“Helicopter Ben” Lives Up to His Name – But What Will Be His Legacy?

Ben Bernanke said the Fed will buy $85 billion in US debt every month through to the end of 2013. That means, by that time, the Fed balance sheet will have 25% of US GDP on its hands. It will eventually have to unwind all that. That will be hard to do.

But for the short term, look for higher prices at the pump, higher food prices, more desperate people about to retire that can’t get good yields on their investments, more insolvent state pension plans, aaaaaand… more riots, revolutions, and civil wars around the world.

Food prices spike up when the Fed does a round of QE*. When the Fed did its first move in 2008, we saw massive riots in the poor nations of the world. When QE2 hit in 2010, the riots were severe enough in North Africa to deliver the Arab Spring. Prices were already high enough this year to intensify the Syrian civil war and provide the foundation for the latest round of anti-US violence in Egypt, Libya, Yemen, Sudan, Tunisia, and Morocco (so far). This new QE looks set to send food prices even higher – and they were already higher in 2012 than they were in 2010.

Jeremy Grantham has said that we are five years into a severe global food shortage. This “QE to Infinity and Beyond” business from Bernanke is going to exacerbate that situation. We may soon see nuclear armed Pakistan and China descend into civil war because of food prices. China might be able to avoid war through draconian internal measures, but Pakistan is not capable of such action in my assessment.

The law of diminishing returns says that this QE will have less effect on the US economy than previous ones. It might even have no effect on the US economy outside of fueling a stock market bubble that will have tremendous fallout when it pops. But that law of diminishing returns is the least of our worries when we look at the law of inflation and how those food prices are going to affect Central America, South America, North Africa, Sub-Saharan Africa, the Middle East, South Asia, Central Asia, Southeast Asia, and East Asia. Think about each in turn, because we do ourselves a disservice if we lump them all together. Can governments in those regions withstand an even more severe food shortage than the one they’re facing now?

*QE= Quantitative Easing, or the Federal Reserve’s purchase of bank loans that may or may not be dodgy… Japan tried it in 2001 and found it to be highly ineffective in the long run.

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