Covert QE Begins in Europe

The Fed and central banks are off to a questionable start this year...

Quantitative easing has already begun in Europe. And they've got the U.S. to thank for the bail out.

"Essentially, we just bailed out Europe’s banking system with the full faith and credit of the United States" according to the New York Post's Jonathon Trugman. He goes on:

"Most Americans associate a covert action with the CIA, not the Fed. But that’s exactly what Ben Bernanke did at the end of November...In reality, the Federal Reserve has just extended essentially unlimited lines of credit, camouflaged as a swap to the world in US dollars."

Here's a run down on why you should be concerned:

* The Fed essentially borrows or is backed up by US taxpayers, already in debt through mortgages, credit cards, student loans.

* The ECB in turn borrows from the Fed and then leverages that money up under its ECB umbrella.

* The ECB then lends it out to 523 of Europe’s most overleveraged banks.

* The desperate banks keep some to fortify their balance sheets, and use the rest to buy sovereign debt in some of the most overleveraged countries in the world, like Italy and Spain, which were just downgraded Friday by S&P.

It seems as though the general public has caught onto the dangerous side affects associated with additional quantitative easing, so why haven't the officials and policymakers stumbled upon this conclusion?

It's a very valid question these days.

Although quantitative easing technically involves the process of printing money, it's essentially just printing paper that looks and acts like money. In doing so, the purchasing power of each printed dollar drops dramatically, and inflation can soon turn into hyperinflation.

It won't be a pretty picture, especially not in today's economy. These aren't “normal” times.

Here are three factors that must be taken into consideration with QE policy limitations, according to The Telegraph: 

First, whatever the truth about the effects of QE, it has strong inflationary connotations. Accordingly, when there is a danger of inflationary expectations becoming unhinged, it makes sense to go easy. Second, avoiding an eventual inflationary outcome depends upon the central bank being able successfully to reverse the injection of liquidity. If there are reasons for believing that this is more difficult and/or dangerous when the amount is larger, this is also a reason for restraint. Third, although a boost to asset prices is one of the channels through which QE is supposed to work, it might boost some asset prices so much that this inflated a bubble, thereby risking a new crisis.

Although controversial, there are a few beneficiaries: banks, debt-ridden countries, and the ECB itself.

For the banks, it’s a fantastic deal. They can borrow money from the ECB for three years at the prime interest rate, which currently stands at 1 percent. If they used that money, say, to buy Italian bonds last Friday, they would get the much higher interest rate of 4.83 percent. Then they could turn around and deposit these bonds at the ECB as security, and borrow even more money at 1 percent 

The latter argument suggests the latest round of quantitative easing won't solve the crisis; it'll merely ease the current crisis for a time as new risks emerge.

*Additional excerpts courtesy of USAGOLD.

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