Hooray for Quantitative Easing???

[jeremymday]

Here we go again...
For all you current or hopeful ERE'ers Id say this is the news to watch...
Are we gonna have inflation or deflation, and by how much? What is the government doing to better or worsen you chances at ERE?
Here's the yahoo article with tons of outraged comments. Makes for an entertaining read...
http://finance.yahoo.com/news/Quantitat ... 9.html?x=0
I am just curious as to what everyones thoughts are about this???

[Cashflow]

Here is my opinion.
"Quantitative easing" is FedSpeak for "printing money."
"Printing money" led to hyperinflation in the Weimar Republic (When Money Dies: The Nightmare of the Weimar Collapse).
If you ever wanted to become a billionaire, you just might get the chance if "quantitative easing" gets out of control (YOU Can be a BILLIONAIRE!!! Without Doing Anything; Five Ways to Profit BIG from Global Collapse).

[jacob]

The Feds(federal reserve) lowers interest rates which increases the value of government bonds. The Feds then print money (write out credit) to the banks who cash in their bonds for a capital gain. This increases bank equity. The banks uses the credit to improve their balance sheets.
The financial fallout is contained right there on the spot, so nothing happens from the quantitative juggling of numbers. It's not like businesses suddenly got more profitable because NOTHING REAL happened. Hence the banks will keep the money, just like they did with TARP.
The whole thing is a dud, except if you own bank stocks. Then it's like Xmas!

[starshard0]

I'm guessing some sort of spiraling hyper-inflation, but I've always been kind of gloom and doom-y about the economy.

[Chad]

I agree with Jacob. This is just another way to give the banks money. The banks are still in trouble with the mortgage mess and commercial real estate is quietly adding to the pain. The Fed is using the tools it doesn't have to get approval for. Unfortunately, this means the banks get a free ride. We should have followed the Swiss model for the bailout.

[George the original one]

Short of again handing each taxpayer $400 or cash for clunkers or first-time homebuyer credit, this is the only way the government can stimulate the economy since interest rates are effectively zero.
Why does the US economy need stimulation? Because US unemployment has only stabilized and not begun to turn around.
We're still in a flat-to-deflationary scenario, so printing money is a reasonable stimulus, but... is it too much or too little?
In the long run, we'll head back to inflation. Hyperinflation, I think, is still not really in the cards until multiple resource shortages start occuring (during last night's trip to the supermarket, I saw that beef is getting very expensive, but chicken is still reasonable... if both were expensive, then I'd worry).

[George the other one]

I think that the major question that we need to ask is "Does inflation create wealth, economic growth, and real employment opportunities?"
I would argue that it does not. Personally I believe that in an economy that uses a fiat currency there is a tendency for inflation to occur when the economy is experiencing growth (though not always). However, it is a large leap of faith to go from saying that "inflation occurs in a growing economy" to "a growing economy occurs because of inflation." That would be like saying "it is cold outside because I am getting colder."
Another question that should be asked is "Why does the Federal Reserve want to stimulate the economy via inflation?" Well, after reading The Creature from Jekyll Island I would be hesitant to say that it is to help stabilize the economy or to raise employment as the afore mentioned book argued quite convincingly that neither of these objectives are the Federal Reserves objectives.

[Louis]

“The Big Money economy is doing well these days. That’s partly thanks to Ben Bernanke, whose Fed is keeping interest rates near zero by printing money as fast as it dare. It’s essentially free money to America’s Big Money economy. Free money can almost always be put to uses that create more of it. Big corporations are buying back their shares of stock, thereby boosting corporate earnings. They’re merging and acquiring other companies. And they’re going abroad in search of customers. Thanks to fast-growing China, India, and Brazil, giant American corporations are racking up sales. They’re selling Asian and Latin American consumers everything from cars and cell phones to fancy Internet software and iPads. Forty percent of the S&P 500 biggest corporations are now doing more than 60 percent of their business abroad. And America’s biggest investors are also going abroad to get a nice return on their money.”
Check http://robertreich.org/post/1488766304

[NYC ERE]

@George I think government-induced inflation is unfair to consumers and (conservative, non-equity-investing) savers both, but to your questions, "Does inflation create wealth, economic growth, and real employment opportunities?" I think the answer is yes (selectively), yes and yes. I watched a rather bald-faced propaganda film from the '30s on YouTube a few months ago espousing the merits of purposeful inflation. The basic idea is that producers, seeing the writing on the wall--their cash reserves rapidly losing value--convert that cash into hard assets, presumably productive hard assets. The purchase of these assets has a stimulatory effect, and--I'm departing from the video at this point--the (unjust) draining of consumers' buying power and wealth gives an incentive to work those productive assets. Also beyond the points of this video, if devaluing the dollar leads to an increase in exports, you may actually have an expanded market to sell this increased output into.
So it seems that QE transfers wealth from the consumer to the producer, from the money market/CD investor to the equity investor, and from the worker to the entrepreneur--Does it actually create wealth and economic growth? Looking at the past 80 years in America, it would be hard to say that it doesn't.

[jacob]

That's the Keynesian argument. It works for the boom part of the cycle, but it fails because it doesn't consider the nonlinear feedback.
First due to the mechanics of inflation, inflation mainly takes from people further away from government (seniors, fixed-income, consumer staples,...) and gives to people closer to the government (defense, banks, ...).
While it is clear that this takes wealth from some people and gives it to others, the question is whether it produces wealth on an absolute scale.
Then you simply need to answer whether the group which the money was taken from is less productive with the money than the group it was given to.
The answer is a direct contradiction to capitalism since capitalism should make money flow to the most productive (highest returns) groups. We (the people), that is, the government can try to make sure that this actually happens; however, sometimes money flows to things which are clearly not that productive such as get rich quick schemes or electric marble towers. So the government can correct for this either through regulation, taxation, or indirect confiscation.
Inflation manifests itself when the money supply (as created by the government) outpaces the wealth supply. Since you can't know for sure what the government is going to do this creates a risk premium. This increases borrowing costs for private investors as well which makes them less productive.
So overall ... if you believe government is more productive than private business, inflation is good. And vice versa.
The answer differs between sectors. Government would probably do a better job at health insurance as witnessed by the fact that governments in non-US countries provide health care with similar results at half the price. Private business probably does a better job at industrial and agricultural production as witnessed by the failure of the Soviet Union.
[Hyperinflation will occur if the government adds massive amounts of money to the circulation without also adding value. The bank bailouts have not added to the circulation. The US could quench a lot of inflation simply by reducing defense expenses which by definition are unproductive. The fiscal policy may in fact render the US toothless. I consider this a more likely outcome than a sovereign default. Equally likely is the massive "waste" of money on keeping old people alive for six additional months in intensive high tech care. Whether it's cutting the health care system or the military, one of them may happen than a USD default.]

[KevinW]

On the OP's question, I see a tug of war between unprecedented deflationary and inflationary forces. The figures on both sides are too big for me to wrap my head around, so I can't call a winner. Since these forces are concentrated in different sectors and unfold on different time scales, my prediction is that we'll lurch violently between spurts of inflation and deflation for a while.

[Carlos]

@Chad
Sums up my thesis of the purpose of QE2 exactly.
I think the Fed is trying to stimulate the economy. A bigger issue in my mind is an attempt to prop up the banks and the housing market. I think the real estate market is still very weak and further price reductions put pressure on bank equity.
The Fed is trying to prevent a need for TARP 2 via QE2...
That's my suspicion at least...

[gibberade]

Jacob, could you elaborate on what this means:

"The fiscal policy may in fact render the US toothless. I consider this a more likely outcome than a sovereign default."

I'm not sure I understand what you mean by toothless & default.

[jacob]

Every country has the equivalent of a credit rating. Sovereign defaults (national bankruptcy) will ding a country's credit for several decades---they are not easily forgotten or forgiven. Bad credit makes growth much more costly. I thus think it more likely that the US would reduce its defense budget (25% of the entire budget) than default on its debt. With a smaller budget it would be difficult to maintain global military dominance.
Fun fact: If you add up the acreage of all the US military bases in the world, the Pentagon actually turns out to be one of the largest real estate owners on the planet.

[George the other one]

@Zev

In theory you are correct. However, in real life I do not see inflation successfully influencing people to buy hard assets (in great numbers). This is because in believing in the former idea you are assuming that people have a lot of fiat currency lying around. However, in practice this just doesn't seem to be the case for the majority of Americans. Specifically there are three major groups of people that inflation does not work for, spenders, savers, and investors. Thus, because of the broad base of people that inflation does not work on, inflation actually has a hard time stimulating the economy. The following is my reasoning.
So first, a lot of Americans are currently spending most to all of their total money supply (income + credit). Because of this inflation will be unable to influence their monetary decisions because they have no spare money to influence. Thus introducing inflation will fail to produce a greater consumer base which is why demand for products will not greatly increase with this new round of quantitative easing. Because of this businesses will not be able to expand even with the increased volume of money in the system because they will not have an increasing customer base (Actually, their customer base will probability shrink because wage increases typically lag behind inflation so spenders will have less fiat value to spend on the same amount of goods).
Secondly, inflation does not work on investors either. What is going to happen is that investors are not going to flee to hard assets. Instead what they are going to do is to try to keep consuming at relatively the same level (plus or minus lifestyle creep which would have happened anyways) while putting their fiat currency into riskier and riskier investments because they will want to beat inflation. However, with riskier investments comes a greater chance of their investments going belly up. This will happen often enough due to the inheritableness of a risker investment and a stagnating consumer base (see point one), and because the current economic conditions are less forgiving. Once these investors lose a large portion of their investments they will either become afraid and cut back on their spending (thus contributing to the contraction of the consumer base), become savers (see point three), continue their current investing scheme (repeat this point), or focus on safe investments. Even if the investor does not lose they will probably reinvest their proceeds which they would have done anyways had the fed not introduced a new round of quantitative easing. Note that inflation has not greatly influenced an investor in the above scenarios other than to persuade them to make riskier bets than they would have otherwise done.
Thirdly, inflation does not influence savers. A saver is probably not going to buy more hard assets because of inflation. Instead the saver may eat the inflation cost, move their fiat savings into the less risky bets that the investors fled, or they are going to move their stored wealth to other monetary systems (viz. Canadian dollar, gold, etc.) because (for the most part) they prefer to have their wealth denominated in a monetary system. Thus inflation may influence a portion of savers (the ones that turn to low-risk betting) but will not produce the desired results with a determined saver (which is most of them, just think of your late uncle that stashed $100,000 in mason jars. Would he be influenced by QE2?).
So thus I guess my argument is that I still do not see how introducing inflation into our current economic situation will help create more jobs because I do not foresee businesses hiring more employees with out an increased demand for their products and I do not see inflation causing the consumer base to increase their demand for products. I can see inflation causing the consumer base to increase their demand for products IF the consumer base had a bunch of unused money lying around but that is not the current economic reality of America.

[gibberade]

OK, I understand now. Thanks for clarifying.
The way I see it, it would be pleasing to see a contraction of the US military. Not only would the debt problem be alleviated, but

the US would cease to exacerbate (or even incite) problems abroad.
Less spent on defense doesn't necessarily mean less security for Americans. Or even less peace in foreign nations. The defense department often makes work for itself...

[George the other one]

@Jacob

I disagree with you on the point of hyperinflation. Hyperinflation is not caused by adding massive amounts of fiat currency to an economy (viz an extremely high inflation rate). It is caused by a belief that the specific monetary system is worthless. This can occur in both inflation and deflation time periods as well as from monetary policy or from other factors. Here are some examples:
Prolonged high inflation rates. This is the typical example.
A deflation period where the government tries to force inflation on the populace. However before the government can achieve inflation people get scared away from the currency due to its uncertain future.
A country looks like it is going to be conquered which throws the value of the long-term worth of the countries currency into question.
Political protest - people simply stop accepting payments in certain currencies.

[Chad]

@George
One way to make a monetary system lose value is by adding massive amounts of currency (I'm not going to use "fiat" like a swear word). Thus, you get hyperinflation.
As pointed out previously the currency infusion into the banks didn't get much farther than the banks. Basically, the banks took the government money at 0% and bought government Tresuries at 1-2%. That does not leave much money from the bailouts sloshing around the economy.

[jacob]

Looks like social security and medicare instead, for now.
http://www.bloomberg.com/news/2010-11-1 ... icare.html

[dragoncar]

Don't forget that inflation is great for people in debt. So everyone with an underwater mortgage, credit card debt, etc. reaps the rewards of dollar devaluation ASSUMING that inflation increases their earning power.
Edit: By the way, why can't the fed buy some treasuries from me? I like money AND sex.