Saturday, December 15, 2012

Bernanke's QE n + 1


Federal Reserve Chairman Ben Bernanke's commitment to provide liquidity (buy U.S. treasuries and other assets) until the unemployment rate drops from 7.7% to 6.5 is an open ended commitment to "print" money - inflation be damned - until it is politically viable to cease propping up the treasury.

Policy makers in Washington must be seriously weighing the consequences of high inflation brought about by "printing," against the likelihood of widespread unrest when the prices of staple goods multiply. Whether governments choose austerity or inflation, someone is going to lose. It's really a question of who will be in more of a position to do anything about it.

Otherwise-serious people appear to be making preparations to protect themselves from the breakdown of civil society. Ask anyone interested in "zombie apocalypse" anything, and you will find it's just a polite euphemism for protecting themselves from their neighbours when the ATMs turn off, the shelves are bare, and the lights, heat or taps turn off in cities.

End-of-days anxiety aside, the real point is that it is unlikely that U.S. unemployment will drop to 6.5% anytime soon. High inflation and its consequences are certainly implied, and so the question becomes, what civil effects might QE n+1 have?

The Federal Reserve needs to keep money flowing through a deflating economy until the government can focus on other priorities. There is a presumption implicit in QE that lower unemployment and a better economy will head off the disorder brought about by both austerity and high inflation, but if it doesn't, there are other, perhaps more oppressive ways to prevent unrest.

In an editorial in the Financial Times this weekend about Big Data (Big data bonanza, the information revolution and the invisible hand) , the writer refers to Friedrich von Hayek's observation that "central planners could never process enough information to allocate resources efficiently" and therefore market systems must inevitably prevail over socialism. The writer points out that this elusive data processing capability is now readily available from Google, Facebook, online advertisers, and instant communications -  even in the nascent form it has taken just over the last decade.

The editorial concludes that the "horror scenario" of big data enabling absolute state (or corporate) power is unlikely because, as the writer states, the benefits of the technology are too great to be monopolized. It's weak tea, but it is notable that such a status quo newspaper has seriously countenanced the threat of authoritarianism enabled by the surveillance apparatus that is the internet. Gathering clouds of an authoritarian crackdown are being observed from both the grass roots and from city sky scrapers. 

If the U.S. (and foreseeably, Japan and the Eurozone) were to pursue a policy of indefinite "money printing" in the form of QE, inflation and some unrest will undoubtedly result. However, it is possible that governments are willing to take that risk because recent advances in technology and surveillance powers mean that the consequences of unrest are much less grave than they might have been just 10 years ago. Occupy Wall Street did not turn into the Battle of Seattle precisely because groups that would have instigated real harm were monitored, infiltrated and summarily arrested before they could cause trouble. The social networks required to form a civil threat can be discovered, mapped and disrupted without warrants, and in many cases, predicted using emerging methods in network and social media analysis.

The ace in the sleeves of the Washington, Brussels, and London is that there is very little threat that any movement could muster that could not be contained by the almost total surveillance made possible by current technology. If they can catch Anonymous, they can capture anyone who aligns themselves with an "asymmetric threat." The risk of popular revolt as the result either austerity or inflated staple prices may largely be mitigated by Big Data. 

U.S. unemployment, nominal or real, is unlikely to see less than %7 for a very long time, and until then, that's a whole lot of money being printed and purchasing power being depleted. Loose money via QE forms bubbles, and bubbles price people out of markets  for things like gas, bread and orange juice. People will be angry.

But in a nutshell: Bernanke and his peers can keep blowing hot money into the U.S. economy indefinitely for the complimentary reasons that a) the households in voting blocs who benefit from QE and don't have sufficient savings to be negatively impacted by nominal monetary inflation and, b) any threat from social unrest can be contained and managed thanks to our new Big Data total surveillance system.

It's win, win.


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