Feds print money to force inflation

posted at 3:35 pm on November 4, 2010 by Ed Morrissey

Well, the media is calling it “quantitative easing” again, or “QE2″ for short, but that’s what it is, isn’t it?  The Fed will print about $600 billion in order to buy Treasury bonds to keep interest rates from going too high.  They want to force some inflation to get people holding capital to start spending it, while still not having a plan to unload the assets they bought during QE1:

The plan to pump $600 billion into the financial system is designed to stimulate the economy in large part by lowering mortgage and other interest rates.

Although the approach carries significant risks for both the economy and the central bank’s credibility, the steps announced by Fed policymakers could represent the nation’s best hope for breaking free of sluggish growth, especially with bold initiatives unlikely from a newly divided Congress.

Fed officials concluded that growth is too slow to bring down the 9.6 percent unemployment rate and is at risk of staying that way for some time absent new action. They were also concerned that inflation has been running too low and were looking for a way to encourage modest price increases, which would give consumers and businesses more reason to spend money before its value declined and help energize the economy. …

The Fed usually manages the economy by adjusting short-term interest rates. With those rates already near zero, Fed officials had to dust off a strategy for boosting the economy that debuted during the darkest days of the financial crisis. The Fed plans to create money, essentially out of thin air, and then pump it into the economy by buying Treasury bonds on the open market. These purchases are to be finished by the end of June, the Fed said.

Using this technique, called “quantitative easing,” the Fed bought more than $1.7 trillion in securities during the financial crisis and in its immediate aftermath. The central bank’s holdings jumped to their current level of $2.3 trillion, and the figure will approach $3 trillion when the new purchases are complete. This new wave of bond buying is a dramatic turnabout for an institution that just six months ago, amid a false spring in the economy, was weighing how it would begin unloading all the securities it had purchased.

This looks like a solution for the wrong problem.  The problem isn’t a lack of capital for investment, it’s the uncertainty of the economic and especially regulatory environment.  Creating a little inflation won’t overcome that; it’s more likely to increase the uncertainty.

But let’s say that it does encourage companies and venture capitalists to unlock the vault, so to speak.  Until we start fixing the structural problems in the domestic market by finalizing tax rates and dealing with the sweeping amount of uncertainty imposed by ObamaCare and the EPA’s self-assigned CO2 mission, will those investors be more likely to spend that money here — or abroad, in more predictable and hospitable environments?  Pushing investors to make decisions now on ventures may well backfire and send a great deal of that money elsewhere, leaving relatively little for American growth once Congress rolls back its previous interventions.

This looks a lot like a Cash for Clunkers move, and the outcome may well do a lot more damage than people think, and in ways they have yet to realize.  If we start marrying inflation to stagnation, well …. welcome to the 1970s all over again.


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oh, well, you guys forgot about the second trick in this particular Depression 2.0 playbook.

You combine this QE2 with trade barriers. That’s right, the left is getting itchy for some good old tariffs and other restrictions on free-trade. The better to force americans into buying our own overpriced, union goods.

or, in the real world, cause a trade war as we enter Great Depression 2.0.

As Slurpee says, you’d think we’d be thanking him.

joeindc44 on November 4, 2010 at 7:22 PM

Its much easier to get your hands on $400 today to buy that suit than it was to get your hands on $20 in 1913!!!!!

Not for long, if the Gummint keeps trying to kick the can down the road.

hillbillyjim on November 4, 2010 at 7:25 PM

Its much easier to get your hands on $400 today to buy that suit than it was to get your hands on $20 in 1913!!!!!

Not for long, if the Gummint keeps trying to kick the can down the road.

One thing that happened in certain dem-run cities is the death of credit. That is, I think it was Detroit, there was no money to borrow. You had to buy things on layaway, thanks to idiotic usury laws.

joeindc44 on November 4, 2010 at 7:28 PM

It can increase export by lowering real wages by lowering the value on the dollar. Which can trickle over to you.

the_nile on November 4, 2010 at 6:58 PM

Really??? Well, I don’t export, so I hope I can stay in business until everything trickles my way.

Since I’m not an economist, the only way for I see my business increasing is for people to have more money to spend and have confidence to spend it. So, my customers need to see more money in their paychecks (decrease in payroll taxes?) and have confidence that the government is not going to take it away at some future point. However, our government is doing the reverse. They are letting taxes rise, increasing the cost of insurance, threatening cap and trade and on top of all these, they are now decreasing peoples buying power.

Maybe I’m cynical and I could definitely be wrong, but what we’re doing has not been working. Put the $600 bilion in the pockets of the consumer and assure them you’re not going to raise taxes (include covert taxes like cap and trade) and I just bet things turn around. But what do I know, I’ve only been doing business in the real world for the last 20 years.

ReaganWasRight on November 4, 2010 at 7:29 PM

the trade barriers argument took a hit on tuesday

fnc panel said O was going to advance several free trade agreements with rep support and dim opposition

also, i think that sestak tried the hate china card, and lost

we really can’t anger china thru trade barriers etc.

i think the yuan is getting more unpegged as we go on

r keller on November 4, 2010 at 7:33 PM

It can increase export by lowering real wages by lowering the value on the dollar. Which can trickle over to you.

the_nile on November 4, 2010 at 6:58 PM

There are some problems with your theory:

1. The US doesn’t have anything to export (see ‘trade defecit’ and ‘outsourcing’).

2. At best, the effect would be temporary: it would only work until the US worker discovered that his imported car went from $20,000 to $26,000 overnight….at which time he would demand a higher wage to make up the difference. Inflate and repeat. Unfortunately for this tactic, communications these days are instantaneous and world-wide, so temporary effects based on lack of price and/or value knowledge won’t last long. If ‘real wages’ are, in fact, ‘real,’ any attempt at reducing them in one country will start an immediate migration to a more favorable work environment where full value will be received.

In other words, you can’t fool people as easily as you could in the past. The Internet and instant communication exposes sham transactions and trickery much faster now.

landlines on November 4, 2010 at 7:39 PM

A little bit of inflation can actually be good for savers.

Again, people. Lets not criticize monetary economics before understanding it.

But what the fed is doing is actually inadequate and nothing extraordinary.

flawedskull on November 4, 2010 at 4:18 PM

http://www.youtube.com/watch?v=zDAmPIq29ro

sharrukin on November 4, 2010 at 4:27 PM

Epic.

hillbillyjim on November 4, 2010 at 7:40 PM

oh, well, you guys forgot about the second trick in this particular Depression 2.0 playbook.

You combine this QE2 with trade barriers. That’s right, the left is getting itchy for some good old tariffs and other restrictions on free-trade. The better to force americans into buying our own overpriced, union goods.

or, in the real world, cause a trade war as we enter Great Depression 2.0.

As Slurpee says, you’d think we’d be thanking him.

joeindc44 on November 4, 2010 at 7:22 PM

Considering all of the history here and around the world re: tariffs I refuse to believe that anyone would try that on a significant scale right now. I refuse to believe.

visions on November 4, 2010 at 7:41 PM

A little bit of inflation can actually be good for savers.

Only if interest rates out-pace the rise in the real cost of living.

hillbillyjim on November 4, 2010 at 7:41 PM

From the Framing to the putting together of the Federal Reserve the dollar lost 5% of its value… that was in 1913.

From 1913 to 2009 the dollar lost 95% of its value.

Can someone tell me the great help of having a currency declining in value?

And remember the lesson from Weimar: order your beers when you get to the bar and pay for them then. They will go up in cost as wait for them. Yet their value remains the same.

ajacksonian on November 4, 2010 at 7:53 PM

BTW, Paulson is out of the picture.

bayam on November 4, 2010 at 3:55 PM

Who would you be more afraid of: Timmy or Paulson? ;-)

batter on November 4, 2010 at 8:14 PM

A little bit of inflation can actually be good for savers.

Again, people. Lets not criticize monetary economics before understanding it.

But what the fed is doing is actually inadequate and nothing extraordinary.

flawed
skull on November 4, 2010 at 4:18 PM

We know what is flawed. I don’t think you lived through the 70′s on a limited income. Inflation is a stealth tax it eats any at your buying power.

chemman on November 4, 2010 at 8:15 PM

I’m not an economist – just a stupid squid …

Is this “QE2″ represent a “devaluation” of the dollar in some form?

If so – exactly by how much?

HondaV65 on November 4, 2010 at 8:28 PM

We know what is flawed. I don’t think you lived through the 70′s on a limited income. Inflation is a stealth tax it eats any at your buying power.

chemman on November 4, 2010 at 8:15 PM

I was a teenager in the 70′s. In the 60′s the news quoted the daily Vietnam body counts. In the 70′s the news quoted the inflation rates with about the same frequency.

It was depressing – I thought that inflation was something that we’d have to live with forever – along with the Soviet Union. Then along came Reagan in the 80′s and got rid of both. Absolutely stunning.

Just a reminder – we just to have 17% mortgages also – so this makes me nervous – even though supposedly they’re doing this to keep interest rates low.

Sometimes I think the only difference between me and the guys running the Fed is – I know that I know absolutely nothing and they don’t.

HondaV65 on November 4, 2010 at 8:31 PM

Inflation will also lead to higher gas prices, food prices, and everything else.

Also, this basically creates another bubble which is probably the idea. They are betting that it won’t pop until 2013 when a Republican takes office.

jeffn21 on November 4, 2010 at 8:31 PM

Again, people. Lets not criticize monetary economics before understanding it.

But what the fed is doing is actually inadequate and nothing extraordinary.

flawedskull on November 4, 2010 at 4:18 PM

We know what is flawed. I don’t think you lived through the 70′s on a limited income. Inflation is a stealth tax it eats any at your buying power.

chemman on November 4, 2010 at 8:15 PM

Someone talks with clear knowledge of monetary theory, and gets jumped like a black panther at a Tea Party event? Not only are his points valid, but inflation is a good thing esp. when compared to deflation. Given the size of the US debt, any sustained period of deflationary stagnation would greatly increase the chances of the US government entering insolvency, which would wipe out the wealth of all Americans (except for the wealthiest ones with overseas assets). It’s hard to see how this fact could be missed by the Fed.

BTW, Paulson is out of the picture.

bayam on November 4, 2010 at 3:55 PM

Who would you be more afraid of: Timmy or Paulson? ;-)

batter on November 4, 2010 at 8:14 PM

I’m more afraid of the disease than the doctors. But no doctor has a definitive cure, and that’s bothersome.

bayam on November 4, 2010 at 8:37 PM

I ran into an apparatchik that was itching for tariffs. Seemed to think that was what would help the middle class.
Also, with respect to the trade deficit, that’s malarky, look it up, it’s not a bad thing and a sign of strength, not weakness.

joeindc44 on November 4, 2010 at 8:39 PM

Inflation “The cruelest tax of all”

Gwillie on November 4, 2010 at 8:41 PM

Seems to me that all this is going to do is drive up the price of everything which means us little people get to pay more taxes while the value of our dollars decline. Ooooo, I get it, crap, were screwed again. By the way it has already begun.

New Patriot on November 4, 2010 at 9:02 PM

“I got a bad feelin about this kid”

hoakie on November 4, 2010 at 9:35 PM

So…no jobs and the price of everything is going up…

How long do you think until the bread riots?

Dark-Star on November 4, 2010 at 9:42 PM

flawedskull,

I don’t think those words mean what you think they mean.

Sincerely,
Inigo Montoya

spmat on November 4, 2010 at 11:11 PM

Audit the Fed.

spmat on November 4, 2010 at 11:17 PM

ust a reminder – we just to have 17% mortgages also – so this makes me nervous – even though supposedly they’re doing this to keep interest rates low.

Sometimes I think the only difference between me and the guys running the Fed is – I know that I know absolutely nothing and they don’t.

HondaV65 on November 4, 2010 at 8:31 PM

WOW!!! I remember when dad re-fi’d down to 12% and we were rich!

Car loans at 10%??? what a steal!

The only saving grace we may have is that population and economic expansions have created enough room for some monetary expansion. <>

Fighton03 on November 5, 2010 at 2:16 AM

Can you say “Pyramid scheme?” Sure you can! Once again, gummint gets away with what they put private citizens in jail for–and jail is where such scammers and cheats need to be, not sharpening their fangs while watching over the fed’s “chickens.” Everything about this administration shouts, “Ef the rule of law.” When the executive, the enforcement branch takes that approach, everything about the nation, its economy, and culture are destabilized. Play QE2 mania in the markets while you can and accumulate hard assets. Two more years of this, even with Repugnicans finally fighting back, is going to seriously test our mettle as a nation.

Ay Uaxe on November 5, 2010 at 12:48 PM

“Let them eat cake!”
bernake

orbitalair on November 5, 2010 at 12:50 PM

Comment pages: 1 2 3