appears to no longer be about “whether“, but now entirely about “how much“. Shocking.

Here is the distilled digest:

  • Quantitative Easing is where the Federal Reserve buys the debt of a central bank.  However, when banks can borrow money at zero percent, and there is still insufficient liquidity in the economy to foment sustained economic growth, Plan B is to inject even more liquidity, only this time the theory is that a large portion of the money will go right into buying assets, e.g. equities in publicly traded companies, as some believe has recently been the case.
  • In theory, the stock market goes up. As a result, people feel wealthier and spend more. In the process, the increase in nominal income also gets taxed which is good for under-reserved state and federal coffers that have seen their tax base get hit hard since 2008.  The risk with this strategy is that the world calls into question the integrity of the US dollar as reserve currency.  After all, Zimbabwe has had the best performing stock market in 2010 but unfortunately the Zim dollar is effectively worthless.

To be clear, the US is no Zimbabwe. The comparison is relative, not absolute.  However, even so, the risk of holding large amounts of currency-based savings would rise considerably if QE2 is activated on the indicated scale.  For calibration, here is one visual rendering of what a $3 trillion Quantitative Easing might look like in terms of the Fed’s balance sheet:

Sooner or later, something has got to give. There are two major schools of economic thought on stimulus.  Someone once summarized them this way:

  • Keynesian economics = over the long-term, everyone can have a free lunch.
  • Austrian economics = over the long-term, there are no free lunches.

I personally subscribe to the latter view and believe that deficits do matter and that 40 million people on welfare and 17% U6 unemployment is a train wreck.  The great global reset is coming one way or another.

So what exactly are we stimulating anyway?
Last week, the Daily Beast conducted their Innovators Summit.  There was a panel discussion with economist-journalist Niall Ferguson where the panelists discussed the implications of fiscal and monetary stimulus. Here is a salient clip:

The gist is this: in a global economy, QE2 will not only stimulate the US economy, but rather capital flows will be felt all over the world and would be likely to manifest themselves in emerging economies and rising prices for commodities.  I could not agree more.

The G-20 meeting did not exactly end in harmony
One important development to watch has been the G20 discussions.  In the meantime, the G20 meetings in South Korea wrapped up over the weekend and published a communique.  Read literally, one would conclude that there is consensus and that the central bankers are in alignment on the game plan.  Unfortunately, coming out of the G20, there is one quote from German Finance Minister Rainer Bruderle, that seems to suggest polar opposite views on the merits of QE2:

“I tried to make clear that I regard that (QE-2) as the wrong way to go. An excessive, permanent increase in money is, in my view, an indirect manipulation of the exchange rate.”

The UK and Germany appear to have opted for the path of austerity and fiscal control. France is on a similar trajectory in spite of massive strikes.  The US, by contrast, appears to be heading in the opposite direction.

Implications for Domain Investors
In summary here is where I think we stand:

  • The stage is being set for QE2 — probably right after the mid-term elections. It may involve trillions of dollars in newly-minted currency — backed by nothing and borrowed from the Federal Reserve.  Austerity could likely still save the US Dollar but this does not appear to the chosen path of US policy makers.
  • If QE2 is launched, the fuse would be lit. Inflation would come back with a vengeance as speculators and emerging markets secure real assets.  In this case, the dollar — which is already down sharply — gets hammered.  Watch agricultural prices, oil prices and precious metals prices for clues.
  • QE2 will almost inevitably stimulate the Internet economy. I strongly believe that in this next phase of global economic integration, the Internet will become more important not less important, and national boundaries will become less important not more important.

And while here is no perfect hedge for the risks associated with US policy-makers executing QE2, I remain convinced that development-grade domain names are a logical store of wealth comparable to physical precious metals and other commodities that are sufficiently rare and finite, that no amount of currency printing will dramatically reduce their relative value .

Join the discussion 5 Comments

  • Aron - says:

    After all, Zimbabwe has had the best performing stock market in 2010 but unfortunately the Zim dollar is effectively worthless.

    Funny — I have a 100 TRILLION dollar bill from Zimbabwe.
    That’s how bad it was there at one point, they were printing 100 TRILLION dollar bills.
    It’s basically worth zero right now.

    Keep printing money — we’ll head down the same path.

  • Louise says:

    Thanx for your input. Here is my opinion:

    Inflation for the US has been predicted for decades, but it doesn’t happen. China is happy to produce all the goods we need at whatever price we are willing to pay for eternity. We’ll see; I’ll be watching those indicators: agriculture, oil, and precious metals.

    That said, Keynesian economics is the wrong decision. But there is a solution, though you may not want to hear:

    US company profits have to stay in the US and be taxed at regular rates then take off for the Caymans.

    Thank you for listening! 🙂

  • TJ says:

    Rob, great piece. On a related topic – I put my money on Gross & Mohamed El-Erian as the two smartest men in the room. There insights on all of this debt issues is amazing. I would love to be a fly in the wall hearing them talk. 🙂

  • Aaron says:

    Great post. It amazes me that Keynesian Economists were completely blindsided by this economic crises, while Austrian Economists had been warning us about this downturn (just as their economic theory has been able to accurately predict all other economic downturns)–yet, when the crises comes, who do our politicians turn to for answers about how to fix it? The Keynesians! Seems like we should start listening to those who really understand the problem.

    It’s also true that whenever the fed prints money, that money ends up ‘stimulating’ something. Unfortunately, that stimulus usually ends up in a bubble that will eventually have to pop. 10 years ago that was the internet. Next came the housing market.

    Here’s my question for you, Rob. You said that: “QE2 will almost inevitably stimulate the Internet economy”. Could you provide more detail as to why you believe this to be the case? And do you think that stimulus will eventually result in a bubble, or do you think it will be sustainable?

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