Is QE4 incoming?

Monday 23 November 2015

Bitcoin is separate to the fiat world, but its health is inversely related to that of its dysfunctional cousin.

If bitcoin is about anything, it’s about freedom from the existing financial order. We’ve seen repeatedly how dysfunction in various countries - Cyprus, Greece, China - has spurred bitcoin adoption, if only temporarily. If the existing financial system worked properly, there would be no need for bitcoin. That’s why talk of QE4 - a massive new round of money printing by the US - is important. Whether or not it happens, the fact that it is on the table at all is worrying.

What’s the background?

Despite analysts stating their belief that interest rates will rise soon, tightening of monetary policy has repeatedly been delayed. There has recently been a drop in US growth, suggesting that the economy isn’t quite as healthy as people thought, though recent figures have been a little more encouraging. The standard trick at this point is that the Fed steps in, creates a load of money and uses it to buy financial instruments. That pushes through to the banks, which are able to lend at low rates to grease the wheels of the economy, and institutions like pension funds, which can pick up shares with cheap money. Result: markets are propped up and everyone stays happy for a little longer.

The boost to the money supply and businesses means that the Fed can keep inflation and employment at ‘healthy’ levels. Looking at it another way, it’s a bit like knowing it’s time to go home and tomorrow’s going to hurt - a lot - but that you can delay the end of the party with another drink.

Aren’t there good reasons not to go for more QE?

The narrative up to this point is that we’re not going to see QE4. The first round of quantitative easing was made in the Global Financial Crisis, and was all about giving liquidity in the credit crunch, when there was otherwise not a lot of it about. QE2 in 2010 was supposed to stimulate economic activity, and then QE3 intended to address persistently low growth. But while there’s plenty of precedent for some more QE, thanks to lack of sustained growth, there are good reasons not to go further down that route.

For starters, the Fed is already a long way out on a limb, and there’s no telling quite what the long-term effect of QE to date will be. Whatever the unknown unintended consequences, though, QE hasn’t proved to be as effective as hoped. There have been limited and diminishing returns. This time, the threats to the system are coming from outside the US, too, so QE likely wouldn’t address them effectively. Then you have the political implications of pumping more money into the system, playing into Republican narratives about mismanaging the economy.

Red flag

QE4 would be the mother of all red flags

Reasons for another shot of QE

Then there are the narratives you’ll get on ZeroHedge and other niche/fringe sites (which doesn’t necessarily make them unbelievable). More recently, a few more mainstream sites have started discussing the possibility of QE4 too.

Growth is limited and there is a raft of red flags in almost every part of the markets. As the FT puts it, ‘So when you have bond yields plunging, corporate spreads widening (even excluding energy and mining), stock prices falling, and commodities (except gold) collapsing, it’s possible there is useful information for central bankers to consider.’ 

The Fed kept talking about interest rate rises, then putting them off - which is not good. Now it seems like there might be a real chance of a rate increase in December, though bizarrely that doesn't rule out more QE: there’s the idea that QE4 would allow interest rates to rise without crushing the economy - giving with one hand and taking away with the other.

Aren’t all these games with money just a big illusion?

Now you’re catching on.

And where does bitcoin come into this?

In several ways. Money serves different purposes. It’s a store of value, a unit of account and a medium of transfer. Bitcoin is a great way to move money around in the event of capital controls (see China, Cyprus, Greece...). It’s not a great store of value, but in the event of a collapse - or even slight decline - of confidence in the dollar it will see some renewed interest.

Mostly, though QE4 would be a massive admission that those in charge of our money supply and economy don’t know what they are doing. As warning lights go, it’s a huge red flashing one on the dashboard. The more that regular citizens cotton onto the fact that the ‘experts’ are just playing games with our money and livelihoods, the more they will look at alternatives - and seek to circumvent the current system. 

The bottom line?

Let's hope it doesn't come to QE4, for everyone's sakes. If it does, take it as due warning that the times, they are a-changing.


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