$100 Billion QE2 a Month, As Far As Eyes Can See

By now, many of you may have already read the Fed leak piece that appeared in Wall Street Journal this afternoon.

Benny and the Inkjets are planning QE2 alright, but with a twist. And that twist is given by none other than James Bullard, St. Louis Fed President who penned the light-weight paper back in July about inflation target and fed funds rate, comparing the US with Japan.

In that paper, Bullard came out in favor of the Quantitative Easing 2 as a way to nudge the inflation rate toward the Fed's unofficial but implicit target, which he calls "stable target state". (I've read the paper, and I still don't quite understand his logic of why that particular area is "stable".)

Now according to the WSJ article, he is in favor of QE2 in a sneaky way, by not announcing the total amount or duration. He wants to do QE2 at a measured rate, less than $100 billion a month, and keep doing it until the Fed decides to stop. Or Bullard decides to stop.

He says in the article that $1 trillion per year of QE2 would give him "pause", but he doesn't say whether that would deter him from printing further. He is worried, supposedly, that it would amount to outright monetization as $1 trillion would be close to the net debt issues by the Treasury Department.

Not that Turbo Timmy and Barry at the White House (who by the way is reduced to pitching a longer school days ) would mind issuing extra debt so that the Fed would appear not to be completely monetizing. And they would get more free money to squander on their grand plans for the rest of us while sending US dollar down the drain.

Bullard seems to have more clout than others within the Fed. It's just my sense, but the Fed's announcement after the September FOMC read like one particular section of Bullard's July paper; that was about how to craft the FOMC language on inflation expectation to guide the inflation expectation and hopefully actual inflation rate higher. In the paper, he praised highly the FOMC language on inflation after the dot-com bust, and he seemed to think that clever language did the trick and the stock market and the economy recovered.

So why do these people at the Fed need advanced degrees in economics? All they would need seems to be BA or MA in English Literature. If they call it economics, then economics is certainly not a science.

Anyway, here we have it. The Fed's plan, $100 billion a month, for as long as it takes. To achieve what? Don't ask. Don't even bother.

They will achieve inflation alright. Just don't expect it to be a gradual affair. We will never know (neither will they) which incremental $100 billion will break the camel's back.

If you want to read Bullard's paper, here's the link. I've read it, and I can assure you there's nothing to be intimidated if you don't have a PhD in economics. It's not really a research paper, but more like an essay, a stream of consciousness about zero interest rate and fear of being stuck forever.

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