Tuesday, September 18, 2012

QE 1, 2, 3, infinity

"Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed."   Ludwig von Mises

With QE1 there was talk of an "exit strategy" and "unwinding" or "withdrawing the liquidity".   This was claimed to be a temporary injection of money to deal with a liquidity crisis.   When QE2 came with more liquidity instead of an exit, people should have begun to wonder if the extra money was in fact temporary.   But now with QE3 of unlimited amounts, nobody should still be expecting any exit strategy.  As this really sinks in, people will start to flee US bonds.   This will cause the Fed to buy even more bonds, printing even more money.  This will cause even more people to flee US bonds, the Fed to buy more,  etc.  The positive feedback loop or death spiral will start.  The velocity of money will increase.  The quantity of money will increase.  The real economy will be hurt.  Hyperinflation seems unavoidable.