Hussman: Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar!

Woo hoo here comes Helicopter Ben Bernanke! We'll all be trillionaires but can't afford breakfast!

• QE 2.0 is a foregone conclusion. Bob Chapman says US$5T is likely to be the amount. When this happens, it is over for the USD! Of course, this is all part of the Illuminist plan to create the global currency crisis to drive the world to their One World Currency, Global Central Bank. They are likely to do this: IMF will become the global treasury department and BIS the global central bank. Both these organizations will report to the Global Luciferian Government.
   
• This article has quite a bit of technical economic jargon. It is an interesting perspective using Purchasing Power Parity (PPP) and Interest Rate Parity (IRP). Excerpts:
   
  Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar
  ….In contrast, quantitative easing can be expected to create a remarkably different situation. The Fed’s purchase of Treasury securities and creation of base money is occurring in an environment where fiscal deficits are already out of control, while two-thirds of the Fed’s balance sheet already represents Fannie and Freddie Mac securities that need to be bailed out by the Treasury. This makes it enormously difficult to reverse the Fed’s transactions – because the Fed is not simply determining whether a given stock of government liabilities will take the form of Treasury bonds or currency. It is instead effectively printing new money to finance ongoing spending for fiscal deficits and the bailout of the GSEs. At the same time, the fact that it is operating in a weak economy and a near-term deflationary environment means that nominal interest rates are being pressed down at the same time that long-term inflationary prospects are escalating.
   
  From the standpoint of the two parity conditions, the very long-term implication of quantitative easing is a gradual devaluation of the U.S. dollar (an increase in the dollar price $/FC of foreign currency). If this increased inflation risk was reflected in interest rates (so that real interest rates were held constant), the U.S. dollar would simply move along that gradually sloped PPP line, and likewise, foreign currencies would gradually appreciate against the dollar.
   
  However, because of economic weakness and credit strains, coupled with the demand for Treasuries by the Fed, quantitative easing instead moves U.S. interest rates in the opposite direction, falling rather than rising. From the standpoint of interest rate parity, capital market equilibrium then requires the U.S. dollar to depreciate immediately, by a sufficient amount to set up the expectation of future appreciation in order to offset the shortfall of U.S. interest rate returns.
   
  In short, quantitative easing is likely to induce what the late MIT economist Rudiger Dornbusch described as “exchange rate overshooting” – a large and abrupt shift in the spot exchange rate that occurs in order to align long-term equilibrium in the market for goods and services with short-term equilibrium in the capital markets.
    ….
  My impression is that Ben Bernanke has little sense of the damage he is about to provoke. A central banker who talks about throwing money from helicopters is not only arrogant but foolish. Nearly a century ago, the great economist Ludwig von Mises observed that massive central bank easing is invariably a form of cowardice that attempts to avoid the need to restructure debt or correct fiscal deficits, avoiding wiser but more difficult choices by instead destroying the value of the currency.
   
  Von Mises wrote, “A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, that is, of antidemocratic policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. When governments do not think it necessary to accommodate their expenditure and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.”
    ….
  Good policy is not rocket science. It begins with the refusal to make people pay for mistakes that are not their own. This economy continues to struggle with a fundamental problem, which is that debt obligations exceed the ability to service them. While policy makers have done everything to preserve the patterns of spending and consumption that created the problem in the first place, we have done nothing to restructure those obligations.
   
  To the extent that we observe fresh credit problems, we should not pursue the same policies. Instead, we should focus on restructuring debt. Let the bank bondholders fail, and defend depositors and customers through the standard procedures that the FDIC has followed for decades. Deal with the debt of Fannie Mae and Freddie Mac by asserting that there is no explicit government guarantee, and let the holders of the mortgage pools receive precisely what they are entitled to receive without public funds. At the same time, expand the role of the FHA to provide explicit government guarantees for future mortgages in return for actuarily fair risk-based premiums, and require mortgage originators to retain a piece of the mortgage loan, along with appropriate capital requirements, and the stipulation that this retained portion bears the first loss if the mortgage goes bad. Finally, refuse to trot self-interested bank and Wall Street executives in front of the public to extort the nation through fear of the word “failure.” Banks fail all the time and customers don’t lose a cent. The only implication of failure is that stock and bondholders of reckless institutions aren’t rewarded for their malinvestment at public expense.

Will we still be able to afford breakfast?

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