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.
All we have to do is look back at Nixon to see what happens when we print money. For any one who lived in the 70’s and 80’s, it is hard to forget what a strain of double digit interest rates, high unemployment and uncontrol inflation.
When Reagan took over after the Carter’s single term, Paul Volcker had just become head of the Fed and he was a “hawk” on inflation. Early in Reagan’s term, price inflation hit 13% and the prime rate 21% under Volcker’s policies. Today, although Vocker is Chairman of Obama’s Economic Recovery Advisory Board, it is difficult to believe that he has any influence of the Obama administration’s approach to today’s problems.
Why should I pay for this mess when I chose to be financially responsible and I chose to stay out of debt? Why couldnt governement and the banks do the same? Yes, I wanted that big house and yacht, but I did not buy one because I knew it was not a wise move to put myself in that kind of debt – even when the times were good!
This derivative game is actually criminal. Wealthy individuals and institutions who profited from this should go to prison and their vast sums of money given back that was stolen due to greed and corruptive practices. Everyone had his hand in the cookie jar. It was great while it lasted (not for the majority of us), but now the price has to be paid by all Americans – now that is criminal also. I say if one who chose to stay out of debt, he should not have to pay for this. Am I wrong?
You are not wrong that you should not pay, but, unfortunately, you will, along with all other Americans. To bail out the banks, to ATTEMPT to forstall the day of reckoning for the derivative scheme, the Fed and the Treasury are debasing the dollar, whick will result in a lower standard of living for Americans.
Much of the blame lies with Alan Greenspan and his 1% fed funds rate, which was the primary cause of the housing boom/bust. Still, great blame lies with big banks that embraced the derivatives that now threaten the world’s banking system. There will be no getting out of this without pain, a great deal of pain.
I find it fascinating that we believe using one debt instrument to purchase mass quantities of another debt instrument is good for our economy. This seems to be such a long shot that leads to very undesirable outcomes on either end of the spectrum.
Carl
The results will be very undesirable. If the results are not hyperinflation, it will be the first time in history that a country has gotten itself in a situation where it can print money at will and not do it until the country’s currency not become worthless.
It is fascinating that we (our country) is using one debt instrument to purchase another debt instrument and somehow that is supposed to be good for our economy. It’s a Brave New World, financially speaking.