Quantitative Easing Isn't Money Printing...

...except when it is money printing... such as when Ben Bernanke last appeared on 60 Minutes

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Of course, Bernanke’s double-talk makes sense in the context of PR and “expectation management” (two fields which are all about double-talk.) When he first appeared on 60 Minutes in mid-March 2009, the Dow Jones was bottoming at sub-7000 levels, everything was on sale for 40% off, and most commentators were worried about a deflationary death spiral. “Money printing” seemed like a good idea, or at worst a harmless one, since prices were collapsing. In 2010, the failure of “money printing” (QE1) is clear to all with eyes to see; and, more important, high oil, gold, and commodity prices have summoned once again the spectre of hyperinflation. Now is not the time to conjure up images of Weimar wheelbarrows, and so Bernanke felt it best to dispel the “money printing” rumors.

Then again, one should remember that Bernanke does have a point when he says that QE isn’t "money printing" … exactly … as I pointed out when QE2 was first announced:

Whenever the Austrians criticize QE, they’re apt to call it “money printing” and make analogies to the Weimar Republic and wheelbarrows full of cash. I’m part of this camp, of course, and I think such shocking comparisons are warranted. (Note that Bernanke himself referred to QE as “printing money” in a 60 Minutes interview from last year! See 7:55 of this video).

But it’s important to remember that though Bernanke might be creating money, he isn’t handing it out on the street -- much as he famously threatened to drop dollars from helicopters in a 2002 paper. The Fed’s money creation will, in the near term at least, remain confined to the bond and mortgage markets. This will, no doubt, create distortions and new variations on the dollar “carry trade,” but it won’t achieve the desired effect of immediate, readily perceptible inflation.

It’s similarly unlikely that QE2 will spur new credit creation from the banking sector for the simple reason that no matter how low the Fed has pushed its fund rate, banks don’t want to lend out their reserves. The Fed has set short-term rates at near zero for the past two years, with little effect in the way of loans to consumers, homebuyers, corporations, and small businesses. With high unemployment, falling home prices, and political uncertainty, banks would prefer to sit on their cash -- or else borrow money from the Fed to buy Treasuries and fund the government while collecting interest.

My guess is that we will head into late winter and spring of 2011 with no discernible positive effect from QE2 -- housing will still be floundering; unemployment will remain in double digits; the public mood will be depresed etc. -- resulting in a precipitous crash in most asset categories and a new consensus that deflation can’t be stopped. (That sentiment will be wrong, of course, and the first sign that run-away-inflation -- that is, the consequences of QE -- is just around the corner.)

And as alluded to above, Q3 is by no means that last arrow in the Fed’s quiver. That is printing money and handing it out directly to the public, much like the “stimulus checks” George Bush sent to consumers in the spring of 2008 -- only bigger and worse. And though it might sound unlikely now, the government might choose to federally mandate that banks make loans to consumers and businesses and extend credit limits.

Money from helicopters.

Over the coming years, we will experience two distinct phases of the collapse of an imperial currency.  The first round of “money printing” will be an expansion of the monetary base in order to temporarily shore up the Treasury and asset markets; the inflation will, for the most part, be confined to the financial sector. The second round of “money printing” will be actual money printing—checks for $10,000 sent to every American, federal mandates that banks make loans, money from helicopters. When this stage begins, watch out.