Does the New QE3 Concern You at All?
I know there are many other things to discuss in the Ricochet community, but I thought I should put a placeholder for comments for the question above.
The Federal Reserve, yesterday, announced it will now pursue zero interest rate policy into mid-2015, by purchasing even more mortgage backed securities at $40 billion per month. They do this by printing money. They are also extending their Operation Twist program of finding whatever short-term securities they can find and selling them in return for longer-term maturities. It's hoped that will decrease mortgage rates and lending rates; it has the additional effect of reducing the debt service costs of the U.S. Treasury.
Concerning the discussion of what I'd tell Romney/Ryan, I'd've run to the nearest microphone and said this shows the failure of Obama economic policy. Obama has taken us to a position where the only policy they seem willing to take is zero interest rates for the entirety of the next administration. (They've probably done this, but the press is probably preparing to ask Romney if those comments are premature since we don't know what economic growth in 2014 will be yet.) The House Republican Conference has already done the hard stuff, guys. Get to work.
I'd also make the point that the Fed is playing a dangerous game with inflation in the long run, and is just giving away revenue to the banks in the short-run. Those banks hold the MBS that the Fed will buy in QE3. Rather than lend that money out, banks are parking that money with the Federal Reserve, which is paying them interest for it. That's right, folks: The Fed is paying banks for not lending money to the economy. And then it says in its statement that business investment is down, and can't seem to see why.
Take it away, Ricochetland! Do you care? Or is this a non-story?
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Mar '12
Re: Does the New QE3 Concern You at All?
This is an attempt to keep the pending financial collapse from occurring during Obama's run for re-election. It will fail. Banks may have more cheap to free money to lend, but businesses, looking at the upcoming issues of rising taxation and the cost of Obamacare, aren't borrowing.
Obama's policies are the problem. The Democrat policies are the problem. Obama's agenda is the problem. Obama is the problem.
May '11
Re: Does the New QE3 Concern You at All?
Here is the text of the speech Milton Friedman gave on Japan.
May '11
Re: Does the New QE3 Concern You at All?
King Banaian
Josiah Neeley: I think the Fed's move yesterday was brilliant. It's basically an adaptation of what Milton Friedman advised the Japanese to do when they had their financial crisis, and has been effectively promoted by the libertarian economics professor Scott Sumner, among others.
...
John Taylor posted on this several months ago. I wrote a paper on NGDP targeting with my mentor and presented it at a professional meeting about 25 years ago. Friedman was in the audience. ... · 18 minutes ago
King,
Many thanks for linking to John Taylor's critique of Scott Sumner's nominal GDP targeting approach. It's a thoughtful engagement of Sumner's intriguing proposal. I need to read it again and think about it.
Can we get Jim Pethokoukis to weigh in here?
Jul '12
Re: Does the New QE3 Concern You at All?
Jun '12
Re: Does the New QE3 Concern You at All?
Interesting, when I read Dr. Friedman's speech one could interpret it as supporting Scott Summner's views. From my point of view controlling for TGDP may be possible, but it becomes very difficult when inflation does start to take off, as eventually it will, and money supply must be sharply contracted to keep the overall TGDP rate of growth, delays create overshoots and undershoots as anyone familar with control systems ( I am an engineer, sorry) will understand, and it is likely these could get out of control and trash the economy, not to mention when contraction of the money supply becomes necessary, politicans will be very unlikely to continue support, and we would have the worst of all worlds. So the policy might work, but people would be likely to prevent it, in my view
May '11
Re: Does the New QE3 Concern You at All?
Jim Pethokoukis writes about the Fed move here:
Jan '12
Re: Does the New QE3 Concern You at All?
When I read your comment I thought that these 'officials' have no more clue than the woman who said to her bank manager:
"How can I be out money; I still have checks in my checkbook?"
Jan '12
Re: Does the New QE3 Concern You at All?
The guy to follow is Allister Heath at CityAM . Here is his article but below is a taster.
"SORRY, but this is not the way to run an economy. There was a case for quantitative easing (QE) at the start of the financial crisis, and conceivably more recently too, to prevent the money supply from collapsing, in the US, in the UK and elsewhere. But not today – and especially not in America. The US economy is growing, feebly but steadily; the money supply appears to be ticking up; housing has shown signs of life; and America has gone much further than the UK in writing off the malinvestment from the bubble years. Above all, the US economy is not on the brink of a precipice – so why did Ben Bernanke, the Fed chairman, announce a third wave of quantitative easing, with the vote a resounding 11-1?"
Nov '10
Re: Does the New QE3 Concern You at All?
Yeah, it’s brilliant. Just because the first two times it didn’t work, it’s bound to work this time. You know what they say, third time is ....
Uh, I have a question though. If the Fed cannot keep the government’s cost of debt service at zero forever, and if interest rises even to just 3%, on all that outstanding debt, what do you suppose will happen to the Federal budget? Will you guys finally run out of other people’s money, because other people won’t have any money anymore?
Jul '10
Re: Does the New QE3 Concern You at All?
It's very concerning, but it is a non-story in that if you ask the majority of Americans what they think about QE3, you will most likely get blank stares or answers about a Canadian highway or a luxury liner. That may be even more concerning.
May '11
Re: Does the New QE3 Concern You at All?
Teejaw,
QE and QE2 did what they were supposed to do (prevent a new Great Depression and deal with Euro-related fall-out, respectively). QE3 differs, though, in that it is open-ended. Rather than stating it is only going to ease to the extent necessary to prevent a new crash, the new policy commits the Fed to easing until after the economy substantially recovers.
As for the national debt, it's important to note that monetary stimulus, unlike fiscal stimulus, does not make the deficit bigger. In fact it makes it smaller because more growth means more revenues. The Fed's actions mean that Congress can cut spending and reform entitlements without having to worry about the drag this might have on the economy.
Sep '10
Re: Does the New QE3 Concern You at All?
Is there any more evidence for this statement than when Joe Biden makes the exact same claim about the American Recovery and Reinvestment Act (aka the "Stimulus Bill")?
Jun '11
Re: Does the New QE3 Concern You at All?
There are some very good points expressed here but Josiah Neeley's perspective has to be examined.
Unless one accepts the view that the Fed is part of some Freemasonic cabal intent on owning the world, then it is more reasonable to see the Fed as pursuing the mandates given to them by Congress. In those terms, Bernanke is faced with a conundrum and he and his helpers are steering the ship as best they can. Only historians in the future will know whether or not the Fed is doing a good job here.
I have been hearing about impending runaway inflation since I was a child many decades ago and while the debate over the dollar's purchasing power is an interesting one, the country has grown much larger and more prosperous in this Age of the Fed. According to traditional economics, shouldn't we have runaway inflation now?
Or is there is something else happening here? Is this a new paradigm and is Bernanke a genius?
What if fuel prices plunge because of fracking? What does that do to the impending default camp?
May '11
Re: Does the New QE3 Concern You at All?
Mark,
Great question. For me, the best test is to look at the reaction of market indicators to the news. If the response to the Fed's announcement is a big jump in equities and a jump in real yields, that suggests that the market is forecasting more growth as a result of the move.
The market isn't infallible, but it's smarter than me and certainly smarter than the Vice President.
Nov '10
Re: Does the New QE3 Concern You at All?
Can blatant lies will turn a bad economy good?
Quantitative easing is fundamentally a lie. It spirits innumerable monetary units out of thin air. All are them are phony.
Monetary units say this: "I certify that the bearer has supplied goods and services, and is therefore entitled to demand what the market deems to be equivalent goods and services in return".
But phony monetary units create a demand unbacked by any supply.
Early-spenders get without giving, via enhanced purchasing power. They experience the quantiative "easing", right now. So where do they get what they get from? Does it appear magically? No: it must be transferred from later-spenders, via a reduction in their purchasing power. They experience quantitative "difficulty", sometime later.
Nonetheless, living this lie--which illegitimately enriches some at the expense of others--will restore prosperity, the Keysenians confidently assure us. How?
Well, the excitement of early-spenders will prove contagious. It will make an entire economy of contagiously excited people produce more wealth than they otherwise would have produced. Moreover, this gain in wealth will exceed any loss of wealth due to accidentally malinvesting phony money in unsustainable lines of production.
What could possibly go wrong?
Edited on September 14, 2012 at 11:18pmMar '11
Re: Does the New QE3 Concern You at All?
Josiah Neeley: Mark,
Great question. For me, the best test is to look at the reaction of market indicators to the news. If the response to the Fed's announcement is a big jump in equities and a jump in real yields, that suggests that the market is forecasting more growth as a result of the move. · 36 minutes ago
Why in the world are you assuming that? The Fed has just announced that it will be making unlimited MBS purchases, the market reaction is simply the assumption that the money they will be handing over to the financial companies holding this junk will rotate those funds back into the market. Unless you are of the opinion that the market is the economy it is difficult to see where growth comes into it.Is juicing the stock market growth?
Sep '10
Re: Does the New QE3 Concern You at All?
My admittedly simple understanding is that inflation is a function of quantity and velocity of money. The last 4-5 years have seen a fairly modest velocity, to say the least.
If this is wrong, or besides the point, I'm willing (eager even) to learn why.
May '11
Re: Does the New QE3 Concern You at All?
Roberto,
If it was just financial stocks that were up then that would suggest that only the financial sector would benefit. In fact, though, all stocks went up, financial and non-financial alike.
The price of a stock is the market's estimate of the present value of future dividends. If the stock market as a whole goes up, that means the market is predicting either more growth, or higher profits as a share of GDP. Since it's hard to see why QE would result in the latter, it's reasonable to take yesterday's jump in stock prices as a sign of the former (particularly when it's matched by an increase in real yields).
Sep '12
Re: Does the New QE3 Concern You at All?
Is this not the opposite of what currency devaluations do? Why hold on to cash, when it's being printed? Is central bank bond buying not a push to lend? If you think there's a lot of cash sitting on the sidelines waiting for a good moment to recirculate, then all of these QE's should be seen as a good thing. So I'm not terribly concerned at this point. In fact, I think we'd want to see some inflation speed up.
Now for my question. Can the US Treasury sell bonds directly to the Fed? Or is the Fed restricted to secondary market operations?
Apr '12
Re: Does the New QE3 Concern You at All?
The Federal Reserve's promise to keep the rate they loan money to bank at zero to 0.25% means my business will be able to pay off all the operating line of debt at my interest rate floor without having to pay steep fees to refinance some of it to a fix loan. Paying off debt is a positive return on investment whereas growth is much more challenging and risky.
Otherwise I am much again devaluing the dollar through QE3 because savers lose out as their nest egg is worth less. A weaker dollar makes imports much more expensive and punishes consumers. A stable dollar gives all of us freedom to make rational desisions and better know the costs and returns on investments.