In memory of Dr. Andreas Höfert

The end of the World as we know it

If it is Saturday, 22 December or later and you are reading this, then the end of the world as some interpretations of the Mayan calendar predicted for 21 December 2012 has not transpired. Another “end of the world” prophecy has failed.

Erich von Däniken, the Swiss specialist on extraterrestrial influences on early human culture (if you believe in such), gave an all-clear already on 12 December 2012 in the Swiss tabloid Blick: “No, the end of the world will not occur on December 21.”

To state that “the end of the world will not occur on a given date” seems a rather easy forecast. Indeed, either the end of the world does not occur and I was right with my forecast, or I was wrong. In this case, though, no one will care anymore about what I said.

One also needs to ask why end-of-the-world stories maintain such a strong hold on our collective imagination. Wikipedia lists over 150 dates of the end of the world since the beginning of the Common Era, including 17 since the start of the 21st century. This is especially puzzling, since behavioral studies suggest that human beings have an optimism and overconfidence bias. Newlyweds expect their marriages to last a lifetime despite being aware of statistics indicating that 40–60% of new marriages in Western countries eventually end in divorce.

Although overconfidence and excessive pessimism seem antithetical on the surface, one explanation suggests that they spring from the same source. Both draw their strength from pride. In a strange psychological twist, our fondness for apocalypse and the end of the world might be as embedded in our vanity as our inherent optimism. After all, what could make us more special than being part of the generation that sees the end of the world?

End-of-the-world predictions have existed since the dawn of civilization. Generations after us will have their versions too. This said, on 12 December 2012 (12/12/12), the end of the world as we know it might still have been heralded - not from old engravings on a pyramid in Central America, but from an announcement written in a rather massive building in Washington DC, the US Federal Reserve. Responding to markets’ bidding and in the activist tradition of doing something rather than nothing, Fed Chairman Ben Bernanke announced the replacement of “Operation Twist,” scheduled to end this year, with measures immediately named “Quantitative Easing 3.5.”

On top of its monthly 40 billion US dollar purchases of mortgage-backed securities, the Federal Reserve will start buying 45 billion US dollars worth of Treasuries per month until the unemployment rate reaches 6.5%; it is currently at 7.7%.

This policy means that by September 2013, the balance sheet of the Federal Reserve will be four times as large as it was before September 2008. Those who doubted that modern central bankers mean what they say when they use words or phrases like “whatever it takes” or “unlimited” must now acknowledge that there are no restraints to central banking actions. One of my colleagues recently stated at an investor’s conference that: “QE1 was a necessity because it was done at a moment when the whole financial system was on the verge of collapsing. QE2 was a nicety, because it aimed at boosting a healing economy and it is doubtful that it really helped.”

In this vein, QE3 could then be defined as a nullity because I still need someone to explain to me the relationship between buying mortgage-backed securities and an improvement in employment. Finally, QE3.5 could be sheer insanity, because it looks like Albert Einstein’s definition of “doing the same thing over and over again and expecting different results.”

The end of the world did not occur on 21 December 2012. If by any chance it did and you are still reading this, then maybe in the aftermath the Federal Reserve announced QE4 and is now buying 400 billion US dollars worth of assets per month.

With this I wish you happy holidays and a prosperous 2013, in which we will certainly not lack liquidity.