EL-ERIAN: It's Official — The World Needs To Worry About The Damage Caused By QE

TBI ^ | 4-20-2013 | Mohamed El-Erian

[blam]

EL-ERIAN: It's Official — The World Needs To Worry About The Damage Caused By QE

Mohamed El-Erian
April. 20, 2013, 10:05 AM

It is now official: "We will be mindful of unintended negative side effects stemming from extended periods of monetary easing." This is how the G-20, the most important country grouping today, put it in the communique they issued Friday night. But what exactly are they talking about?

It all started with the difficulties that most advanced economies faced in generating adequate growth and employment after the 2008 global financial crisis. Rather than catalyze the political system into action, this "new normal" worsened polarization. Feeling a "moral obligation" to step in, central banks (led by the Federal Reserve) embarked on a series of bold and unprecedented policies – or what became known as "QE infinity."

QE, or quantitative easing, refers to the use of central banks' balance sheets to manipulate financial prices. It follows the flooring of policy interest rates at zero for a prolonged period of time, and also commitment to keep them there for a lot longer.

The idea is simple: manipulate key financial markets in order to "push" investors to take more risk, thus also stimulating spending and investing. With time, improving fundamentals would validate the artificial prices, thus also allowing central banks to exit.

Most investors have responded to QE as very few wished to take on institutions with a printing press in the basement. Yet, despite the manipulation of financial markets, growth and jobs have consistently fallen short of expectations.

Facing insufficient demand, structural impediments and policy uncertainty, the real economy has not responded as envisaged by central bankers. In response, officials have widened the scope and scale of QE.

The G-20 now recognizes what Fed Chairman Ben Bernanke

(snip)

[C. Edmund Wright]

I’m reminded of the cliche...” the mountain will not come to Mohammed......”

[Logical me]

This QE manipulation of the market has allowed the communists King Obama empire to mislead the American people to the pending crash of our economy.

[palmer]

For the most part, both political parties mislead the pubic on QE. There are two reasons, first one of the primary purposes of QE is to give money to politicians to spend. Second, nobody likes giving out bad news, especially politicians to constituents.

[palmer]

With time, improving fundamentals would validate the artificial prices, thus also allowing central banks to exit.

Anyone with a few functioning neurons realizes that there are no improving fundamentals on US Treasury debt. Thus there is no way the Fed is going to exit the t-billl market. They will burn them, blend the ashes into a smoothie and drink it (or they would if they were actual paper). When the Fed exits the t-bill market will crash and the Federal government will be insolvent overnight. Therefore they are not going to exit, but inflate more.

[griswold3]

Eggactly!
No one is talking about the loss of trust in the system caused by the failure of central planning the last 70 years. The Fundamentals are broken like Humpty Dumpty.

[jiggyboy]

Looks like one of the bigger fish is deciding to slip out of the net.

[Graewoulf]

” - - - it will become increasingly ineffective if economic improvement faces additional political headwinds in the months ahead. - - - “

Duh, what could possibly go wrong?

Read more: http://www.project-syndicate.org/commentary/the-global-economy-s-time-factor-by-mohamed-a—el-erian#ixzz2R4AXBctX