As a kid, when it was time to go to the doctor it always meant a shot. I'm not real fond of needles. In fact I down right despise them. Of course, that made the "you're gonna feel a little prick" even worse. But, afterwards Mom would always say "now lets go get an ice cream cone" and I would feel much better. Nothing like a quick, short-lived sugar high to make you feel better about things.
Quantitative Easing (QE) in reality isn't any different. The question is do we need a shot in the arm, and will the vaccine work? We need something to spur an economic recovery. But, is QE the vaccine? Taking a flu shot to help with a cancerous tumor is not the answer.
Oct. 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high. “There would appear -- all else being equal -- to be a case for further action,” Bernanke...(is) considering ways (to) stimulate the economy as unemployment holds near 10%... After lowering interest rates almost to zero and purchasing $1.7 trillion of securities, policy makers are discussing... purchasing Treasuries...
Purchase additional Treasuries with what? Newly printed money. A pattern of borrowing and spending from future generations is not the answer. I'm not sure really what is. Consumers are trying to pay down debt and change their spending habits, while the government does not. Consumer spending makes up 70% of the U.S. GDP (economy). And until consumers feel safe to spend, there will be no recovery. The graphs below show just how much new money has been printed and injected into the system:
To simply explain Quantitative Easing (QE), consider the following two perspectives:
1) QE is a way to spur the economy into a re-start. Print and issue new dollars, buying with them newly issued or existing government securities or treasuries, and add them to the FED's balance sheet. This injects the new money into the economy, and the FED effectively monetizes and capitalizes our debt. This should cause prices to rise (inflation) because there are more dollars floating around and people will spend more of them to buy hard goods, food and energy, driving prices up. Money is cheap, rates are low. Banks lend cheaper money, and businesses hire and give raises with the cheaper money. People have more money to spend. People buy washing machines and flat screens. At least that's the theory. Ahh, the feeling of that sugar high. But, in 30 days those flat screens get more expensive because they were built in China, and your spending U.S. dollars...
I can tell you that when the supply of something is high (dollars), the price of each falls (devaluation), and that is exactly what is happening to the dollar against the world currencies. In Europe, they too, have significantly devalued the Euro the same way, but that's a whole different blog. Consider...
"Paper money eventually returns to its intrinsic value ZERO" - Voltaire 1729
2) QE is a desperate attempt to do something when you have run out of ideas that make sense but you feel you have to do something. It's short term bad choices without any long term regard for the consequences. Recently, dissension is evident at the table of the Federal Reserve Board of Governors. Two members are openly dissenting and speaking about that dissension publicly. You see, there is no real proof that this does anything for the economy. It just devalues our dollar against other world currencies. Rothbard says the devaluation of our currency has been going on since World War I...
The Monetary Breakdown of the West by Murray N. Rothbard
http://www.lewrockwell.com/rothbard/rothbard240.html
"...the prognosis for the dollar and for the international monetary system is grim indeed... until we return to the classical gold standard at a realistic gold price... And fueling disintegration will be the continued inflation of the supply of dollars and hence of American prices which show no sign of abating. The prospect of...runaway inflation at home...and economic warfare abroad. This prognosis can only be changed by a drastic alteration of the American and world monetary system: by the return to a free market commodity money such as gold, and by removing government totally from the monetary scene."
Both theories can stimulate a lot of happy hour debate. Now just how much flu shot dosage will cure cancer? I mean a flu shot is better than nothing right? So lets keep giving incremental doses until we see some change...I fear wrong. Throughout the centuries it has been proven time and again that you cannot control the markets indefinitely. It's just too big. Over $1 Trillion in stimulus was but a drop in the ocean of the world economy. Did it create jobs? Yes, for a few months. Some, maybe a year. Ahh, that sugar high. Then we are left with no jobs, and $1 Trillion more in debt. So, let's try it again and see if it works any better. Really?
I'm not here to tell you how to fix this. We all know a lot of smart people have tried. One very old theory is to do nothing. The market and economy will take care of itself, and will seek its own level. Some businesses need to fail, some banks need to fail, and some people just need to lose their homes. Natural Selection. It's not pleasant, but it is survival of the the fittest. How would the world be today, if we had bailed out the dinosaurs? I can see the nightly news headlines now: Dinosaur breaks through playground fence, eats 6... Some things are better off left to nature. Wouldn't you agree?
In the mean time I wait. Like the rest of the consumers in the U.S., I am watching my spending, paying down debt, and waiting for the appearance of the catalyst that will spur an economic recovery. I wait for the election cycle to bring about hope & change just like everyone else is. There is no doubt that we need change. We need the government to apply our basic principals for checkbook/debit card management. We've mortgaged our kid's futures. Now we are beginning to mortgage our grandkid's futures as well. We may have actually already done much more than that. Like so many the last few years who took out a loan that they could never repay, the good 'ole USA may have done the same. With the rest of the consumers in the U.S., I am watching my spending, paying down debt, and waiting for the appearance of the catalyst that will spur an economic recovery.
D
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