Palin: Riding the QE2 will require a lot of Dramamine

Emboldened by her successful debate with a Wall Street Journal reporter over monetary policy, Sarah Palin continues today to blast the Federal Reserve and the Obama administration over the second round of “quantitative easing.”  Palin calls Obama an educated man who certainly can’t believe the nonsensical explanation he gives that the QE2 will somehow push businesses to invest domestically while weakening the dollar abroad.  Instead, Palin suspects that Obama’s ride on the QE2 also gives him a free ride on debt, allowing the President to avoid making tough decisions — and warns that the rest of us should start taking our Dramamine:

It would be a global disaster if the U.S. economy remained permanently stuck in the mud. But the same cannot be said of his claim that the Fed’s experiment in pump priming would automatically lead to increased economic growth. By the time this experiment is over, QE will make us queasy.

Will driving the dollar down in this way do anything to boost U.S. exports? The short answer is not really. A weaker dollar will temporarily boost exports by making our goods cheaper to sell; but inevitably other countries will respond in kind, triggering the kind of currency wars economists are warning us about. It’s precisely to prevent this scenario that World Bank President Robert Zoellick recently came out in favor of some new type of gold standard or “international reference point.”

Will QE2 then at least boost domestic investment? No, again. As I explained in my speech in Phoenix, the reason banks aren’t lending and businesses aren’t investing isn’t because of insufficient access to credit. There’s plenty of money around, it’s just that no one’s willing to spend it. Big businesses especially have been hoarding cash. They’re not expanding or adding to their workforce because there’s just too much uncertainty created by a lot of big government experiments that aren’t working. It’s the President’s own policies that are creating this uncertainty.

The President is an educated man. I would hope that he knows these things as well as you and I do. So why then, if he knows it won’t really boost our exports or our domestic investments, would he still come out in defense of this dangerous experiment? I think the most plausible answer has to do with the debt. As liberal economist Paul Krugman has explained, a little inflation goes a long way towards driving down the value of the enormous national debt Obama has run up. And the higher the inflation, the greater the likelihood he won’t have to take any of the tough decisions needed to bring the deficit back down. In other words, pushing inflation upwards means you can have your cake and eat it too. You can spend all you like and then make the bill disappear by driving down the value of the dollar – buying with one hand the debt your reckless spending is issuing with the other. No need to cut spending, folks, just run the printing presses. It’s a win-win scenario.

Except, of course, that it’s more likely to be a lose-lose.  Businesses won’t feel any more pressure to spend their money now in long-term growth strategies in an environment where the American government deliberately undermines confidence in the dollar; they’ll be more likely to look abroad for growth opportunities.  At the same time, our creditors won’t be terribly eager to purchase any more US debt at the current interest rates offered.  We will have to pay substantially more interest for any deficit spending we incur from this point forward, which means more money going to debt service and more deficit spending.

The QE2 strategy might work if the Obama administration planned to spend less than annual revenue over the next several years in order to lower the national debt and avoid issuing new Treasury notes.  Any backlash against devaluing the dollar would be felt only indirectly in those circumstances, as we would not need to promise higher yields to acquire capital, although we would still have to deal with the backlash coming from our trading partners on exports.  However, the Obama administration doesn’t plan to offer an austerity program along with QE2; they expect to run annual deficits from between $800 billion to over $1 trillion for the next several years, and the rates we will have to offer will only accelerate our annual deficit problem, even with a devalued currency.

And of course, if the Obama administration planned to spend less than current annual revenue, the Fed wouldn’t have felt the need to try QE2 in the first place.  The Fed has run out of options to deal with monetary policy in an environment where Congress won’t reform spending and entitlements and a President demands even more deficit spending.  In the face of a political establishment that refuses to acknowledge fiscal reality, the Fed has set sail on the QE2 for Weimar, or at the very least, Greece.  There isn’t enough Dramamine in the world for those choppy seas.