This is a bit of a summary of the QE discussions, taking a larger view of what the central banks are trying to do here are the large areas of interest:

• The US dollar is too strong to allow an economic recovery here and needs to be weaker. QE is an attempt to suppress dollar strength.

• The Federal Reserve needs lower interest rates to stimulate lending/borrowing to address the high unemployment rate.

• The Federal Reserve needs to help the Treasury move $1.5 trillion in government debt … this year, next year, the following year … forever.

• The US government cannot afford high real interest rates that are the natural outcome of deflation so the Fed must do everything it can to avoid it. 

The dollar argument is well presented by Tim Duy (The Fed Guy):

Etc. Read the entire article, it’s worth it.

Countries want cheap currencies and devalue accordingly. Cheap money means a country’s goods are less expensive than other countries’ goods. It is an export advantage which is why the US is whining to China about its undervalued yuan. Tim Duy and others recognize the strength of the dollar and also recognize the need to devalue. Ambrose Evans- Pritchard notes the same thing. The dollar is too expensive. Devaluation helped countries unhinge themselves from the death spiral of currency speculation during the dark days of the early 1930s. Too damned bad it cannot happen! The problem is that few analysts recognize the source of dollar strength; the ability to exchange it on demand for a valuable physical good at a stable price: that good being crude oil. The oil/dollar cross is fixed by the upper bound which is the price where the economy that uses the oil ceases to profit from using it wasting it.

Right now the upper- bound price would have be less than $99, the average yearly price for 2008, the ‘Great Spike’ year. The world is poorer now than it was then. I doubt the markets could support $90. This price relationship makes the dollar a defacto hard currency backed by crude oil. Any decline in price represents a repricing of dollars, making them more valuable. Regardless of what central banks do the outcome is more pain. Any success at devaluation of the dollar increases fuel prices to the economy- killing point. Devaluation of other currencies makes buying dollars in order to buy fuel an exercise in masochism.

Despite the current mini- bubble inflated by currency, commodity and stock traders, the dollar is still the king. It cannot be otherwise. No other currency has the advantages of the dollar: its float, its liquidity, its reach and what it is proxy for. If the dollar was to fail in some way another currency would take its place and become the instrument of depletion- driven deflation. It’s baked into the cake. An ‘oil(ly) cake’. Yum!

As for business and consumer borrowing and lending being ‘stimulated’ by the Fed and other central banks buying longer- dated government bonds, the question is … What Tha Fu*k is the Fed Smokin’? Where is the connection between the Fed and jobs? Since when is a non- sequitur a strategy?

The Fed cannot compel anyone to borrow; it certainly cannot compel anyone to borrow so as to hire! Why would anyone sane do either? One of the ‘revelations’ of the current mess is how crooked the lending business is. The anger of the public is palpable and most of it is directed at bankers first; their political lapdogs second. Excuse me! The big businesses ARE borrowing – at astoundingly low rates – to speculate in assets or lend back to the Treasury. This is behind the recent expansion of M2 money multipliers (from incredible John Williams’ Shadow Government Statistics):

Instead of producing goods and services, companies are now hedge funds. Why hire workers when one can hire money instead, using it to directly make more money?

The establishment ‘solution’ to unemployment is ‘stimulus’ to big business; then, the dole, ‘benefits’, welfare … until such initiatives funded by debt become unaffordable … then general poverty. What a choice the establishment offers!

The Fed is lost in the desert of its mind. The major lending issue isn’t stimulating more of it but well- founded concern over repayment by an outraged citizenry.

Public anger is at the point of all borrowers walking away from all debts. “Take that, @#$%&; bankers! Let the class war begin!” Talk about a black swan! Repudiationism and the ongoing political crises both in the US and in the Eurozone are five alarm fires. What happens next? The central bankers are so far behind the curve it is embarrassing. They don’t recognize their own vulnerability. Class war in the 1930s involved the public not buying goods and services, which bankrupted the monopolists. The massive debts hold today’s monopolists hostage. All that is saving them is the ignorance of the public toward the efficacy of the instrument that they already hold in their hands. This is a state which cannot be counted on for very much longer.

Governments holding bankers and finance to account would do more to inspire confidence than any other tactic. People will endure any hardship if the outcome is fairness and justice. The Germans throwing the Mediterranean nations under the wheels was enough to support the German mark  euro. What would happen if the Eurozone decided one fine day to investigate- prosecute finance crooks. Perhaps the euro devaluation that all and sundry hope for so passionately would come to pass.

Ditto in the US. Since the Fed cannot gin up inflation and prosperity perhaps the Justice (Useless) Department can.

Lending might be theoretically cheap(er) but even with zero rates of interest the underlying increase in dollar value makes ‘real’ interest rates unaffordable. Borrowing must be paid back with dollars that increase in value along with crude oil. This makes the high bubble- prices of competing goods (and assets) unsupportable. The Fed is pushing on a string. Assets such as gold and stocks are currency traps. Liquidity enters … and is destroyed.

The issue of selling Treasury debt, rolling over existing debt and outmaneuvering the deflationary effect on the real price of Treasury debt service is the heart of the matter. Under any and all conceivable circumstances the Fed is compelled to buy Treasuries and monetize US debt. It really has no choice.

First of all, the US government is set to borrow on the an expanding scale endlessly into the future. This means willing lenders must be found every month for hundreds of billion$ used to retire existing debt that is maturing. This is on top of the hundreds of billion$ of NEW debt that is consequent to the decline in government revenues across the spectrum. The Fed is the defacto banker for the states and municipalities as well as for the Federal government. Since government borrowing at scale depresses yields, the Fed can finance the bankrupt states; directly and indirectly by ‘bidding down’ the yields of other forms of debt. The Fed seeks a bull market (bubble) in bonds that drives yields to near- zero across all classes and at all maturities. By doing so the government escapes (for awhile) the looming adverse consequence of its borrowing; the real interest cost on that debt.

The size of the debt itself is a force that cheapens it. As with all surpluses, management costs rise faster than the value of the thing (the debt) itself. Consider this: All money is lent into existence. As business expands so does money. More money means more debt. There is no other way! The long expansion since 1982 means a mountain of money and associated debt which now cannot be serviced by business’ cash flows. Credit must contract: as it does so, money disappears as well. It’s the Iron Law again, this time working backwards. The Fed is not only pushing on a string but this string is connected to a battleship heading toward an oil well at the bottom of the Gulf of Mexico! Even without declining resource availability, the overhang of unserviceable credit would force deflation.

This debt bomb is the source of confusion among finance analysts who focus on the debt to the exclusion of energy. We are ‘lucky’: both are working against the central banks … and us.

Yields are sure to rise: either notational yields or real yields. The Fed seeks to forestall this by buying debt on its own account. Letting yields rise on government debt in the amounts that currently exist is fatal to the government. Even at the minuscule crisis- driven yields, interest payments on the current debt at +$350 billion are the largest category of public spending after defense, Social Security and Medicare. The massive size of the Federal debt insures that any rise in rates would have interest payments rising past other budget categories. At some point interest costs will become unmanageable, either because of increased interest rates or because the principal has expanded. The inevitable outcome is default.

Additionally, deflation increases the value of payments made on debt even if the notational amounts don’t change. The Fed is compelled to battle deflation otherwise the ‘real’ cost to the Treasury becomes breaking. As money becomes more valuable, it becomes scarce. When this happens there is sparce currency available in circulation to service the debt by taxation. Hence, the monetization attempts.

Here is where the US of A resembles most the Weimar Republic of 1920. Years ahead of the Great Hyper- Inflation the republic was actively monetizing its rapidly expanding debts. In a currency regime with few assets to ‘hedge’ against inflation the outcome was preordained  Here, the Fed tempts fate and monetizes with its eyes wide open. Nevertheless, it is doomed to fail.

First, the US of A differs from its Germanic cousin is the depth of hedging assets available to Americans. Any excess currency will flow into liquidity traps such as gold, stocks, commodities and ‘strong’ foreign currencies which is taking place now in advance of QE itself. This is the market ‘pricing in’; buying the sizzle not the steak. All of this is this outside the various ‘carry trades’ that export liquidity to traps overseas. Unlike the Weimaraners’ marks, the funds will not chase goods at spiraling prices but will disappear out of circulation as is happening right under the inflationistas’ noses! Money will be scarce – the banks will hoard it!.

$2 trillion in QE is quite a bailout for banks, no?

While this blatant robbery takes place, the deflationary hazards of crushing debt and debt service will increase. Since deflation is a crude oil rather than a debt issue, the dollar will retain strength. As will be seen in the fuel markets, prices will rise and then fall. Priced in crude the dollar has value.

QE is just another form of cheating. Here’s James Howard Kunstler:

There is no escaping thermodynamics and entropy. It is mortgages alongside the other things, too. What awaits is the Great Simplification. Besides Matt Simmons (whose daughter accepted a posthumous award from the group for his service) and James Kunstler, the other name on everyone’s lips at the ASPO conference was Joseph Tainter. We’ve reached the point of diminishing returns on complexities.

The central bankers have been confronted with challenges that they are not equipped to surmount. Every tool that the Fed has at its disposal has been worn out from overuse – expedients applied repeatedly since the Reagan era began. They have lost their potency. What central banks offer is credit, what is behind many of our problems today is credit. How can the cause be the cure? 

What can be done? The answer is leadership.