Wednesday, 27 February 2013

Savers to the slaughter

Ben Bernanke’s (Chairman of the Federal Reserve) was hauled up in front of Congress to explain the rationale behind the Fed’s third, $85bn-a-month round of quantitative easing (QE), and to evidence that the benefits still outweigh its costs and risks.   Bernanke is in the same mould as our own, ex-Chancellor, Geoffrey Howe who’s debating style was described by Denis Healey as ‘…like being savaged by a dead sheep’ – but Bernanke got so angry that he told one of his inquisitors “none of the things you said are accurate”. Ouch!

Denis Healey - great eyebrows!

So what’s got Bernanke’s blood up?  My guess its nervousness that QE is actually the wrong thing to be doing.  He spent quite a bit of time warning Congress on the economic dangers ahead.  He picked out oil price increases and the inflationary pressure this will bring.  Although no one has the foggiest clue what the benefits of QE might be there is broad agreement on the dangers and top of the list is stoking up future inflationary pressure.  As the Fed’s own projections for growth in 2013 in December were at a pretty impressive 3 per cent one wonders why they want to pour more fuel on the fire.  The other risk that the Bernanke was keen to high light was the turmoil in the Eurozone, which took a turn for the worse yesterday as the Italians voted for chaos and disaster rather than more austerity.   Surely the Fed needs to keep its ‘power dry’ to help shore up the US banks in the event of a Euro meltdown rather than throwing banknotes off the roof of the Empire State building (about as scientific as QE).

The real danger of this blind faith in QE is that it gives the Republican Party a juicy bone to chew on.  With all the other important Fiscal decisions that need to be made, with Republican support, hanging on to QE seems to be unnecessarily dogmatic.  If the Fed needs further evidence of the worthlessness of asset purchase schemes (QE) they should look at the experience we have had in the UK where we have burnt through over £375 bn ($578 bn) in QE since 2009.  This has had the effect of:
  1. Crippling savers throughlow interest rates / high inflation
  2. Supporting thousands of  ‘Zombie’ companies that are limping along tying up valuable capital and resources
  3. Soaking up valuable financial resources, which we may need when the wheels final come off the Eurozone (watch out for the German election in September)

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