Over the last month, with astonishing rapidity, opposition to looser monetary policy has become the default position of the Right. Sarah Palin, Paul Ryan, and Mike Pence have all condemned QE2. Conservative worthies have written an open letter to Ben Bernanke urging him to cease and desist. Conservative pundits who have never previously expressed any interest in monetary policy are now alarmed by the prospect of (as some of them put it) “hyperinflation.”
Maybe Bernanke’s critics are right. Certainly there are a lot of smart monetary economists who agree that QE2 is a bad idea, and the skeptics include many of the people on whom I usually rely to form judgments about economic policy. But I find the economists on the other side of the argument–I’ve started reading these three economists daily–more persuasive.
I suspect that intellectual inertia is affecting conservatives’ assessment of this issue as much as the merits. As in so many other areas of policy thinking, conservatives are still reacting to the experience of the late 1960s through the early 1980s–when monetary restraint was exactly what the economy needed. The last decade, in which excessively loose policy at least abetted a ruinous bubble, has reinforced the conservative preference for tight money. But that preference is not applicable at all times and in all circumstances, and it is no longer 1979.
Yet conservatives are talking about runaway inflation at a time when the consumer price index, which itself is generally considered to overestimate inflation, has been registering 1-2 percent inflation. The spread between inflation-indexed and unindexed bonds has also yielded a market prediction of inflation in that range. Opponents of QE2 say that the Fed should not be deliberately raising expectations of future inflation. Maybe they’re right. But let’s have some perspective. If the Fed delivers on the 2 percent average inflation it seems to want, we’ll still be below the average inflation rates of each of the last five decades.
And let’s remember as well that both Milton Friedman and Friedrich Hayek would probably have favored something like QE2.
I have wondered if the recent comments on inflation (I recall in the NRO web briefing an article listed that "inflation is now being seen at Walmart" or some such) have the potential to set off inflation.
If you believe rational expectations, and I am out of touch on this theory, ultimately the economy and its players control the real money supply. But in the short run talk of inflation could possibly spur it.
Reply to this commentLinkReport AbuseThe problem I have with QE2 is it's not addressing the issue with the economy at all. The problem is not that there aren't enough dollars in the system. The problem is the banks aren't lending the dollars they have.
Look at the difference between banks required reserves and actual reserve. The difference is unnerving. When this difference is unleashed, there will suddenly be too many dollars chasing too few goods and inflation will spike.
You are right that current inflation isn't bad (except that it may actually be too low). However, the coming inflation, may be severe and will only be made worse by the dumping of dollars into an economy that is already too liquid.
I see QE2 as yet more denial in Washington that the Administration's policies are the problem.
Reply to this commentLinkReport AbuseEconomic policy seems very much like consensus science. Misguided and decided for political reasons.
QE2 isn't clearly necessary and seems unlikely to have the desired efficacy given the acknowledged non-results of the much larger QE1. The rest of the arguments are probably only for economist's argument's sake.
Reply to this commentLinkReport AbuseRamesh -
Forget what the economist say - they are never going to agree anyway. Here is a real world example of the folly of QE2.
The week when QE2 was announced, gas prices in my neck of the woods increased 15 cents per gallon. This increase was counter to historical trends (when gas prices decline in the fall due to lower demand). Based on my driving patterns, this translates into almost $300 per year in lost purchasing power for my family and I. The same thing is happening with food prices.
There are no free rides, and money (value, welath, etc.)cannot be created out of thin air. Someone is goint to pay for this, and I am afraid is is going to be consumers. So the real question is - how is QE2 going to help the economy when consumers like me now have less money to spend? Add tax increases, profligate government spending, and all the new regulations spewing from Washington to the mix, and please explain what persuasive arguement economists or foisting on you that this is a good thing.
Here is a news flash - (one that doesn't take an army of economists to explain.) All of our economic problems are flowing from the simple fact that as a nation (collectively and individually), we are consuming more than we produce. The federal government (and states too) are the prime movers in this sad state of affairs. Government tax policy, fiscal policy, monetary policy and regulatory policy all punish production and reward consumption. This serves the interest of the banking industry, which makes money by having us all go into debt. If we want to have a higher standard of living, we need more production, not more consumption and debt. We can't borrow and spend our way to prosperity without more production. It is as simple as that.
Reply to this commentLinkReport AbuseIt depends on when we reach a "tipping point." if we do not reach the point then this might be modestly beneficial. But my fear is that the tipping point is far closer than we realize. BTW this is a 600 billion dollar tax increase on savers.
Reply to this commentLinkReport AbuseThe problem is that QE2 simply doesn't pass the smell test. It's also has no basis of historical precedent. Indeed, the best precedent calls for exactly the opposite remedy.
In the late 30s the Depression looked like it was going to be over, but then the country slid into an economic downturn that was almost as bad if not worse than the early 30s. Why? Companies were holding on to tons of cash because they were fearful of what the future held for their investments - just like today.
Again, why? Well, the biggest reason was Social Security which passed in 1938. This was a huge change from before and, like the healthcare law and finance law of today, no one knew how it would affect them and their businesses.
So the people who had the money kept it even as the federal government was spending more and more and more - essentially doing QE2 then although it wasn't called that.
So unless you want a world war to come along and free the pent up capital that is being held today (because the war effort allowed businesses to "know" what the future held versus the ever more dangerous and anti-capitalist laws being pushed by Roosevelt and the progressives), then don't be hoodwinked by Krugman and his ilk.
Reply to this commentLinkReport AbuseEconomics is not about statistics.
Reply to this commentLinkReport AbuseWhatever interpretation one can give to Mr. Hayak's words (a notoriously difficult thinker and writer), and I suspect there are many, his colleague and mentor Ludwig von Mises (remember him?) would have strongly disapproved of the "QE2."
Mr. Ponnuru's prognostications have not been the most felicitous. I recall about a year or so that he, and a certain Mr. Lowry, grandly advised the Republican party to concentrate on the deficit because of the "amazing resiliance of the American economy." Words to that effect. Perhaps they were thinking of the 1930's. In any event, the fear was that come late 2010, the American economy would be roaring ahead with plunging employment and wouldn't the Republicans look foolish?
Mr. Ponnuru's fears were unfounded. So is his credibility.
Friedman's monetary focus was on the supply of money itself. Based on an exhaustive history of the data, he found that expanding the money supply could produce some increase in economic growth in the short term, but that the longer term effect would be to create inflation. On the other hand, reductions in the money supply had sizable negative impact on the rate of economic growth. Note that the consumer price index may not be very good indicators of inflation, particularly in the short term, and that there was a significant lag before the effects of monetary policy would be felt in the economy - making it very difficult to use monetary policy to "steer" the economy to take advantage of the short-term benefits of monetary stimulus. Friedman therefore taught that the ideal monetary policy would seek to maintain a small but steady increase in the supply of money.
Unfortunately, there has been little discussion of what the money supply has actually been doing. I was under the impression it had been skyrocketing, but a search for data today suggests that that trend peaked in 2009 and that money supply may actually be declining. If we're still skyrocketing, then QE2 seems absurd on a Friedmanite analysis. If its dropping, then it may be a reasonable means of avoiding a nosedive.
This would be a great topic for NR to address.
Reply to this commentLinkReport AbuseThis is a fine post and I don't know where I come out on all of this. You can't find many economists these days willing to go to the mattresses and say "Okay, here is QE all laid out, this is the rationality, and this is where its all heading." On a related matter, I often think back to TARP and how Henry Paulson's entire strategy and rationale did a hundred and eighty degree turn in about...what? Two weeks?
What rankles me the most about QE2 (along with TARP) is that we seem to be relying a great deal on economic Gnostics these days. The Gnostics were a heretical Christian group (who were around since before Christ) who claimed to have a rarefied knowledge of how everything spiritual worked, but this knowledge was accessible to only a select few. The hoi polloi only needed to shut up and follow along and trust that everything is going to work out just fine.
Reply to this commentLinkReport AbuseThis, from today's PPI is scary:
Reply to this commentLinkReport Abuse"Crude foods: The index for crude foodstuffs and feedstuffs increased 4.2 percent in October. For the 3 months ended in October, prices for crude foodstuffs and feedstuffs climbed 13.3 percent following a 2.8-percent decline for the 3 months ended in July. Over sixty percent of the monthly rise in October can be linked to a 22.7-percent surge in the corn index. Higher soybean prices also were a major factor in the advance in the index for crude foods."
What does this bode for our economy? I don't see how, in the midst of this employment recession, we will be able to accommodate high corn and soy prices.
Regarding Kevin's comment -
The problem is not that banks aren't lending (I get plenty of loan offers every day delivered by our money-losing postal service). The problem is that we the people do not want more debt - either individually or from collectively through our government. When are policy makers going to wake up and realize that we can't support our existing debt, and we do not want to have an ecomony based on even more debt. We need policies that favor production and the creation of wealth, not those that favor consumption and the destruction of wealth.
We are in the process of destroying our economy and our money supply. If the recent election had a message -
Reply to this commentLinkReport Abuseit would be that we want this stopped.
I agree with commenter Kevin 100%.
Here are two links from the Washington Post that were helpful to me in coming to my own conclusions:
External Link
External Link
QE2 is not so much bad as it is ineffective. It is not working now (bank reserves are rising much faster than spending). If it were working, it would in fact create inflation.
It remains to be seen if banks will unleash their reserves into the market if/when the economy begins to grow at a faster pace (which would create inflation) or will go along with the Fed's "unspooling". I hope it will be the latter! In that case, QE1 and QE2 will both be a wash, and the banks will be the only winners, having gotten temporary free cash. Otherwise, QE1 and QE2 will be disastrous examples of good theories divorced from an understanding of how Americans will actually behave.
Reply to this commentLinkReport Abuse"And let’s remember as well that both Milton Friedman and Friedrich Hayek would probably have favored something like QE2."
Please. That statement doesn't even rise to the level of conjecture.
Reply to this commentLinkReport AbuseRamesh,
Nice job focusing on the debate within the right on this, especially as it reminds us that Friedman's work was more robust and complete than just "tight money good, loose money bad."
That said, I took a look at David Beckworth's original attempt to translate Friedman's work into a pro-QE2 argument (link was in an earlier post by you on this subject), and it doesn't wash.
Beckworth's best argument (essentially adopted by the other two economists you cite via link) is that a money-supply increase is needed to counteract a decrease in the velocity of money. Since MV=PQ, a velocity drop can be a real problem.
The problem is, the very graphs Beckworth uses could just as easily be explained by a velocity reduction *in response* to the original QE (2007-9). In fact, velocity levels off when QE ends (I get into the details here: External Link
).
More to the point, Friedman (and Hayek) tended to be unhappy about *any* money shocks in *any* direction, tight or loose. They would have both argued that stability in *policy* begets stability in the economy.
QE2 does not signal stability, and if all QE1 did was lead to a fall-off in velocity in reaction, QE2 will likely do the same thing.
Reply to this commentLinkReport AbuseCould I get a citation on the CPI underestimating inflaiton? Always seemed to me that with their rules regarding subsituted goods and the exclusion of gas and heating oil that the CPI drastically underestimated price inflation as it is actually felt by the consumer.
Reply to this commentLinkReport AbuseLast resort of a losing argument: Well, these DEAD people would probably support it.
Seriously, Ramesh. I respect you, but you need to use better arguments than that.
Want proof that QE2 (and Bernake for that matter) is a failure? Look at the Bond Market movement the last two weeks.
Reply to this commentLinkReport AbuseSound money has always been a conservative position, at least in some corner of conservatism. The right corner.
QE2 is a tax on the elderly and those smart enough to have saved for a rainy day.
Reply to this commentLinkReport AbusePA Buehler: "This, from today's PPI is scary:
"Crude foods: The index for crude foodstuffs and feedstuffs increased 4.2 percent in October. For the 3 months ended in October, prices for crude foodstuffs and feedstuffs climbed 13.3 percent following a 2.8-percent decline for the 3 months ended in July. Over sixty percent of the monthly rise in October can be linked to a 22.7-percent surge in the corn index. Higher soybean prices also were a major factor in the advance in the index for crude foods."
13.3% increase in 3 months equal an annualized increase of over 50%.
But sure, no signs of inflation anywhere...riiiiight
Reply to this commentLinkReport AbuseThank you for the voice of reasonableness.
Reply to this commentLinkReport AbuseI think the question is how much cash is being "hoarded" so to speak. Increasing the money supply into a situation where the money isn't going to be used is for what purpose?
The QE2 is being done because the adminstration does not want to admit their policies are stopping any growth whatsoever. In taking this easing to this extent, everyone else - not just conservatives Ramesh, not sure where in the heck that crack came from - realizes that the very real possibility from continued easing at this point is late 1970s style stagflation. The trigger; not oil but rapidly rising food prices due to a failure in supply as well as the removal of foodstuffs in order to fight the bogy-man of environmental fuel pollution fanatics.
We have had the first hit - the US harvest has been downgraded twice in the last few weeks or so - so corn and soybeans are starting to rise. For you E85 users, screw that idea - the prices with regular gas are getting closer - so E85 is now a really bad buy.
When multiple policies which fly in the face of reality begin to collide, it is never pretty.
Ramesh, I appreciate the linked to arguments and the need to not just cite dogma as inevitable, but there really is no reason for QE2 at this time. I fail to see where the things easing can actually fight are currently present.
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