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Source link: http://archive.mises.org/16240/where-is-qe2-taking-us/

Where Is QE2 Taking Us?

March 28, 2011 by

Five months into the second round of quantitative easing — “QE2″ — it is useful to take stock of what it has, and has not, accomplished. QE2 has begun to deliver on all the dangers of which the critics warned, but not the alleged benefits.

FULL ARTICLE by Robert P. Murphy

{ 12 comments }

Caleb March 28, 2011 at 9:09 am

Bob (can I call you Bob?), I feel a thousand times smarter after reading your articles. Great job! Keep it up!

David March 28, 2011 at 10:08 am

Where is this chart? “In the chart above, the monetary base (which I define in this article) surges three times: first in late 2008 when the crisis hit, then in March 2009 with the initial round of quantitative easing, and finally in late 2010 with QE2.” Thanks.

bionic mosquito March 28, 2011 at 10:33 am

The purpose was a pre-emptive “saving” of the banks. The banks have no excess reserves, except for the distorted accounting. The balance sheet can be made to lie, cash flow and liquidity cannot.

All the rest is a head-fake for public consumption.

The Fringe Economist March 28, 2011 at 12:48 pm

Wow, never knew the late 2008 monetary increase was so significant! That’s scary…

Ed Fowlkes March 28, 2011 at 1:02 pm

All we can do now is pray that “The Bernank” doesn’t announce QE3! That would lead us right over the edge of the cliff.

Dick Fox March 28, 2011 at 2:02 pm

Bob,

It appears that there is not much serious risk of a huge inflation at the moment but that very fact should give Bernanke and crew pause. If such massive injections of money do not move the inflation rate then their theories have serious flaws in them and if inflation does breakout their theories will have just about as much success curbing it as they have starting it.

Actually, because we are in a contraction, the mechanisms of introducing cash into the economy are broken. The FED buys bonds and other instruments to inject money into the system but the money flows directly into excess bank reserves, foreign exchange reserves, gold (and some other commodities), and foreign exchange. Why? Because there are no qualified borrowers. The banks cannot lend to the quality of borrower who needs the money because the borrowers are losing their homes and credit ratings.

Not only that but businesses are faced with so much uncertainty that they simply cannot afford to borrow to expand. Tomorrow they may be hit with a tax bill or a health care bill that could put them out of business.

Right now the FED has itself in a trilema. It cannot contract the money supply to slow inflation because of serious deflation. If cannot expand the money supply because it fears inflation. But neither can it sit still because there all kinds of situations adding to the problem day by day even with FED inaction (for example the increasing debt burden on the national debt growing more each month than the Republicans have proposed cutting spending.)

There is only one solution and that is growth. But congress and the president refuse to implement policies that will allow growth. All they need to do is make the Bush tax cuts permanent and cut corporate taxes to 15%. This is the magic formula of Nobel Laurete Robert Mundell.

Joe March 28, 2011 at 3:08 pm

@Dick,
I agree with the growth scenario. I also strongly suggest that the government get out of the way and let the economy grow. There also needs to be a large cut in spending. I am talking a lot more than the republicans are attempting to do. Why allow the socialists to become a bigger parasite? They have been doing that for years.
To be honest I believe that the people of this country are reaching a point where no amount of rational thought or common sense will deter them from asking for more and will do so even after it has all come crashing down upon them. Look at London and Madison. They are the new reality.

Dick Fox March 29, 2011 at 7:14 am

Joe,

Thanks for the thoughtful reply.

I believe that we should address spending and the over-regulation of the economy (for those who believe we need more regulations take a look at John Stossel’s interview of Jeffery Tucker, government mandated light bulbs, toilets, just look at any product you buy and you will see the government’s hand stamped on the side) but first we must reverse the contraction in our economy. This article in Forbes by Louis Woodhill is very important to understand. Only growth will solve our problems, not spending cuts, not QE.

I am very supportive of sound money and I believe that Ron Paul is doing most of the heavy lifting for our country right now, but even sound money will not bring recovery like a return to growth. We should at every point be pushing Republicans to move from their hyper-austerity posture to one of sustained economic growth. The thing that is interesting is that this is both an economic win and a political win, but the Republicans are determined to play by Democrat rules.

As Robert Mundell says, “There are no costs to the right policy mix.”

Deefburger March 28, 2011 at 4:48 pm

It’ll either be QEIII next or an alien invasion, whichever comes first. SOMETHING must be stimulating to the Keynesian economy! Right? Just think how fantastically stimulating an alien invasion would be! All those black budget projects could get a big infusion of cash, a ready excuse to spend is at hand, AND we can forget about terrorists and killer asteroids and focus our global attention on one single humungous problem….And spend ourselves into global human salvation! Woo Hoo!

What do they smoke at the Fed?

victor March 29, 2011 at 6:15 am

The Fed’s “digital printing press” certainly points to the USD falling the way of the Pego and Zimbabwe $.

Robert April 10, 2011 at 12:52 pm

Good article Robert!
The “Bank Loans Are Still Falling” section of the article is an apparent perception of the banks that higher inflation is looming over the horizon and the Fed controlled interest rates are to low. What bank, in it’s right mind, would loan money at 2% interest with the perception that future inflation would eat up any returns? The banks and I both perceive the inflationary effects of QE2 are far from over. Only a free market determined interest rates would “loosen up” credit and spur investment and savings.

Tim Kern April 11, 2011 at 5:22 pm

I was right there with you until the final paragraph’s mention of “job creation.” At least WE (economists and econ students) have to stop using that misleading, moronic term!

Jobs are not goods, remember?

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