Everyone is singing the praises of the Federal Reserve’s next round of “Quantitative Easing” to the tune of nearly $1 trillion. Those in favor extol the virtues of the magical printing presses as if we all had been given a free cruise on the ship Queen Elizabeth 2. The truth for most of us is closer to 3rd class tickets on the Titanic.
Quantitative easing is simply printing more money. Normally the Federal Reserve buys government bonds passively to maintain its interest-rate target. With quantitative easing the Fed aggressively buys government bonds and other securities in large quantities.
So how does the Federal Reserve print money? First, it buys government bonds and other financial securities from big New York City banks. It pays for these bonds with newly created electronic money, using computers to change the records of the banks’ accounts at the Fed. If the banks want paper dollars, Federal Reserve Notes, the Department of the Mint at the U.S. Treasury prints and sends crisp new dollars to the Federal Reserve which forwards them to the banks.
People with inside information, or well-informed guesses can make tons of money off this process. Some bond traders and big banks are making a killing off of QE2.
The Fed says that quantitative easing will reduce interest rates and that this will increase investment spending which will increase employment and therefore help the economy recover. The truth is different. Printing money only distorts markets and slows the recovery as capital is again misallocated as was the case in the housing bubble and the tech bubble before it. Remember that Chairman Bernanke told us from 2005 to 2007 that there was no housing bubble and that everything was fine.
In addition to the threat of new bubbles, there is the more immediate and visible threat of price inflation. The value of the dollar has fallen by 13% over the last 5 months. The September Producer Price Index showed that meat prices went up 5.2% and gas went up 6.1%. Meanwhile, interest rates are at historically low levels; for retirees and savers this has virtually eliminated safe interest income and forced people into more risky assets.
Basic economics tells us that any set amount of money is sufficient as long as prices and the value of money are free to adjust. Given all the Fed’s money printing we should not be surprised that gold is up 24% this year. The reason the price fluctuates is that the value of the dollar is fluctuating, in this case plummeting, not that gold is unstable.
Quantitative easing is just printing money. This cannot help the economy recover and in many ways makes the economy and the dollar more unstable. It certainly is a bad deal for consumers, retirees and savers. The only beneficiaries are large multinational exporters, dealers in government bonds and securities, and money managers with inside information. Economic recovery will occur not because of quantitative easing, but in spite of it.
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Economic recovery will occur not because of quantitative easing, but in spite of it.Or perhaps more accurately, “recovery” will occur where economic activity is actually supported by real savings and prices aren’t distorted. Everything else will be a false recovery, like government contracts being handed out because Uncle Sugar’s bond prices are still being manipulated by central banks.
I think that QE2 is a bad idea, but this statement is false: “The reason the price fluctuates is that the value of the dollar is fluctuating, in this case plummeting, not that gold is unstable.”
Measure prices in gold for food, housing, what not, and you will see that these prices are MUCH more volatile than the same measured in the dollar. If and only if gold becomes the predominant currency are we likely to see a reversal of this situation.
Is the FED buying bonds to promote economic recovery, or are they merely shoring up the value of bonds?
Somebody is selling and when that bubble pops, where does that leave the FED and the government?
Let’s not pretend the interests of the FED are so far-reaching or thoughtful.
QE2 is Bernanke’s attempt to keep the counterfeiting operation in tip top shape. What good are printing presses and the Federal Reserve’s balance sheet without its special beneficiaries? The counterfeit operation enriches the beneficiaries without any concern about those who are stolen from or without any concern about the future.
QE2 is another way of saying: destroy savings and capital.
Isn’t another beneficiary those who borrow money now at low rates and pay it back with cheaper dollars later? if true and understood, this should motivate investment that uses debt. Isn’t that right?
There’s nothing we can do to stop this disaster, the thing we should be discussing is how we react on an individual level. What should we be doing? Buying gold? real estate? stocks? guns?
I currently have most of my assets in rental real estate. I would like opinions on how this investment vehicle will perform given the QE1, QE2, … environment.
The world champion debtor (U.S.) is on a mission to destroy the value of it’s creditors’ holdings.
You’ll benefit from this debt destruction to the extent that your rental real estate has debt on it. Any changes in the value of the real estate won’t be significant in comparison.
I like that closing remark. Austrian tend to be unnecessarily pessimistic. Sure, all these interventions will create their own distortions, including inflation, bubbles, and busts. It doesn’t always have to end in a Zimbabwe style hyperinflation or Soviet style collapse. Those are outliers. No one, including the central banksters, are interested in those outcomes. While banksters may be overconfident in their ability to hit specific inflation targets, but they are not clueless about avoiding Zimbabwe.
Zimbabwe didn’t plan to have hyperinflation. The nation’s money managers probably read Keynes’ GT, Paul Krugman’s NYT column and a few tombs by some other neo-, post-, or otherwise hyphenated disciples of His Lordship. Mugabe and his ministers undoubtedly thought they could use a limited measure of inflation to stimulate the economy while pursuing their nefarious objectives, which started the ball rolling. Once inflation gains sufficient momentum it is virtually unstoppable. Undoubtedly the ministers were/are helpless to arrest it without toppling the regime. I’m sure the Zimbabwe financial masters were not clueless. They were merely Keynesians. Eh, or is that the same thing?
Purchasing gold (and/or silver) would seem to me to be one way of betting against the Fed’s QE2 scheme succeeding. The Fed is the 800lb gorilla with a huge arsenal to influence (viz., manipulate) financial markets, including the market for gold, but this time around it may have run out of bananas. At least the initial response of markets to QE2 seems to indicate the gorilla is weakening.
Good Summary
Compare the first sentence of this article with the assertion of another article on the same page:
“Everyone is singing the praises of the Federal Reserve’s next round of “Quantitative Easing” to the tune of nearly $1 trillion.”
“The Whole World Says We Are Idiots”
So who is right, everyone or the whole world?
This is a great example of the confusion caused by cognitive dissonance on this site. There is obviously a struggle between paradigms going on here.
A very nice summary, and I loved the opening paragraph.
The Fed is now printing $6 billion per day, and nothing good will come out of
it for the middle class.
When you say “as capital is again misallocated,” do you mean purchasing foreign currency?
When you say “large multinational exporters,” do you mean arms and weapons manufacturers?
QE will not accomplish anything, but it’s certainly not inflationary. (If anything, due to the income on those bonds being taen out of the private sector, the net effect is deflationary) It merely substitutes one asset (reserves) for another (bonds). It doesn’t add any net financial assets to the economy. Where is the inflation going to come from?
http://bilbo.economicoutlook.net/blog/?p=661
When are we getting rid of the Fed?
QE does NOT, repeat NOT, equal money printing!!!! As the above article rightly points out, QE consists largely of the government/central bank machine buying government debt: i.e. one form of government liability is swapped for another.
In particular, short term government debt is almost indistinguishable from cash. Quantitatively easing short term government debt is about as pointless and has as little effect as swapping $10 bills for $20 bills. That’s why QE has been called “pushing on a piece of string”: it has little effect on inflation or anything else!
Just because ink isn’t involved doesn’t mean money isn’t printed. The only way inflation cannot be impacted is if that entire $600 billion never gets spent. When was the last time government didn’t spend?
Thanks to Murray for pointing out that because “ink isn’t involved doesn’t mean money isn’t printed”. I think about 90% of the population (me included) know that that money is created primarily by book keeping entries or electronically, rather than by actually printing $ bills.
Murray then claims that “The only way inflation cannot be impacted is if that entire $600 billion never gets spent.” Really? So how come there have been long periods (several decades in a row) in Europe and the US where “spending” rose by leaps and bounds, yet no inflation ensued? E.g. spending in the UK increased about fourfold in real terms during the 1800s, yet the prices were much the same at the end of the century as at its beginning.
Inflation occurs where demand exceeds the ability of an economy to supply. Given the large amount of capital equipment currently lying idle, and the large amount of unused labour (i.e. high unemployment), the $600 billion probably COULD be spent with little inflationary impact.
However (and unfortunately) there is little chance of much of the $600 being spent for the reason I gave above, namely that QE is little more than swapping one form of money for another.
And finally, Murray asks “When was the last time government didn’t spend?” I completely fail to see the relevance of the question, particularly as QE does not put more money (in the narrow sense of the word) into the pockets of government. It’s the private sector (or more accurately, former bond holders) who end up with more money!
In an effort to make my friends and family more aware of money supply I am asking for silver for Christmas. They may not want to hear about economics from me but they may learn something when they begin shopping for a silver coin or trinket.
doesn’t this defeat the purpose of trying to create a recovering economy. what i see is that the value of the dollar will decrease and inflation will occur. what i think we should do is NOT print more money
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