Friday, August 27, 2010

Quantitative Easing round 1.5

There is a lot of talk and angst about QE lately. There is a long thread over at naked capitalism where I actually participate. See here. The gist is:

“QE will weaken the Fed’s balance sheet, and undermine confidence in the institution.”


QE in 08/09 has been applied. Basically the FED prints money and buys stuff. Note that this is no different from how the modern banking system works. Banks create money out of thin air (that is the money multiplier) and PEOPLE buy stuff with it. Market centric wisdom says that markets will allocate that money to the most productive use. SO let the banks create money, lend it and let the people make the smart decisions.

Problem is that lately the people have been buying mc-mansions, HDTVs and sports cars. And here we have a clear example where "markets" just fall flat on their faces. I hate to say this, but it was better when Reagan was spending money on defense or Obama was spending money on healthcare. Sometimes the people are just hedonistic retards.

QE 1.0 was a success in that it provided liquidity in markets that needed it most and avoided a death spiral of illiquid markets and plunging prices (what happened in the great depression). The FED have tried to get the markets off the QE and they are throwing a tantrum... we may be looking at QE 1.5

2 comments:

Stephen G said...

Might this be where creative destruction has scaled -- the destruction is vastly greater with each creation?
Consider what I've done in the past hour: Visited the post office (after it had closed for the day) and weighed and purchased postage for a half-dozen envelopes using the automated postal center. I then went to the grocery store and paid at a self-serve register, using my debit card so that I could withdraw an additional amount an not have to hit an ATM this weekend. I then stopped at a Redbox kiosk and rented a DVD. Paying a human to do things is being factored out. Is the productivity multiplier stronger than the Fed's desire to print?

Marcf said...

well, monetary talk is a focused topic but I am happy entertaining the idea of creative destruction.

Yes you can argue that technology has advanced so much that you don't need humans to service you.

Take that to the extreme and you have vastly efficient crops fed to humans who don't have to work for it.

But in the current system, if you don't work you don't eat. So something has got to give.

QE does serve the purpose of feeding the masses but if nothing is produced then you run in accounting problems :)