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Big Ben's Ghost of QE Past, Present, and Future
It was the best of times; it might be the worst of times.
Dollar bills glide effortlessly to the ground, dropped from the giant QE machine in the sky. All is quiet, all is calm. There is peace on earth, well, at least in Washington D.C. and on Wall Street. And then with a horrible crash, another Mortgage Backed Security (MBS) explodes and collateral damage spreads far and wide.
Cut to three am in the Big Ben bedroom. A ghost appears amid the sound of Hope and Chains and carries the sleeping Head of The Fed to a land far away. The Head of the Fed wakes to the sound of his own voice saying , "The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." and "we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."
The ghost says, "I am the ghost of QE past. That is what you said. Where has all the prosperity gone?"
And the Head of The Fed says, "I'll get back to you on that" and promptly falls into a deep sleep dreaming of Keynesian sugarplum trees and simple delusions.
But his dream turns into a nightmare as the Keynesian sugarplum tree dissolves into a money printing press which has been running so long and so fast that it overheats and burns to the ground. The Head of the Fed screams in anguish, "What will we do without a printing press?" The ghost of QE Present enters and says with a deep voice, "Tell everyone that all is quiet, all is calm, and quickly order a faster printing press with overnight delivery. Give this a code name to make it sound important - call it QE4. Tell the people it is for their own good. Most people still listen to you and will believe a faster printing press will solve all their problems."
The Head of the Fed smiles contentedly and falls asleep dreaming of helicopter drops and fewer critics.
But that dream also turns into a nightmare as the helicopter collides in mid-air with a gigantic black swan. Both crash and burn. The Head of the Fed wakes with a start, grabs a blue pill, and chants "Inflate or Die" over and over. On the 13th repetition, a third ghost arrives and derisively states, "Kinda hard to plan for a black swan in your econometric models, isn't it?"
The Head of the Fed looks in horror at the third ghost and fears for his printing press and helicopter. But attempting to regain control he states, "Of course I can't model a black swan event. No one can."
The ghost sighs disgustedly and says, "I am the ghost of QE Future, and I am here to show you the probable future. Look out that window. Do you see the long lines of unemployed workers desperately seeking jobs? Do you see the gasoline price - yes - $8.99 per gallon? Do you see the cost of food for a family of four - outrageous? On the bright side, banker bonuses are up 10% this year. But, for most people, things got worse, much worse, instead of better, after you implemented QE4. So you decide, QE4, QE5, QE6 and more, or another plan?"
The Head of the Fed was quiet for a long time. He finally said, "I'll get back to you on that," popped another blue pill, and fell asleep dreaming of even bigger and faster printing presses, larger helicopters, and the absence of black swans.
The ghost of QE future dejectedly stated, "We tried. Now it is up to someone else." And he faded from this world with a sad and cynical smile.
What goes around, comes around. Train wrecks do occur! It might be the worst of times.