Today the financial community awaits Fed’s decision on Quantitative Easing 2, which has become the euphemism for a second round of money creation in another effort to get the economy going. At the end of its two-day FOMC meeting, the Fed will reveal the details (some, at least; all, probably not) of Quantitative Easing 2.
Looking at the statistics, it’s clear that Quantitative Easing 1 failed, with the economy still stuck in recession. But, why let a poor past performance keep you from doing the same thing again? (Proponents of quantitative easing assert that the recession would be worse had QE1 not been implemented, but that cannot be proven.)
Unfortunately, quantitative easing is not something new, but is simply another name for John Maynard Keynes’ flawed concept of printing money in hopes of stimulating the economy. The immorality of debasing the currency, reducing the value of peoples’ savings and destroying retirements of those on fixed incomes is not discussed. It’s all about the short-term. Could we expect anything less from politicians?
Some analysts expect an announcement of a “mere” $300 billion with a promise of more to come. Some are calling for $500 billion, some for $2 trillion. Others are calling for “shock and awe,” just bomb the money supply, let the chips fall where they may. The latter fear deflation, not inflation. Besides, they argue, QE1 did not result in price inflation. Former Fed governor Larry Mayer says it will take “more than $5 trillion.”
Additionally, the Fed seems set on raising “inflation expectations,” which, according to conventional theory, will cause Americans to turn from saving to spending. It used to be that saving and being thrifty were virtues, but not in today’s brave new world. With this theory, the Fed must think that it can keep price inflation from getting out of control. But how?
That Japan is still mired in a 20-year recession despite zero and near zero interest rates and an abundance of “bridges to nowhere” projects has not dampened the enthusiasm for this Keynesian policy. But, one need not go to the Japan to learn that central bank and government interventions will not always get economies moving. Look at our own Great Depression.
Although it is not known how long it will take for increases in the money supply to result in higher price inflation, it eventually will. Further, QE2 will be on top of QE1, an injection somewhere around $2 trillion. If this were a football game, the Fed would be penalized for piling on.
Paul Farrell of MarketWatch takes a very caustic view of QE2 in his Sell bonds now, Fed’s QE2 is doomed to fail. Investment Business Times’ online site has an excellent explanation of the mechanics of the Fed employing quantitative easing. Sadly, the article embraces the concepts of Keynesian economics as if they were sound policies, which they are not.