I was having a conversation with my son about the housing economy the other day and he brought up Quantitative Easing ...or QE3. I had never heard of this term (QE3 or QE2) , I am ashamed to say until he brought it up. I knew about the FEDs plan to print more money and use this strategy to slow down the hemorraging that was happening in our economy. Yet I never heard it described as quantitaive easing.
So my little baby boy (32 years old) shared with me his knowledge. As he spoke he shared that he felt this would help for a couple of reasons. Simply put: First he explained that the banks are pretty flush and have their reserves pretty filled up and are feeling more secure. With this he felt that the FED executing another QE or QE3 it would open up the banks to loan out more money across the board, not only in housing monies but for all consumer goods. This he felt would be a good jump start to the economy as it would also drive the job market in the right direction...more monies means more spending means more products...means more jobs, means more houses sold means economy getting stronger.
It would make sense seeing as how we have an election year coming up and the DEMOs need to do something or Obama may be seeing his last days in office. So with this in mind your comments are invited. Please read the articles and let me know your thoughts. With all the negative "double dip" news I am trying to keep a more optimistic outlook...
Nuff Said... Robert Moreno
Quantitative Easing: What is it and why is it?
- October 10th, 2010 9:44 pm ET
Ruminations, October 10, 2010
Quantitative Easing: What’s that?
When you want to institute a policy that is sure to arouse suspicions, the best thing to do is to use a new name for it. The Federal Reserve has recently announced that it is seriously contemplating instituting a policy of “quantitative easing.” Who could be against a policy of quantitative easing – that is, unless you realized that it is just a term for printing money and lots of it.
Now, we all know that printing money can lead to inflation or even hyperinflation (as in post World War II Hungary where prices doubled every 14 hours or so). So, why would the Fed even consider a policy of quantitative easing? They’re not stupid. There are upsides to that method, they believe – especially today – and here are they are:
- The Fed is able to take on an expanded role of trying to help stimulate economy as well as stabilizing the currency. In days gone by, the primary role was stabilizing the currency and ignoring the economy.
- Quantitative easing, some at the Fed feel, would avoid the risk of deflation – which we have not experienced since the Great Depression. They call the current inflation rate in the U.S. (virtually nil) “disinflationary” and posit that continued slowness of recovery could lead to deflation. In a deflationary economy, prices drop and continue to drop. Consumers postpone purchases reasoning that prices will be cheaper in the future; this action leads an acceleration of the economic downturn. And then there is the debt repayment problem; when an asset diminishes in value, such as in our housing market, people may abandon these assets.
- By printing money and then purchasing government securities, the Fed increases the balances that member banks have in the Fed and thus the assets that banks have available for lending. With additional assets, it is assumed that banks will lend more to individuals and businesses, which will lead to a growing economy.
- Trade balances improve. Printing money lowers the value of the dollar and, therefore, cheapens the price of U.S. goods. This can lead to increased exports and more jobs; hence, a rebounding economy.
So, it looks like a good idea and one that should be implemented. And, in fact, William Dudley, president of the Federal Reserve Bank of New York, said last week “We have tools that can provide additional stimulus at costs that do not appear to be prohibitive. Thus, I conclude that further action is likely to be warranted…”
Is there a downside? Everything has a downside. Let’s look at some of the potential downsides.
- The dual role of stimulating the economy and supporting the currency: You may recall that when Paul Volker assumed the position of Fed Chairman, he halted runaway inflation but, at the same time, contributed to the 1982 recession. Still, Volker’s actions contributed to the long-term stability of the dollar and the economic growth that followed for 25 years. This contrasts with the times when President Richard Nixon ordered Fed Chairman Arthur Burns and when President Jimmie Carter ordered Fed Chairman William Miller to print more money to stimulate the economy; the effects on the economy were virtually negative in that the money supply contributed to inflation and little else.
- The risk of deflation: There are some economists (notably Robert C.B. Johnsson) who believe that the impact of deflation is relatively benign. Often the steps taken by a government to counter deflation, as in Japan from 1995 to present, prevent a free-market adjustment and can prevent or prolong a recovery.
- The Fed’s purchasing government securities and increasing bank funds available for loans may not work. With banks sitting on a high number of non-performing loans (a euphemism for loans that a bank made that will never be repaid), it is likely that banks will hold-on to these new assets. Futhermore, in order to issue loans, there must be a demand. Given that businesses are currently sitting on almost $2 trillion of cash that they are reluctant to spend because of uncertainty in markets and with government policies, it is hard to see how this bank infusion of funds will help.
- Quantitative easing may not help with trade balances as it is hoped. Countries depend on the value of their currencies to survive in the international market and, at the same time, the dollar serves as the world reserve currency and all countries have a stake in the dollar. When the U.S. acts counter to currency stability (i.e., lowering the value of the dollar) it can throw the world into potentially a disastrous situation by setting in motion a scenario where many countries devalue their own currencies. Between 1929 and 1933, when countries rushed to devalue their currencies, world trade fell by two-thirds.
There are other concerns. Al Broaddus, former president of the Richmond Federal Reserve Bank, says that the amount of expenditure of quantitative easement may not produce much of a result. And add to that the psychological effect of printing money – it may indicate to people that the economy is in horrible shape and that investment and, therefore, expenditures should be avoided and resources should be invested in commodities.
And we can’t overlook one of the key commodities: oil. The Organization of Oil Exporting Countries (OPEC) currently prices oil in dollars. OPEC has discussed that, with the falling dollar, other currencies or a basket of currencies should be considered as a pricing mechanism. If we do adopt a policy of quantitative easement, the issue could be raised again. If the price of oil is linked to a more stable currency, then the dollar-price could rise to new heights and that would have exert upward pressure on our prices and downward pressure on our economy.
Upsides and downsides: Every policy has them but it seems as though the downsides quantitative easement would hurt a lot more than the upsides would benefit.
Will the last one out, turn off the incandescent light bulb?
When Congress passed legislation in 2007 banning the sale of incandescent light bulbs by 2014, they thought that they were making a cleaner environment and creating green jobs. Alas, they have evidently accomplished neither but have instead lost jobs and increased imports.
With decreasing demand, GE closed its last incandescent bulb factory in Winchester, Virginia, and laid-off 200 workers. GE had thought about converting the factory to manufacturing compact fluorescent light bulbs (CFLs) but found the conversion cost would be prohibitive. So, the bulbs will be made in China.
Well, at least the environment will be cleaner, right? Maybe not. In 1987 the town of Traer, Iowa, handed out CFLs to everyone. When people found out how cheap they were to operate, they left their lights on all the time resulting in an 8 percent increase in energy consumption.
It seemed like a good idea at the time.
Quote without comment
Polish central bank governor MarekBelka, prior to a meeting of the International Monetary Fund, October 8: "If you want to strengthen your competitiveness by devaluing your currency, this is a sign of despair, this isn't a policy,"