to QE3 or not to QE3

by mainwall

Is further easy money from Bernake to banks coming this Friday? If so, it will largely keep the dice rolling at the Wall Street casino. Since the administration believes Wall Street IS the economy, it makes sense to them.

The effect on the real, Main Street, productive economy? Not so good.

Is Bernake more afraid of not doing something, anything, that will signal to the markets he’s still on their side? Or will he wait for more blood on the floor of the stock exchanges before he can safely ride to the rescue?

Bernake’s biggest fear is deflation, which some say is necessary to deleverage from our global over-indebtedness. The usual story of the Great Depression has deflation in the role of villain, and Bernake built his career on understanding that fact. If it is a fact.

So his play is the inflation game, which to do successfully, he needs a goldilocks amount, just enough and not too much. Otherwise, a debased currency will cause hyperinflation.

His is a waiting game, hoping the debt keeps rolling over and over until – what? Either the debt is gradually wrung out with inflated dollars, or somebody doesn’t get paid, or – the whole thing crashes and a whole lot of people don’t get paid. Time, if it is on Bernake’s side, will also bring us growth, which should also help pay down debt, strengthen bank balance sheets, and support stocks.

Ok, what’s wrong with this picture? Bernake’s options actually come down to buying time, for the banks and the sovereign debt holders to work out their problems. How’s that going? About as well as we can expect in a culture of “I’ll be gone, you’ll be gone.” Everybody is looking to be in a chair when the music stops.

And growth just isn’t showing up. Perhaps because the productive economy has been shoved into the back seat while the banks keep the wheel. The corporations are riding shotgun. Their dilemma? Cutting jobs hurts demand. Low demand is deflationary. They need actual people to buy actual stuff!

And how’s that derivatives thing going? Just fine, thank you … that’s 601 trillion, just shy of 10 times the global GDP, or all the goods and services produced in the world. Bernake also has to help make sure everyone still believes they will get paid, because no one wants to know what happens when that market goes blam.

The longer the game goes on, the more the banks and speculators can extract from the middle classes to keep the money moving, so they can slice off lots little bits, that, in huge volume and with huge leverage, add up to quite huge sums.

But when taxes and inflation are the only hope for the rich to keep on getting richer, how can anyone not understand the anger coming from Main Street? When Warren Buffet, an investor (not a businessman), wants higher taxes, it’s only because he wants the game to go on, and for that, he’ll gladly pay a little more.