Thursday, October 7, 2010

QE1 vs QE2

Quantitative Easing, or QE, is a powerful monetary tool available to central agencies under fiat money systems. It is the art of "printing money" to buy assets. This creates asset inflation.

The FED has done a first round of QE in march of 08, stabilizing the markets and sparking a market rally the likes of which not seen since the great depression. The FED has recently hinted it would do QE2.

In my mind QE1 was a necessary stabilizing tool. A deflationary spiral can become entrenched and catastrophic in the sense that the system capsizes out of equilibrium (Fisher moment in economics, where decrease of asset/capital, leads to asset deflation, leads to lower asset/capital in a feedback loop). QE1 prevented these dynamics to become entrenched.

QE2 is a very different beast. At a moment of no volatility in the markets (VIX down), the FED wants to stimulate the economy by printing more money. Many commentators argue that this is pushing on a string. Namely that the economy is repairing its collective balance sheet and won't invest in a long time for lack of growth opportunities.

I have 2 comments,
1 is that it says that the so called "growth" opportunities were really ephemeral (why did growth disappear overnight?) and linked to housing. The housing bubble, instead of being accounted as inflation (which it was) counted towards growth and GDP. It was at heart a monetary phenomenon (QE0 by the banks). There was NO growth, just a monetary illusion of it.

2 QE2 is profoundly unfair, it keeps housing prices up leaving a whole generation (starting with mine) out in the cold when it comes to home ownership. Housing has to come down where young couples can afford starter houses, until it does, there is a fundamental imbalance in the market. I am not talking about "morals" but pure economics. The market is currently inflated and distorted.

QE1 was a necessity to stabilize a capsizing ship.
QE2 as a stimulus tool is profound market manipulation.

QE1 was good, QE2 is evil.

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