As we track the FED’s effort to control the economy we’ve focused on QE. There was actually a previous “Operation Twist” back in 1961, which was very similar to what we saw last year.
The 1961 version, named after the popular dance of the time, extended the length of debt in an effort to take immediate pressure off the market in an effort to strengthen the dollar. Simply put, the FED sold short term debt (less than three years), purchasing longer term debt with the proceeds. By doing this they extended the timeframe of the debt accordingly, ostensibly giving the economy time to recover so it could pay off the debt over the longer time frame.
Though it’s generally agreed that this first Operation Twist was unsuccessful in the short-term, hindsight analysis is mixed. Some think the FED didn’t pursue this easing long enough for it to be effective. Others look at the longer term picture and consider it to have been more effective than originally thought. It’s been this bigger picture analysis that kept the idea alive during our modern era of QE.
Our contemporary Operation Twist (OT2) was announced on September 21, 2011. The goal this time was to extend the debt without introducing new currency. Like its predecessor, OT2 sold off short term bonds (less than three years) and purchased $400 billion in longer term bonds (six to thirty years).
By pursuing QE in this manner, the FED hoped to avoid excessive inflationary pressure while at the same time affecting the economy in much the same way QE1 and QE2 were supposed to. Furthermore, it didn’t expand the FED’s balance sheet so much as extend a portion of it.
On June 20, 2012, the FED extended OT2 with an additional $267 billion in an effort to give legs to an economy that clearly wasn’t buying into previous efforts. However, that doesn’t mean that OT2 wasn’t effective. It’s quite possible that things would have been worse, on paper, than if they hadn’t implemented these measures.
On one hand the FED clearly is ingenious in producing ideas to help string the economy along. Without their intervention it seems clear that we would have entered a full-blown recession, or even depression, within the past decade.
On the other hand, we wouldn’t be in this mess in the first place if we didn’t have a full-blown fiat currency. It is the intervention of the FED that created the ability for excessive credit and the massive bubbles we’ve experienced in the first place. Sure, there are bubbles without fiat currency. But they are generally isolated in both location and sector. In our current situation, the bubble pervades the market and, in fact, is the market in many ways.
Debt bubble, inflationary bubble, materialistic bubble, currency reserve bubble and whatever other name you want to give it, all are conspiring against the U.S. being able to sustain its current economic status. Our debt is massive. Our currency is overprinted. Our GDP is lagging. Unemployment is high. Wages are low. What else can be said?
Well, tomorrow we’ll look at QE3 and consider the answer to this question.
For your prosperity,
J. Keith Johnson
The Gold Informant