QEII follow-up: why do people hate the idea?

by on November 12, 2010 at 9:50 am in Economics | Permalink

Philip W., a loyal MR reader, asks:

I put a great deal of stock in your post today telling me not to flip out over quantitative easing.  But I wonder if you could make a posting at some point trying to get inside the heads of some of the very bright people who are, more or less, flipping out.  For example, Jim Grant, as in this video:
 
Or if you don't have time to watch the video, just think of certain Wall Street skeptics of the Fed who like to do things like price the S&P 500 in terms of gold, and who decry the Fed's attempts to manipulate asset prices, and who say that the Fed is ever-more levered, and that this can lead to Very Bad Things in the not-too-distant future.  I'm afraid I can't just accept the idea that these people "don't get it," but I am at a loss to understand how there can be such a gulf between their way of thinking and yours.  Do Interfluidity's musings about the moralizing running through the political economy explain it?
 
I believe many of your readers may be wondering the same things.
 
As usual, many thanks to you for producing such a high volume of consumer surplus for me.

First, Interfluidity is a wise man.

Second, I believe the price of gold is high because of "financial-existential risk," not because of inflation per se.  The U.S. dollar and debt are no longer unambiguously safe and is there any real solution to the triple menace of highly leveraged banks, moral hazard, and financial strategies of extreme negative skewness?  It remains to be seen.  Given the forthcoming flow of debt finance required to keep Uncle Sam up and running, lots of inflation today wouldn't maximize political rents to leaders or medium-term seigniorage.

Third, the libertarian right is having a hard time seeing the Fed as a relative ally over the last three years, which it has been.  That admission implies an unappetizing shift in the goal posts for what is possible, and that sounds like a intellectual surrender to a lot of people I know.  I think they are in denial.  One alternative to acceptance is to view the Fed as sinister, which then leads you to fear anything they do, including QEII, their current major monetary policy initiative.  

Fourth, trust in government is at an especially low level and so monetary policy is viewed through this lens.  You need not have absolute trust in government (ha) but I doubt if government today is significantly more sinister, if at all, than in recent times past.  Possibly Obama is an arrogant man who wishes to lower your relative status in the broader scheme of things (at least with some "p" this is true), but don't let that influence your analysis of his policies or the policies affiliated with him.  Keep your eye on the ball – most of all markets are telling us that future inflation just won't be that high.

Addendum: Scott Sumner makes many interesting points on related issues.

1 Robbie Clark November 12, 2010 at 6:12 am

Tyler Cowen: "Keep your eye on the ball — most of all markets are telling us that future inflation just won't be that high."

What will you say, if say, in 5 years inflation is in the double digits under the Fed's own admission?

2 Ed November 12, 2010 at 6:31 am

The amount involved in this program matches the amount of new debt the US government must take on shortly.

How is this not printing money to pay for our own debt?

And when before in history did doing that not lead to economic collapse?

3 Jim November 12, 2010 at 7:04 am

"What will you say, if say, in 5 years inflation is in the double digits under the Fed's own admission?"

He will blame whatever Republican president we have at that time.

People hate QE2 because it is a baldfaced admission by the Government that they have absolutely zero interest in fixing any of our problems. Or even pretending to address them. Their solution will always be to print or borrow more money.

People support QE2 because the USA's current problems are just not affecting them very much, and/or they are incapable of criticizing anything Obama does.

4 T. Shaw November 12, 2010 at 7:23 am

"I doubt if government today is significantly more sinister, if at all, than in recent times past . . . "

Replace "sinister" with either "stupid" or "politicized" and you may have it.

There are two problems. Studpidity and untrammeled power combined set up conditions so that when the idiots inevitably screw up things it will be truly BIG TIME.

These institutions are basically responsible (did not see it coming, if nothing else) for this great recession. What evidence is there that they get it right this time?

Anyhow, it's monetizing the debt: printing paper money. Money rates can hardly be any lower . . .

5 Noah Yetter November 12, 2010 at 7:34 am

One alternative to acceptance is to view the Fed as sinister, which then leads you to fear anything they do, including QEII, their current major monetary policy initiative.

The Fed IS sinister, not in the sense that its managers are out to do evil, but in that its very purpose as an institution is destructive, immoral, and inconsistent with both liberty and an idealized market economy. It is not unique in this, merely a member of the larger class of Central Banks which enable and perpetuate the inherently fraudulent and insolvent system of Fractional Reserve Banking. QE2 is simply emblematic of this.

Markets invented money all on their own without the help of any government. Government takeovers of monetary systems, which have been repeated over millenia, have never produced superior results.

I should just stop now and instead refer the curious reader to any number of Murray Rothbard tomes.

6 Alex November 12, 2010 at 7:48 am

Seeing "trust in government is at an especially low level" immediately reminds me of the opening chapter of Wealth of Nations: "For in every country of the world, I believe, the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal, which had been original contained in their coins."

Outside of fundamental objections, it is hard not to notice who bears the burden of QE2. I rarely drive, so when I fill up my car, I notice my gas is now $3.40 instead of $2.78. The real stunner is the dramatic swings in the grocery bills.

It is quite disheartening to read so many economists paint broad brushes about The Economy and Policy, but gloss over what this does to the great majority of people.

And one more quote from Barbara Tuchman (A Distant Mirror): "Coins called in were re-minted with a lower proportion of gold or silver and re-circulated at the old face value, with the difference being retained by the Treasury. Since the petty coins of daily use were those affected, the system reduced the real wages and purchasing power of common people while bankers, merchants, and nobles, whose movable wealth was in large gold coins or gold and silver vessels and plate, were less affected."

7 A Berman November 12, 2010 at 8:46 am

Congratulations on your marvelously succinct yet accurate description of President Obama!

He will always favor debtors over lenders. Reducing unemployment will be his main goal, and he quite possibly sees high inflation as a bonus, if not an outright goal as well.

8 Josh November 12, 2010 at 9:09 am

Maybe people don't like QE2 because it was expected to cause the dollar to fall further, and oh, look, it has. Sure, there's the standard abstract libertarian fear of "future inflation cuz of the increased money supply" but now I'm starting to see articles about inflation right now exacerbated by the falling dollar. At least crude oil has been recouping a lot today.

9 Andrew November 12, 2010 at 9:40 am

My favorite think about interfluidity is that his name sounds like a professional wrestler.

He should end every paragraph with "Whooooooooo!"

10 Perry The Cynic November 12, 2010 at 9:53 am

"You need not have absolute trust in government (ha) but I doubt if government today is significantly more sinister, if at all, than in recent times past."

It's not that government is any more ill-intentioned today. It's that over the last few years, the scale of generally accepted intervention has mushroomed, as has the armageddon-based language justifying them, with no concomitant evidence of insight or understanding. The larger the interventions, the more likely they are to trigger unexpected systemic (and possibly irreversible) changes.

The ultimate source of much of the current anxiety is not a perception of evil or ill intent; it is a perception of incompetence paired with hubris. It makes many people want to say, "Step slowly away from those economic levers before we are forced to shoot you."

Cheers
— perry

11 Andrew November 12, 2010 at 9:59 am

I'd be content if they didn't tax capital gains on gold and take naked pictures of us at the airport.

12 Outsider November 12, 2010 at 10:11 am

Part of the opportunity cost for having done something like QE

is not knowing what would have happened with out it.

In that respect there is no way ex post to asess the choice.

In a complex system like the economy

it is also difficult to isolate the effect of any given course of

action. I think the idea of being curious is approriate since we all

seem to be way to emotional about the question. We should be careful

not to credit or blame any course of action for the outcome good or

bad since we just don't know. Tyler's position is quite reasonable

based on the evidence we have seen to date. He tells us what he

thinks and why and is not carrying around a bunch of idealogical

baggage. For those of you who are maybe its time to set it down

and start doing some honest reflecting.

13 Six Ounces November 12, 2010 at 10:59 am

I don't hate the Fed and see sense in maintaining an elastic currency. But I'm highly skeptical of the Fed's ability to spur the economy without negative consequences.

I don't see any signs of inflation nor do I fear double digit inflation in the future.

I think there is a commodity and house price bubble underway. I also think we've exported our inflation to China.

Banks are flush with liquidity. They are not increasing lending and they are reducing funding costs by not renewing their highest cost liabilities. How exactly will QE2 help?

If we are out of recession, i.e. Cyclical unemployment has vanished, then why are we continuing with expansionary fiscal and monetary poilicy when the lagged effect will occur after we have returned to our long run GDP growth?

If monetary policy is ineffective, we should not do QE2. If monetary policy is effective, we should not do QE2. I don't think there's any theory which supports it. It's political.

14 Outsider November 12, 2010 at 11:47 am

Just an observation.

The countries that are going down the austerity

path don't seem to be doing so well. I think it is

a dramatic illustration that timing matters. It's not only what

to do but how and when. QE does not look so bad right now.

I also think the outcome will be a result of a blend of the

interaction of what everyone is doing in the world with

public, fiscal and monetary policy. These are interesting times.

15 Jason (the commenter November 12, 2010 at 1:43 pm

This has nothing about the Fed appearing sinister. There are large structural problems in the American economy, which printing money does not solve.

16 dirk November 12, 2010 at 2:09 pm

"DeLong and Krugman are arguing the current unemployment is not structural precisely to justify continued fiscal policy."

We aren't talking about fiscal policy. Scott Sumner has probably been the loudest voice calling for looser monetary policy, not DeLong and Krugman. If you think Sumner's motives are political — what exactly is his political agenda?

17 dirk November 12, 2010 at 5:46 pm

"in this case the clear winners are those who currently have large bondholdings"

and those without jobs.

when the Fed tightens monetary policy, they will sell bonds, not withdraw cash from every household. is that unfair?

"Even if there would have been enormous damage without Fed intervention (deflation, bank failures, higher unemployment, federal hiring freezes), there's something to be said for 'justice, though the heavens fall'."

life isn't fair. do you prefer the government to be fair or pragmatic? capitalism isn't *fair* — but it is pragmatic. quit whining.

18 Six Ounces November 12, 2010 at 9:49 pm

Dirk, I made it clear Krugman and DeLong want more fiscal policy.

But whether we're talking fiscal or monetary policy, the questions remain: Are we still in a recession or are we in a recovery? Is the current unemployment cyclical or structural?

If the recession is over and unemployment is structural, there is no basis in theory for either fiscal or monetary policy. If we employ expansionary policies in a recovery, we will likely get inflation and an expansionary gap.

The policy and the theory are confused.

We overconsumed and overproduced for at least a decade. We have a huge resource debt to pay off. We're paying it back with unemployed labor and capital. The solution is not to build more resource debt.

Wages must drop and labor must seek different jobs. Paying them to do nothing or paying them to do what they did before only makes the problem worse.

19 Andrew November 13, 2010 at 2:13 am

Also, our main problem isn't the short-run economy, it is the long-run government promises that must be retrenched (as in dig a hole and bury them). In fact, it is likely a lot of our short-run problems are due to the long-run problem. Does QEII deal with the long run problem? Not really. You won't be able to inflate away future promises. Your future liabilities are real. That's a good reason to hate it.

20 Barkley Rosser November 13, 2010 at 12:13 pm

People need to remember that the money multiplier process is broken. So increases in the monetary base are not

translating into increases in the money supply.

Also, all the foreigners complaining about the policy are ones with bilateral trade surpluses with the US and

are unhappy about the dollar going down in value, although any textbook tells you that if you are running large

and persistent current account deficits as we have been doing for a long time, the value of your currency should

go down, and virtually everybody outside of the PRC has been denouncing their policy of pegging the yuan/rmb to

the US dollar. The real joke is that for all the whining by the Germans about the dollar devaluing, it is currently

rising thanks to the rising fear of an Irish default.

Bottom line is all the talk of QEII is way overblown on all sides. It will not cause much an increase in

economic activity because long rates are only declining a bit and the dollar devaluation is not going very

far, while it is also not going to lead to much inflation due to the non-functioning of the MM, the the 0.4%

increase in the TIPS spread from 1.2% to 1.6% probably on the money for a reasonable forecast of the

inflationary impac of it, in short, pretty much a big zip.

21 J Thomas November 14, 2010 at 6:35 am

"People need to remember that the money multiplier process is broken."

Why is it broken?

More important, who broke it? Who do we blame? Why they broke it is maybe less important, but at any rate we have to ask who first before we can ask about their motives.

22 Jones November 20, 2010 at 1:06 pm

I don't have any problem with printing money in this situation (is there a reason we should call it QE, when it's just printing money?). Inflation is currently low and we need something to stimulate the economy. The Fed can decide to not print money later (which it will eventually need to do) as the population is still growing and so there will eventually need to be money printing to accommodate more people, or the Fed can decide to sell it's government bonds at a later date.

Jones political forum!

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