The Open Secret of UK BOE Going QE Infinity

Confirmed today,

http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech631.pdf

Ever since the moment we’ve learned that Bank of England is going to choose a new leader, it is confirmed in every trader’s mind that BOE is going all-in QE Infinity. That’s why I mentioned in One More Major Economy Jumping Onto QE Infinity Express yesterday that Japan is the last one going on board the QE Infinity Express. Today, we get the confirmation finally from King’s speech admitting that BOE has committed to QE Infinity for some time already.

Purpose of QE

For those who do not understand the impact of QE, I am going to explain it using common sense.

When a country printing money beyond its means, does not matter what the mechanism is, with the goal of devaluating its currency, the tactic is employed for several benefits.

First, potential stimulus in export due to relative cheapness as other countries can buy these products at a relatively lower price.

Second, reduce import of goods coming from other countries. Combined with the first, this will improve the overall trade balance of the country.

Third, to turn the existing debt into something more manageable. By turning everything more expensive in terms of the country’s devalued currency, the cost to service the existing debt, interest payment, will become relatively smaller. A very funny way to mess with those who invested their money in the country’s future.

The Catch

Such scheme works if and only if you can devaluate a currency against something else.

For example, Japan was the biggest one doing QE all the way since 1980s. It was possible for Japan to keep doing that because no one else is doing it. The moment US chose to jump in with first few rounds of QE, the currency flow on dollar yen (ninja) immediately reversed, leading to the biggest FX swing in centuries.

As more and more countries jumping on board QE, US chooses to go all-in with QE Infinity. That is the only logical choice left as there is no going back without QE.

At this point, as all major economic bodies are now doing QE Infinity, there is no more major currencies left to devaluate against.

So the devaluation game is now over. The major economies can keep printing more money and that will do absolutely nothing to improve their economies. Once all these announcement shocks are over, the currency markets will be stuck in a tight range until some of these sovereign debt defaults.

The Illusion of Growth and Hyperinflation

There would be a short period of time where the signs of growth will show up like now. And maybe at times hyperinflation may flare up, where everyone will start to panic. But I am quite sure that will not happen.

All hyperinflation starts with assets and consumables inflation. Unlike the historical case of Germany right before 2nd World War, where the price increase was localized, this time all major central banks are printing money. So inflation will be pretty uniform across all the countries.

The increase in price on everything in everywhere will choke off production of necessities, not just luxuries. Collapse of production means empty shelves in stores and in turn implosion of retail businesses. Before hyperinflation can materialize, the economies would have collapsed before that can happen.

Think of the old communist China and Russia. That is where the world is heading now.

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