Ben Bernanke and the Great Monetary Hail Mary

 

Takeaway

  • European countries have lost private buyers for their debt, requiring the central bank to buy government bonds
  • The Federal Reserve claims that 2 million jobs have been created as a result of $2 trillion in quantitative easements 

These are epic times in the developed world’s attempt to deal with over-indebtedness. An unshakable malaise has set in due to sluggish spending and a deleveraging banking sector, and as a result, employment growth is suffering and deficits remain bloated. Governments are facing diminished tax yields and will ultimately run out of buyers for their debt, which is currently happening in Europe.

Central banks are inevitably called in to treat all these related symptoms of the underlying debt disease. That momentous time has arrived for Europe, as its debt symptoms have progressed to full-blown illness in the selling of government bonds. Meanwhile, unemployment is the most stressful symptom afflicting the U.S.

In recent weeks, the central banks of the developed world have taken the next big step, a monetary Hail Mary, to combat these symptoms. A Hail Mary is an act of desperation associated with putting all the chips on the line when your team is behind and time is running out. The ECB offered to support the bonds of those European countries that have lost willing private buyers, and Germany — the last holdout — has accepted the offer. This will be a four-decade bond support program, given the demographic-related deficits that will occur. For the baby boomer generation, their related entitlement spending has only just begun.

Meanwhile, the Fed has also made an open-ended Hail Mary of mega asset purchases that will ostensibly continue until the labor market is healed through self-sustaining growth. 

This could be a long period of time given Bernanke’s claim that 2 million jobs have been created as a result of $2 trillion of QEs to date. If this estimate is correct — and there is ample evidence that it is an overestimate of monetary effectiveness — it implies that each added job comes at a cost of very close to a million dollars of monetary expansion. These are very expensive jobs. 

Read the full version of this article on Dr. Spellman’s blog, The Spellman Report.

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.

About The Author

Lew Spellman

Professor, Department of Finance, McCombs School of Business, The University of Texas at Austin

Lewis Spellman received his BBA and MBA from the University of Michigan and his MA and Ph.D. from Stanford University. His research interests include...

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