Harry Potter Understands QE2

Economists, politicians, and taxidermists have been all a-twitter over the past couple weeks with talk about Ben Bernanke's latest gambit to kick-start the U.S. economy, QE2. The general consensus is that Ben Bernanke is out of his mind, blindly driving the U.S. economy off a cliff.

But on the release date of the latest installment of the Harry Potter film series, let's suspend disbelief for a moment, and consider that Dr. Benjamin Bernanke (that's right, he has a Ph.D. in this stuff) isn't an evil monetary magician, bent on completely destroying the American dollar and American life as we know it.

It's a mess
Let's imagine for a second that Dr. Bernanke is actually doing his darndest to get the American economy back on track. An economy, by the way, that relies on consumer spending for a vast majority of its oomph.

Well, consumer spending won't happen when people feel they don't have any money. A 9.6% unemployment rate (and that number is low, if you consider the declining labor-force participation rate) and collapsed housing prices have people concerned about their overleveraged lifestyles. This has pushed the savings rate up to 5.5%, a level we haven't consistently seen since 1998.

So if you've got people (aka consumers) scared about losing their jobs and homes, how can you expect them to go out and spend? You can't. But what is a Federal Reserve chairman to do?

Limited toolbox
The Fed's mandate is to "promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." But it only has three tools to manage this: open market operations, adjusting the discount rate (the rate at which it lends to banks), and reserve requirements. These essentially boil down to monkeying with interest rates to increase or decrease the amount of money in the economy.

I may be missing something, but I didn't see anything in that list about mailing money to people so they can go buy stuff (which eventually leads to more jobs, which leads to more buying).

So Bernanke has to work within confines of the financial system to get money to the people. That means boosting liquidity by lowering reserve requirements, so banks have more money to lend, and dropping interest rates, so businesses are better able to borrow. But as my colleague Morgan Housel pointed out a few months back, all the liquidity in the system won't do any good until people are buying, giving businesses a reason to hire and invest in growth.

Outside the box
Enter quantitative easing. Through this mechanism, the Federal Reserve buys assets from banks to infuse more money into the system. These assets have generally been U.S. government debt and mortgage-backed securities, which has artificially increased demand for these assets, resulting in lower interest and mortgage rates (something that should make it easier to borrow for businesses and homeowners).

However, lower interest rates also make fixed-income securities less attractive to investors, so they pour their money into equities and commodities. This flood of liquidity is one of the reasons we saw the S&P 500 rocket up 80% from its low in March 2009 to its recent high in April 2010.

Knock-on effect
This boost to investor equity portfolios had what is referred to as a wealth effect -- people feel more wealthy (i.e. they have more money) when their nest eggs look like they were laid by an eagle rather than a hummingbird (never mind they once looked ostrich-like).

When people feel more wealthy, they feel more like shopping. Looking at the results from high-end retailers like Saks (NYSE: SKS  ) and Nordstrom (NYSE: JWN  ) , we can see that something has opened up the wallets of the wealthy. Both companies have reported monthly same-store sales growth since last December, and Nordstrom even achieved third-quarter sales greater than those seen in the same quarter of 2007. For those who have succeeded in erasing their short-term investing memories, that was before everything hit the fan.

Just listen to what Saks CEO Stephen Sadove had to say about the company's third-quarter performance: "With improvement in the financial markets, we have experienced a more stable and predictable operating environment this year, and we feel much better about the overall tone of business and the way our customers are responding to our initiatives."

Notice how he relates rising financial markets with his company's fortunes? Now, look at what the hint of QE2, which first crossed the bearded lips of Dr. Bernanke during a speech in Jackson Hole, Wyo., on Aug. 27, has done for markets. The S&P 500 is up 12.4% in the three months since then, effectively extending the market rally started by the first round of quantitative easing that had stalled out in late spring. And just in time for the holidays, the most wonderful (retail) time of the year.

How long will it take?
As can be expected, there is a lag between when the market expects a liquidity boost (and rises) and when it translates into higher spending. And because most people with investment portfolios are upper-middle class and above, not everyone has been able to share equally in the quantitative easing bonanza. Just looking at Wal-Mart's (NYSE: WMT  ) third-quarter results tells us it hasn't worked its way through the system as quickly as officials would like.

The world's largest retailer reported its sixth straight quarter of declining same-store sales in the U.S., and Mike Duke, president and CEO, said, "Financial uncertainty still weighs heavily on everyday Americans, including many of our core customers. The paycheck cycle is still pronounced for these customers."

Until we stop seeing comments like these, no one will declare quantitative easing a success, and I am sympathetic to those voices that want to know how much longer we have to give this strategy before calling it a failure. I would argue, however, that we already know it isn't a failure -- it did what it was intended to do, reflate asset markets.

Now what?
But that is just step one, a stopgap if you will. Ben Bernanke, as powerful a wizard as he may be, is only one man, and monetary policy is only one branch of our country's economic plan. We need a concerted effort between fiscal and monetary officials. Bernanke's latest round (hopefully the last) was an effort to buy time for Congress and the administration to get its act together on getting our financial house in order (most importantly by clearing up uncertainty around tax changes, so that small-business owners can figure out what is in store for them).

In itself, QE2 is not a solution. It's like Advil. It doesn't actually make the pain go away; it blocks your sensors so you can get the job in front of you done. Now it's time for Congress to get the job in front of it done, and done quickly. Like any magic, quantitative easing can easily turn on its user, and there are limited marginal returns with each round. Pushing it too far will definitely lead to dire consequences.

But I don't think we've crossed that line yet. There's still time to defeat Voldemort turn the U.S. economy around. But time is running out.

Nate Weisshaar owns one piece of Harry Potter marketing, but none of the stocks mentioned above. The Motley Fool owns shares of Wal-Mart. Wal-Mart is a recommendation of both Motley Fool Inside Value and Motley Fool Global Gains. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy and a dream to soar on the wings of a hippogriff.


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  • Report this Comment On November 19, 2010, at 2:18 PM, TheMotleyTimbear wrote:

    "I may be missing something, but I didn't see anything in that list about mailing money to people so they can go buy stuff (which eventually leads to more jobs, which leads to more buying)."

    Shouldn't this be easy for the Treasury department?

  • Report this Comment On November 19, 2010, at 3:00 PM, slpmn wrote:

    I like the theory and all, but am highly skeptical its the best solution long term. I tend to view the US economy over the last 20 years as a fat kid running a marathon powered entirely by doritos and soda pop. No surprise then that he periodicly collapses, only to be shocked back to life with a shot of addrenaline straight to the 'ol ticker (most recently, TARP). Then, back on his feet, he's handed another pop and starts chugging along again. Well, anyone who made it through third grade nutrition can tell you that's not really an optimal way to do it. So the fat kid is starting to lag behind, and with QE II, they basically stuck a funnel in his mouth and are pouring in a 5lb bag of white sugar. When that's used up, what's left? The alternative - letting things muddle along on their own, maybe even contract a little, might be painful, but would at least set a foundation for a fundamentally stronger economy, one that's not dependent on 4% 30 year mortgage rates to grow.

  • Report this Comment On November 19, 2010, at 3:23 PM, TMFTheSnake wrote:

    @slpmn

    No disagreement, but there are very few people in America (politics or Main Street) that seem willing to accept this stance.

    I'm not trying to argue QE2 is the correct approach, just trying to point out that there is some method to the madness. And it appears to be having the intended impact.

  • Report this Comment On November 19, 2010, at 5:08 PM, TMFDiogenes wrote:

    " 'I may be missing something, but I didn't see anything in that list about mailing money to people so they can go buy stuff (which eventually leads to more jobs, which leads to more buying).'

    Shouldn't this be easy for the Treasury department?"

    Stimulus spending requires Congressional authorization, which isn't likely because of "OMG THE DEFICITS WILL EAT YOUR GRANDCHILDREN" obstructionist tactics.

  • Report this Comment On November 19, 2010, at 6:30 PM, csguernsey wrote:

    It seems to me that monetary stimulus by the Fed has about run out of leverage. There not much lower that interest rates can be pushed, and past monetary injections have led the banks to sit on record reserve levels (far above those required) rather than lending domestically. It is more likely that further monetary stimulus will overheat emerging economies than help that of the US.

    Our elected leaders need to get off their butts, look at the history of the Great Depression, and look for ways to inject fiscal stimulus that produce tangible investments in the future productivity and security of our economy.

    On, and by the way, lets re-enact reasonable regulatory measures to prevent wholesale speculation from bringing us down again.

  • Report this Comment On November 19, 2010, at 6:54 PM, Strega100 wrote:

    My magical suggestion, since current plans aren't having the intended effect, would be for the government to assist every stable homeowner to refinance their mortgage based on the amount actually owed at 3.5%. It's not the government mailing money to people but it would allow people to spend more, thereby creating more jobs. It might even be an excellent idea for those banks that we, the people, bailed out to pay it forward by offering such mortgages.

  • Report this Comment On November 19, 2010, at 8:54 PM, wolfman225 wrote:

    " 'I may be missing something, but I didn't see anything in that list about mailing money to people so they can go buy stuff (which eventually leads to more jobs, which leads to more buying).'

    I got an idea. How 'bout if, instead of "mailing money to people so they can go out and buy stuff", we let the people keep more of their money in the first place?? Seems reasonable to me to believe that this would have an even bigger impact than sending out checks, since you wouldn't have the overhead of all those gov't middlemen to pay.

    Also, I don't think worrying about the deficit equates to "obstructionist" tactics. Remember, it was the Democrats that bragged about passing "PayGo" as a sign of their superior fiscal restraint. Since it's passage, every spending bill that has come up has been exempted. Convenient, isn't it; how Congress can proclaim fiscal responsibility and undermine the intent of the very bills they pass, almost in the same breath?

    "Obstructionist" Republicans are simply insisting that the law be obeyed. ie. offset the new spending with dollar-for-dollar cuts.

    It's not magic, but simple common sense seems to be an equally arcane subject to modern ploiticians.

  • Report this Comment On November 19, 2010, at 8:57 PM, wolfman225 wrote:

    Oh, I almost forgot. It's not that banks aren't lending, exactly. It's that they have done as demanded and set more rigorous borrowing standards that need to be met, as well as businesses not borrowing due to uncertainty over the future regulatory and tax environments.

    You can't have it both ways. You can't demand that banks stop making risky loans and at the same time complain that they aren't lending broadly enough.

  • Report this Comment On November 20, 2010, at 12:41 AM, xetn wrote:

    Just a "foolish" thought but if stimulus spending would jump-start jobs, create jobs etc. why hasn't it worked already. It is a complete farce that government spending and Fed inflating the money supply can create any sustaining jobs. For every dollar spent by government takes a dollar out of the private sector, where real jobs are created. For every dollar created out of thin air by the Fed, will eventually increase prices of many goods and services (and in fact already is).

    The best approach would be to greatly slash government spending, eliminate most (if not all) regulations on business, which mostly aids one or a few businesses at the expense of the rest, and increases costs for compliance. Slash taxes by at least the amount of spending cuts. Finally, eliminate the Fed, which is ultimately the root cause of most boom/bust cycles.

  • Report this Comment On November 20, 2010, at 1:04 AM, goalie37 wrote:

    If the scenario were to unfold exactly as the Fed hopes, with $600 billion working it's way into the economy at large, there would still be one major danger. That money will not be distributed evenly. It would gravitate into areas perceived as providing the best return. These areas would then be pushed into bubbles. Haven't we already been through this a few times lately?

  • Report this Comment On November 20, 2010, at 5:16 AM, marktsgooch wrote:

    "... to get the American economy back on track. An economy ... that relies on consumer spending for a vast majority of its oomph."

    Yes. But just because consumer spending is important doesn't mean that its lack is the root problem, or that increasing it is the solution.

    For example, a car requires petrol (gas) for the 'vast majority of its oopmh'. But if it runs out of coolant & the engine overheats, forcing more petrol through it isn't going to help.

    If, OTOH, the problem is debt & an economy which consumes more than it produces, then increasing debt & consumption makes matters worse, not better.

    Perhaps this problem cannot be fixed by tinkering with interest rates & money supply. In which case, the FED is the wrong part of government to fix this problem, and the FED needs to take a back-seat role, and stop making matters worse, whilst others use their more appropriate tool-kits to fix it.

  • Report this Comment On November 20, 2010, at 6:32 AM, TopAustrianFool wrote:

    "that relies on consumer spending for a vast majority of its oomph"

    Yikes, that is the People's magazine explanation of how the economy works. You are clueless.

    How simple... We should all go out and spend and then it will all be alright...

  • Report this Comment On November 20, 2010, at 6:41 AM, TopAustrianFool wrote:

    "consumer spending won't happen when people feel they don't have any money."

    And how, exactly, does the inflation cause by QE2 is going to make people feel like they have more money?

  • Report this Comment On November 20, 2010, at 6:43 AM, TopAustrianFool wrote:

    "collapsed housing prices"

    What collapsed housing prices? There are houses for sale all around you that have not sold in over a year. This means prices are not low enough for people to buy.

  • Report this Comment On November 20, 2010, at 6:46 AM, TopAustrianFool wrote:

    "I may be missing something, but I didn't see anything in that list about mailing money to people so they can go buy stuff (which eventually leads to more jobs, which leads to more buying)."

    No... it leads to more buying immediately, which in a month leads to higher prices and in about the same time leads to the same place we are now, 28 months later. So give it up... and let the market liquidate the malinvestment the Fed and govt policies have created over the last decade.

  • Report this Comment On November 20, 2010, at 6:50 AM, TopAustrianFool wrote:

    "by lowering reserve requirements, so banks have more money to lend, and dropping interest rates, so businesses are better able to borrow."

    Banks have plenty of money to lend, but if by the time they get paid back the money has been inflated/depretiated, then they end up with a loss. So they'll lend it to you at a very high interest rate, which most people won't accept. So there you have it. QE is causing the same problem it is supposed to solve. Its pretty depressing that a PhD in whatever Bernanke has does not help him understand this. Sad sad...

  • Report this Comment On November 20, 2010, at 7:20 AM, TopAustrianFool wrote:

    "Stimulus spending requires Congressional authorization, which isn't likely because of "OMG THE DEFICITS WILL EAT YOUR GRANDCHILDREN" obstructionist tactics."

    Where have you been for the last 2.5 yrs? They already tried this. This is not QE2. This is QE250. They have been doing this for the last 10 yrs, it got us into this depression. What more do you need? Do you need to destroy all the wealth this country has created in order to be convinced Keynesian Economics are absurd?

  • Report this Comment On November 20, 2010, at 7:22 AM, TopAustrianFool wrote:

    'You can't have it both ways. You can't demand that banks stop making risky loans and at the same time complain that they aren't lending broadly enough.'

    That is what Keynes is all about. Having it both ways. It never works, but it helps govt acquire more power and control.

  • Report this Comment On November 20, 2010, at 8:27 AM, FlorisHJ wrote:

    If fewer people were out of work (more had regular paychecks) presumably that would be a good thing for the economy. But we want "real", private sector jobs. So how about this:

    Any company that adds people to their payroll that are currently bona fide out of work (say 6 months or longer) gets to keep the payroll deductions that they collect for the next two years, then it phases out over two more years. For every person they lay off, they lose the payroll deduction of their highest paid "new employee".

    A simple mechanism like this would provide a huge incentive to create better paying jobs - and since the people that would be hired are currently not employed the IRS is not, in principle, losing any tax revenue. If this law only applied for six months (i.e. only for additional hiring between January and July, for example) then there would be a "rush" to grow payroll cheaply. I am not a PhD economist; I would like someone more knowledgeable to explain why this is less likely to kick start the economy than current policy...

  • Report this Comment On November 20, 2010, at 12:47 PM, TopAustrianFool wrote:

    You don't need any new schemes of taxes to jump start the economy. Just cut govt spending and STOP inflating the currency. In 16 mo you will have a recovery... Keep messing with incentives andit will take 20 yrs just like the great depression.

  • Report this Comment On November 20, 2010, at 12:58 PM, wolfman225 wrote:

    @FlorisHJ:

    One major thing about your idea is that manipulating payroll deductions as you suggest would require additional gov't. The biggest anchor on the economy right now is the burden, especially on small businesses, of complying with all of the regs handed down from DC as it is. What they need is less government intervention and fewer mandates, not more.

  • Report this Comment On November 21, 2010, at 6:14 AM, JDEvolutionist wrote:

    I found this to be a very disappointing article.

    Why? Because: -

    1. It seems to accept, promote and justify QE and the other systems of economic manipulation that seem to remain accepted practice; even after the general acceptance that prevailing economic theory, which had resulted in the near collapse of the financial systems, were fundamentally flawed.

    2. It relates rising markets to prosperity when in fact there is really no real rise, only a reduction in the value of the measure of that prosperity. Gold and stocks have gone up because the real value of currency has gone down; plus of course there is the impact of desperation as to where to safely invest and the tendency to go with the flock.

    3. It makes no attempt to understand the inertia inherent in financial systems that has the tendency to create ill advised confidence where none is justified.

    4. It totally seems to dismiss the significance of debt burden on the state and consequentially on the citizen.

    5. It attempts to justify support for the very institutions that have created the problems in the first place.

    Governments need , for example, desperately to: -

    1. Recognise their own inability to achieve their stated objectives.

    2. Start acting for the people and not pandering to the people (hard because the people tend only to vote for what they think is best for them as individuals).

    3. To resist the temptation to believe what the financial community tell them. The majority of people only lose out as a result of the activities of the upper echelons commerce and power, who like most others only have their own interests at heart. Think in terms of applying the thinking and processes revealed in John Perkins's book 'Confessions of an Economic Hit Man' not just to other countries but to the mother countries themselves. The same systems is a work to maximise gain for the elite in individual nations.

    4. Reduce their size and cost. Less representatives, administration etc.etc.

    5. Act to maximise the employment of people in the creation of wealth for the benefit of the citizen and not in its transfer to the corrupt institutions that have evolved to treat the citizens as slaves.

    6. If small businesses require funding to set up the enterprises to create wealth then government should make that funding available directly and totally bypass the now useless but still greedy and corrupt banking system.

    7. Should seriously look at ways to redistribute wealth, not through socialism or communism, but by ensuring that the ill gotten gains of the rich are redirected towards balanced wealth creation.

    People need to: -

    1. Stop being apathetic.

    2. Stop being deceived by the people that pay for their votes - vast sums are being spent to get representatives of the elite into power so that they can maintain the Status Quo.

    3. Stop just accepting what they are being told to do. (Pay for the faults of others; give their money away to the bullies that demand it; support wars and expenditure that are totally unjustified. To mention a few.)

    4. Start to recognise that they are a part of a whole and that their greatest opportunity of real advance and civilisation lies in the determination of truth and working together as a community.

  • Report this Comment On November 21, 2010, at 9:26 AM, wolfman225 wrote:

    "7. Should seriously look at ways to redistribute wealth, not through socialism or communism, but by ensuring that the ill gotten gains of the rich are redirected towards balanced wealth creation."

    I was willing to go along with most of this until i ran into this gem. Government is already looking for ways to actively redistribute wealth. Something they do not have the moral, legal, or constitutional right to do! Redistribution of wealth is, by definition, Socialism (from each according to his ability--to each according to his need).

    Firstly, who gets to determine what constitutes "The Rich" and where do they get the constitutional authority? Second, who determines what gains are "ill-gotten"? Is it the same group? Is it perhaps people who have gotten "undersevedly rich" by working in industries that aren't politically correct, such as tobacco, oil & natrual gas, "BIG Pharma", etc?

    Third, any monies collected (confiscated) to go towards "balanced wealth creation" would be a complete waste. Government has a long track record of proving that it cannot create long term jobs, only short term tax-payer funded make work.

    If you want to REALLY screw things up for our and our childrens' futures, give the government complete control to determine the amount of success that should be "allowed" and who should be allowed to attain it. We may as well simply consign ALL resources to the control of Uncle Sam, sign up as government employees, and let whoever happens to be in political power at the moment dole out to us what we are determined to need/deserve, regardless of our own desires.

    Capitalism is messy. Some will not prosper in such an economic system (although they will have better opportunities than in any other). There will always be a bottom 15%, regardless of attempts to make outcomes "fair". But, allowing even the consideration that government should be given the power to pick winners and losers is an idea deserving of a quick death and a deep, deep interment.

  • Report this Comment On November 21, 2010, at 12:00 PM, JDEvolutionist wrote:

    "... until I ran into this gem." (wolfman225)

    Expressing ideas is never very straight forward and in this case I tried to get around the socialistic redistribution from one section of a society to another by suggesting redistribution of wealth in the direction of wealth creation (ultimately for the benefit of all). Billions of pounds, spent on giving bankers undeserved bonuses, redistributed instead to small businesses in the form of loans (something that banks seem apparently incapable of doing) would be a far more constructive move in solving the current problems of the Western world. At least newly created wealth could be used to pay off some of the excessive debts that currently exist, something that attempts to utilise present wealth might not be very successful at doing because in many cases that wealth is in reality only imaginary in any case!

    The process of QE is in reality itself a redistribution BUT in the wrong direction (here they are without doubt doing what "... they do not have the moral, legal, or constitutional right to do!"). It is a process of taking from the ordinary citizen in order to prop up those that are threatened with loss because the schemes, that they set up in the first place, were in fact nothing other than corrupt scams for gathering the wealth they are now frightened might be taken away from them.

    Executive pay has risen totally disproportionally to the pay of the ordinary citizen. It has done so because the people who 'call the shots' within many corporations and institutions have sought to maintain parity with the likes of bankers, lawyers and celebrities, who derive their remuneration from opportunity that has with time allowed distortion of value in the 'work' that is done. Distortion that may be identified in the modern world as having its genesis in the likes of Hollywood and the Banking Sector (although distortions of this sort can be identified throughout history).

    Yes, capitalism is messy and society will never be fair but that is what the true purpose of government should be there to control; government should be there to ensure that society operates in ways that ensure maximisation of fairness and justice for ALL its citizens. That does not say that all people should be paid the same but it does mean that government should act to prevent minority sections of the society controlling and dominating the enterprises of the society at the expense of the majority. For the moment government has lost sight of this responsibility, probably because true representation of the citizens within government has been replaced by excessive bias towards representation only of the rich and powerful. A far cry from the aspirations of Lincoln's Gettysburg Address.

    The powers given to government and currently being abused by it have and are continuing to "REALLY screw things up for our and our children's futures, ..."

  • Report this Comment On November 22, 2010, at 7:52 AM, TMFTheSnake wrote:

    While I appreciate all the discussion this article has sparked, I fear many of you read it through your own lenses and ignored the parts that didn't jive with your own philosophy of how "right" or "wrong" QE2 is, thereby ignoring my opening plea: suspend your disbelief. This wasn't a defense of QE2, it was an attempt to understand the thinking behind it.

    For those of you that called my arguments too simplistic, how simplistic is it to just dismiss Bernanke as an idiot who has no idea what he is doing?

  • Report this Comment On November 22, 2010, at 7:53 AM, TMFTheSnake wrote:

    @TopAustrianFool, I can't get behind your argument because with so much excess capacity in our system, where is "the inflation cause[d] by QE2" going to come from?

    And, yes, saying consumption is a main driver of our economy is simplistic. It is also accurate. Even the Austrian school of economics believes that supply and demand are the basis for an economy. Demand is code for consumption. And in America's mainly service-based economy, we have a nearly endless supply of service providers, so the main pull is demand.

    As for collapsing housing prices, I think a view of any housing index would tell you housing prices have collapsed. I didn't say they were too low. I said they had collapsed, and was implying that this has a psychological impact on consumers by making them feel less wealthy.

  • Report this Comment On November 22, 2010, at 7:59 AM, TMFTheSnake wrote:

    @JEDevolutionist

    You were disappointed by an article with the headline "Harry Potter Understands QE2"?

  • Report this Comment On November 22, 2010, at 10:54 AM, JDEvolutionist wrote:

    TMFTheSnake

    No, I was disappointed with the content, which I have now re-read.

    Let me start by saying that I am neither an economist nor and American citizen but I do recognise that my future and that of my children will be impacted by what American does.

    I do, however, appreciate that not only are the tools available to solve the present problems very limited but also the downside to a collapse in the economy, which has the potential to have drastic implications with respect to maintaining the infrastructure upon which present day nations are dependent and hence on their stability (national unrest), is enormous.

    It is almost true to say that collapse cannot be contemplated because the downside is not imaginable. However, any conceived 'truth' of this is only in the mind, in reality the economy, and it applies to many western economies, is far from indestructible. Bad, reckless management, blind to the simple realities of being in debt, have taken nations to crisis points that are presently only unrecognised because thus far the small boy has not shouted loud enough to be heard above the clamour of 'bull', when he says "the emperor has no clothes on."

    Yes, QE may have resulted in some temporary composure, if it can be called that, but at heart it is only worsening the situation - building greater debt, committing the average citizen, his children and his grandchildren to greater hardships in the future. I don't think you need to be an economist to see that!

    The solution. Those that 'have' are going to have to bite the bullet and realise that much of what they have has been unjustly gained on false and basically corrupt pretenses. It they won't, then then someone is going to have to make them (government?). The average citizen just can no longer be seen as the cash cow for the wealthy minority and unless something real is done the future for many is going to be very grim.

    That's my opinion anyway!!

  • Report this Comment On November 23, 2010, at 9:16 AM, TopAustrianFool wrote:

    TMFTheSnake

    You asked:"where is "the inflation cause[d] by QE2" going to come from?"

    I think what you are asking is: where is inflation being reflected?

    Inflation comes from printing money. It is being reflected in the fact that prices are back up about 8 - 10%/yrs since 2008. It is being reflected in house prices not dropping even when the house sits on the market for over a year. It is being reflected in a $13,000,000,000,000 economy supposedly growing at 2%/yr and jobs growing at 0% per year.

    Where are the jobs of this economy going into? Do you know what 2% of 13,000,000,000,000 is? If that money was being stashed away the Fed would not have to artificially lower interest rates. There is a disconnect in your argument. You need to ask more questions and be more skeptical of what you hear and agree with.

  • Report this Comment On November 23, 2010, at 9:26 AM, TopAustrianFool wrote:

    "Even the Austrian school of economics believes that supply and demand are the basis for an economy. Demand is code for consumption. And in America's mainly service-based economy, we have a nearly endless supply of service providers, so the main pull is demand."

    The difference is that the Austrian school of economics subscribes to the reality that in order to create a supply for which there is 'a priori' demand you need to save wealth in order to free-up time to take the risks inherent of new ventures. If you obscure the inherent risks, which are reflected in the interest rate, then you will see careful less assessment of what the 'real demand' is thereby producing malinvestment. Which in Bust times need to be liquidate or time rates need to be adjusted by increasing savings. Neither of which yours, Keynes', or the Fed's, philosophy espouses.

  • Report this Comment On November 23, 2010, at 10:09 AM, TopAustrianFool wrote:

    "Demand is code for consumption."

    No, it is not. Demand is the want or need of something for which someone is willing to exchange the product of their work/effort. Consumption is the use, be it waste or not, of resources. If consumption is an end then burn it all and you will have your Keynesian recovery. Demand implies need, if you render the currency worthless, then it ceases to represent peoples work or effort, therefore people will be willing to exchange it for things they need less or don't need at all. This causes consumption, but of the wasteful kind.

  • Report this Comment On November 23, 2010, at 4:25 PM, TMFTheSnake wrote:

    @TopAustrianFool

    "Inflation comes from printing money."

    No, it doesn't. Inflation comes from an increase in the money supply above that of goods supply. However, to achieve an increase in money supply, you need that money being printed to work through the system (also konwn as velocity).

    In order to have velocity, you need the banks (which is who is receiving the windfall of QE2) to increase lending, ie your taking of risk in new ventures.

    This isn't happening, so we don't have rising money supply. In fact, money supply has been shrinking since late 2009 (http://www.shadowstats.com/charts/monetary-base-money-supply....

    Also, demand does not (and has never) implied need, and even if it did, it stopped implying need decades ago in Western economies that have moved past subsistence-level income.

  • Report this Comment On November 23, 2010, at 4:39 PM, TMFTheSnake wrote:

    @TopAustrianFool

    As for how many questions I have to ask and where my level of skepticism needs to be, or even what I agree with, you obviously haven't read the above article.

    At no point did I say QE2 was the correct action. I said it was the action that was taken and I looked for the logic behind that action. My conclusion was:

    "I would argue, however, that we already know it isn't a failure -- it did what it was intended to do, reflate asset markets."

    There is no judgement there as to right or wrong, just a judgement that the goal of increasing the level of asset markets had been achieved.

    You have no idea what I agree or disagree with on this issue, other than your attacks.

  • Report this Comment On November 23, 2010, at 6:21 PM, TopAustrianFool wrote:

    ""I would argue, however, that we already know it isn't a failure -- it did what it was intended to do, reflate asset markets.""

    Whoa... So your assett markets were inflated but the money supply decreased and there is no inflation. This is even beyond Keynes.

    Check your math, somewhere in your calculation you leftout the generation of wealth term out and added a money supply sink that has no physical meaning.

  • Report this Comment On November 23, 2010, at 6:30 PM, TopAustrianFool wrote:

    "demand does not (and has never) implied need"

    Well, if I said "need" I should have said value. Real demand implies value. Have you looked at your velocity lately? or should I say: "Got Velocity?"

    If you make easy money available consumers spend iit differently. When you inflate people save less because it is not worth it. And also it create the illusion of real savings which would act in the longer term, and promotes capital assett investment, your Bubbles, to meet future demand that will not be there causing your Busts.

    "In order to have velocity, you need the banks (which is who is receiving the windfall of QE2) to increase lending,"

    The banks will lend at high interest rate because you are depreciating the dollars they will receive in return in the future. If you don't want higher interest rates then the bank won't lend. If you want the bank to lend, then stop inflating and you will see more savings and more lending. It used to be that inflating the money supply worked because banks could get rid of the debt owed to them by selling securities, but that no longer works.

    Keynesians love using models and equations full of constants, which in reality do not work. So most of the strategies you mention assume too much which makes them wrong most of the time and only right in the short term.

  • Report this Comment On November 23, 2010, at 11:45 PM, TMFTheSnake wrote:

    @TopAustrianFool

    "Whoa... So your assett markets were inflated but the money supply decreased and there is no inflation."

    Well, as you may have noticed from reading my article, I emphasized the rise in equity markets, specifically US equity markets, which can rise without impact on inflation (because they aren't physical assets and don't have the same supply limitations). You are correct, though. We are exporting inflation to countries like China that "manage" their currencies (as well as certain asset classes like commodities).

    I know the Austrian school believes asset bubbles exist - you know moments where asset prices no longer reflect the underlying value. So yes, you can have asset appreciation without "physical meaning."

    Again, I am not saying I agree with QE2 (in fact I believe I called it "a stopgap" and "not a solution"), just explaining the reasoning behind it (not an evil plot to destroy the dollar and America). The reason was to create the psychological wealth effect in order to stimulate demand (in the consumption sense).

    And just because I enjoy pointless argument (QE2 is here and all this debate won't change that), your argument that people save less when you have inflation (and ridiculously low rates) makes sense, but also rings false in the current situation as the savings rate in the US has climbed dramatically over the past year and a half as people try to straighten out their personal balance sheets (a pleasingly Austrian solution, I assume).

    Additionally, I am not blaming the banks for not lending. I am merely pointing out that it is difficult for the money supply to grow if there is no lending taking place as there is no multiplier effect.

  • Report this Comment On January 02, 2011, at 6:48 PM, notme2012 wrote:

    Wolfman225,

    There isn't a bottom 15%! It's more the bottom 80%. My income really hasn't grown for 10 years. Yet the rich have sucked up everything out the American economy. The founder of my employing company hasn't given his employees a real pay increase in 8 YEARS! As for the government controlling everything, no big business controls everything and when they fail, us poor suckers pay for their bailouts. Stop with 'soundbites' and look at the poverty in America. We have millions of working poor!

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