Some recovery! – Fed preparing for “QE Lite”?
There are a lot of talks about the Fed’s meeting next week, especially about some money printing – QE Lite as some have called it (instead of full throttle QE2). The disappointing economic data, the dire shape of the states, the spectre of deflation and mid term election are putting pressure on Bernanke to start reinjecting money into the system. Not everyone agrees on the stimulus though: some regional Feds fear that the Fed policy may stroke another asset bubble rather than letting the debt purge run its course (that is common sense). Yet others fear deflation like the plague. The compromise may be that the Fed roll over bonds purchased during the crisis rather than letting them expired as previously planned (this does not add to the balance sheet per se).
A lot of people will argue how Bernanke can do this, via the banks or via other institutions and how much or how little but at the end of the day, the Fed can keep adding the juice to de debt addicts but it won’t make much of a difference. Why? Well first, one way or the other, Keynesians and monetarists fools are going to learn that you can not build an economy on unlimited credit and a permanently distorted cost of capital. All those malinvestments and overconsumption must be redeployed. Bernanke is simply assuring that it goes deeper and longer. The idea that one needs to inject more money to have economic growth is the great fallacy of our times.