Arguments against QE2

Besides the claim that it won't work, that is.  We might as well see them put on the table.  Edward Hugh (do read his whole post) sums one of them up:

Push to shove time has come, I fear, and if this reading is right then it is no exaggeration to say that a protracted and rigourously implemented round of QE2 in the United States could put so much pressure on the euro that the common currency would be put in danger of shattering under the pressure. Japan is already heading back into recession, as the yen is pushed to ever higher levels, and Germany, where the economy has been slowing since its June high, could easily follow Japan into recession as the fourth quarter advances.

In other words, even if the Europeans should follow suit, they either can't or won't and perhaps their loss will exceed our gain.  They have a straitjacket currency union and also tougher rigidities.

The second argument is that Thailand, Brazil, and other countries are becoming bubbles.  The claim is that financial institutions are still prone to seek too much risk and so the new liquidity flows to riskier markets than the U.S.  The new liquidity doesn't help us much, while it becomes "hot money" for some more vulnerable countries, which in the meantime have overvalued exchange rates.  The more that real rates of return fall in the U.S., the more dangerous this mechanism becomes.  There is a double whammy if those same countries are betting too strongly that robust Chinese commodities demand will continue indefinitely.

I'm not trying to persuade you of these (both seem fairly speculative to me), it's simply time to take stock of the debate.  It's a good example of why macroeconomic knowledge is hard to come by, namely that each situation brings some new risks and new constraints.


Before I clicked on the article, I made a mental bet that it was written by a European commentator.

I won the bet with myself.

Of course Europe, particularly Germany, is uncomfortable with a weaker dollar. Dah. Or, I should say, Yah.

It's the right thing?

Anyway, I was thinking about my two price controls are better than one theory, and we actually have an example. As usual, we stumble into the right thing without even knowing it. Imagine if you couldn't give the bank your house but had to actually come up with the money.

Kieran, If you choose to have a fiscal policy that does not balance even at full employment, you get what deserve.


You make it sound so simple. Fiscal and monetary policy create a balance of full employment without asset-class speculation and systematic misallocation of resources. In practice, politicians allocate capital where they believe the political return is highest and the Federal Reserve eases, creating asset-class speculation without generating full employment.

What about quantitatively tightening the labor supply through mass deportation of illegal immigrants? Rising wages are a stickier form of inflation, it would have less political repercussions (it would actually be a legal and technically necessary act of government), and while you can argue about the economics of it, it is better than thinking you are going to be able to inflate your currency without public and the financial markets front-running the policy and negating the effects. The effect of QE2 is going to be global financial instability and rising commodity prices, which will just bring us back to 2008.

Anyone want to be that if QE seriously occurs that the banks won't lobby for a reset of all the 20- and 30-year "fixed" loans? Mind you, part of why I grabbed a 30-year loan four years ago is because I was betting that QE would happen in a non-trivial fashion. By some accounts, it already has.

The part that I don't get is why everyone assumes that the average person is stupid. It is a LOT harder to hide these things today than it used to be because of increased connectivity. If we start printing money like it is free, people are going to reduce their valuation of the money. Starting with the ones buying our debt.

It just gets uglier from there.

QE is "quantitative easing", sometimes considered an "unconventional monetary policy" that can be done even when interest rates are at zero. The Fed is basically printing up money and using it to buy assets.

Post goes unanswered for an hour and then we both answer it 4 seconds apart. Weird.

QE= Quantitative Easing.

Basicly the Fed makes sure banks have plenty of money to lend, so that the economy will be pepped up.

I like the way the distinguished economist Yoram Bauman explained it:

If the U.S. economy were an animal, what animal would it be?

YORAM BAUMAN: I would have -- I would have to go with a hamster right now. And it's a hamster that's been running around its cage, you know, for maybe seven years. And it's tired. So, as a microeconomist, I look at it, and I think that the hamster needs some rest. Macroeconomists look at the hamster and think that the hamster needs some methamphetamines.

And I'm sure that they're right. But, after two years, it's going to be one ugly hamster. I mean, it's going to have rotten teeth. It's going to have like bloodshot eyes. It's going to be scratching itself all the time. You know, there's going to be a price to pay.


Quantitative Easing is the politically correct term for monetary inflation.

The European Central Bank can´t engage in QE (at least not officially), because its only objective is prize stability. Unemployment and the state of the economy are not part of its mandate. Its independence is furthermore guaranteed by several treaties, so that national governments can only exert very marginal influence.

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