QE 2 - Will it do more good than bad

[washunut]

Perhaps we can have a thread that is less about who is evil and who is virtuous and more about macroecromics. I am not an economist but like many have an interest in the subject. The Fed has all but announced that because the economy has not reached full potential and inflation is running below their target they need to do more. They can't lower short term rates below zero so they will have another round of quantitative easing.

It appears that the hope is to raise asset values including housing and exports. The latter will help exports to some extent so the hope is that translate into wage inflation, etc.

The Fed understands that there is a cost to this but hope that the benefit is greater than the cost. The reason I use the word hope is because this is pretty new ground for the fed at a time of a tepid recovery.

The flipside is that QE2 will in fact bring inflation, but that it will not be in the asset classes that the fed hoped for. An example being what we have seen the last 4-6 weeks with price increases in metals and grains which have not yet had a material impact on the final cost paid by consumers.

So what do you think. Will the Fed be able to revitalize or at least increase the price of houses. Will we get the wage inflation that the fed expects. Or will we get higher inflation but in undesired places. Higher oil and food costs, higher costs of imported goods with little or no wage inflation to offset it.

 

[repeter]

The thing the Fed Reserve has consistently failed to do is look at matters from the banks' perspective. Its simply more profitable for banks to keep borrowing for basically nothing, and then give back to the government at a huge gain.

The Federal Reserve needs to do something to make banks lend to the people. Therefore (and rather counterintuitively), I think the Feds need to raise interest rates. That'll also start taking care of inflationary worries.

As for the QE, I think it will work, especially in conjunction with the foreclosure investigations going on. The idea is sound, and there is already a precedent for increasing house values.

But like you, washunut, I'm just an amateur with an interest, so don't take this to the bank

 

[washunut]

The thing the Fed Reserve has consistently failed to do is look at matters from the banks' perspective. Its simply more profitable for banks to keep borrowing for basically nothing, and then give back to the government at a huge gain.

The Federal Reserve needs to do something to make banks lend to the people. Therefore (and rather counterintuitively), I think the Feds need to raise interest rates. That'll also start taking care of inflationary worries.

As for the QE, I think it will work, especially in conjunction with the foreclosure investigations going on. The idea is sound, and there is already a precedent for increasing house values.

But like you, washunut, I'm just an amateur with an interest, so don't take this to the bank

Thanks for your thoughts. I have heard others mention the point of raising rather than lowering interest rates. For example if mortgage rates are low but you expect them to go lower why borrow now. If rates inched up perhaps people who are thinking of buying a house will say I better byt before rates get too high.

On your last point, QE2 should have the impact of lowering rates. If that happens it is unclear what happens to housing and what it does to things like food and gas.

 

[Lord Tammerlain]

Perhaps we can have a thread that is less about who is evil and who is virtuous and more about macroecromics. I am not an economist but like many have an interest in the subject. The Fed has all but announced that because the economy has not reached full potential and inflation is running below their target they need to do more. They can't lower short term rates below zero so they will have another round of quantitative easing.

It appears that the hope is to raise asset values including housing and exports. The latter will help exports to some extent so the hope is that translate into wage inflation, etc.

The Fed understands that there is a cost to this but hope that the benefit is greater than the cost. The reason I use the word hope is because this is pretty new ground for the fed at a time of a tepid recovery.

The flipside is that QE2 will in fact bring inflation, but that it will not be in the asset classes that the fed hoped for. An example being what we have seen the last 4-6 weeks with price increases in metals and grains which have not yet had a material impact on the final cost paid by consumers.

So what do you think. Will the Fed be able to revitalize or at least increase the price of houses. Will we get the wage inflation that the fed expects. Or will we get higher inflation but in undesired places. Higher oil and food costs, higher costs of imported goods with little or no wage inflation to offset it.

QE2 will drive inflation, that is the goal. With inflation will come demands for wage increases, even if wage increases are lower then the real inflation rate, it will be cheaper to employee people. With higher inflation and higher wages the massive amounts of debt that people have will in effect be less of a burden for most people to pay back, provided they have long term mortgages and not variable rates.

QE2 will not increase US exports unless the inflation rates goes very high (In dollar terms exports might increase, but remember the dollar would be worth less then before) as the majority of US goods exported are industrial machinery, chemicals or agricultural products. Consumer goods which are generally more price sensitive would still be too expensive to produce in the US.


Overall positives, it will make debts less of a burdern and perhaps increase economic activity in dollar terms. It will help prevent massive defaults from occuring which would prevent a possible significant crash in the economy

Overal negatives, the lenders will be seeing their returns go down drastically, any foreign investor who is currently invested in the US will be burned. Anyone on a fixed income will suffer, there is a significant chance that the inflation will be hard to contain causing far more inflation for far longer then expected ( see the 70s after Nixon took the US off the gold standard)

QE2 will do nothing to fix the problems in the economy, as it becomes easier to do after the first time, it will just paper over the problem to be dealt with at a later date.

QE2 will be done because it is an easy solution to todays problems, while creating future problems that can be dealt with later by someone else. I do not recall any country that has engaged in significant QE emerging from it in a stronger position. From a personal standpoint, I would suggest far more countries follow Germany when it comes to monetary policy. Using inflation to increase competitiveness does not increase productivity, it just lowers living standards

 

[drz-400]

The fed is in an interesting predicament. Over the past month ten year treasuries have fallen 40 bp and on the other hand you have commodities taking off. To me this suggests that the market has already "priced in" and is expecting QE2. I am not sure how much QE2 can accomplish because of this. I am in favor of it though because it will help keep inflation from falling further, which would be even more detremental to the economy.

 

[phattonez]

I hate to break-up this interventionist lovefest, but if the problem is insufficient demand for homes, then it seems to me that the easiest way to get people to buy again would be to allow prices to fall to the point where people would buy again. But the market can't take care of itself, of course not. Spontaneous order never created anything efficient.

 

[washunut]

I hate to break-up this interventionist lovefest, but if the problem is insufficient demand for homes, then it seems to me that the easiest way to get people to buy again would be to allow prices to fall to the point where people would buy again. But the market can't take care of itself, of course not. Spontaneous order never created anything efficient.

Not a lovefest just tried to keep it civil for a change. It worked for several hours.

That said, I happen to agree with your point. I did want to get the counterarguements to poke holes in my thinking. The people on the federal reserve might be right or wrong but they are not dopes. So tossing out what they are doing out of hand seems silly from a non-economist like me.

 

[Aunt Spiker]

They need to set goals. Police offers, for example, have goals for tickets sometimes - this isn't to maximize safety of the area. It's to net more profit from fines.

If it works for towns and counties then it could possibly work this lending-issue. . . of course it's just not that simple.

 

[Ahlevah]

QE2 will in fact bring inflation, but that it will not be in the asset classes that the fed hoped for.

In fact? Since the Fed more than tripled the size of its balance sheet beginning in 2008, we were supposed to have hyperinflation by now. Instead, Treasury note yields keep hitting record lows and banks have more than $1 trillion in reserves. Considering that banks already have record amounts of cash on deposit with the Fed, why would they lend if the Fed threw even more money at them:

(A)s a result of QE1 the banks are holding close to $1 trillion of excess reserves. The important question is why are banks unwilling to put these essentially zero earning reserves to work. Either the banks: 1) are not in a position to put additional capital at risk because their balance sheets are shaky; 2) are continuing to experience large write-downs on commercial and residential mortgages, as well as on a wide variety of other loans; or 3) customers may not have the balance sheet capacity or the need to take on additional debt. They could also see no expansionary prospects, or fear an uncertain regulatory future. In other words, no viable outlets exist for banks to loan funds....

With existing excess liquidity in banks and companies... it should be clear that QE2 and the purchases of additional assets by the Fed will, like previous purchases in QE1, serve only to bloat excess reserves without advancing income, spending, or jobs. From this point in the cycle, for QE2 to generate expansion, money growth and therefore debt levels would have to rise.

http://www.hoisingtonmgt.com/pdf/HIM2010Q3NP.pdf

So we have a situation in which people who are drowning in debt need to be tossed a life preserver of more loans? And they'll just grab the money and head to Dillard's and go on a spending binge? Good luck on that scenario.

 

[washunut]

In fact? Since the Fed more than tripled the size of its balance sheet beginning in 2008, we were supposed to have hyperinflation by now. Instead, Treasury note yields keep hitting record lows and banks have more than $1 trillion in reserves. Considering that banks already have record amounts of cash on deposit with the Fed, why would they lend if the Fed threw even more money at them:



So we have a situation in which people who are drowning in debt need to be tossed a life preserver of more loans? And they'll just grab the money and head to Dillard's and go on a spending binge? Good luck on that scenario.

I had never heard that the first time the Feds went into the market anyone said it could/ would cause hyperinflation. It appeared that the reason for their move was to RESTORE liquidity into the markets not increase it beyond where it had been. As your article states the Fed essentially bought up paper from banks. They hoped that by trading toxic assets which could not be moved with treasuries then banks would be a better position to lend and they are. There were conflicting things happening though. While we firmed up the banks we also asked the banks to lower their leverage ratios. We also insisted that they be more prudent to whom they lend.

I may be wrong but QE2 is quite different. This will not be another round of bolstering bank balance sheets, which would have a good probability of doing nothing. This instead will be monetarizing the federal debt. This debt will not be sold to banks but to whomever cares to purchase treasuries.

On a more basic level it could be asked, what is a dollar and what value do you place on it. Since the Fed announced QE2 there has been a pronounced reduction in what a dollar can buy for a number of commodities and foodstuffs. It also seems to have caused the dollar to lose value in terms of the Yen and the Euro.

I would ask that if you can only respond with little snipes like your last paragraph, please go to a thread that welcomes that sort of trite attack.

 

[phattonez]

Not a lovefest just tried to keep it civil for a change. It worked for several hours.

That said, I happen to agree with your point. I did want to get the counterarguements to poke holes in my thinking. The people on the federal reserve might be right or wrong but they are not dopes. So tossing out what they are doing out of hand seems silly from a non-economist like me.

I'm not just going to give them the benefit of the doubt though because they are in that position of authority. I know that what I posted here was merely a glancing blow, as a real argument against more inflation takes just a little more elaboration.

 

[washunut]

I'm not just going to give them the benefit of the doubt though because they are in that position of authority. I know that what I posted here was merely a glancing blow, as a real argument against more inflation takes just a little more elaboration.

I essentially agree with your post. That being said it seems even nobel winners can't agree on this. So I can't expect myself or the other posters to have THE answer.

I have been a skeptic of the triple deficit policy ( government, trade, personal) for quite a while. However for a long time it has been able to overcome this debt and still have low inflation and low interest rates for over twenty years. Sort of like the housing or tech bubbles. It works being in them until it doesn't. So maybe another way to look at this is will it be the straw that breaks the camels back.

 

[Missed AB]

On your last point, QE2 should have the impact of lowering rates.

QE only will lower rates because the Fed is buying it's own securities with the money. The more 30 year bills are bid on, the lower the rate. When the fed bids on it's own securities, this puts a floor in the coupon.

The problem becomes what is the rate WITHOUT the feds involvement. When QE stops and the fed stops artificially suppressing rates, then you will have rates ballooning.

For example if mortgage rates are low but you expect them to go lower why borrow now. If rates inched up perhaps people who are thinking of buying a house will say I better before rates get too high.

I has to do more with qualifications for the mortgage and debt to income ratios being too high, and people being upside down on their mortgage not able to sell.

 

[drz-400]

So we have a situation in which people who are drowning in debt need to be tossed a life preserver of more loans? And they'll just grab the money and head to Dillard's and go on a spending binge? Good luck on that scenario.

Very true, the fed at the moment has very little ability to stimulate demand with monetary policy. This is because rates are so close to zero the demand for money has become "infinitly" elastic. The fed however still has a degree of control over inflation, and allowing further disinflation is a much worse senario than no or increased inflation. Increasing inflation will also help those people who are "drowing in debt".

 

[Missed AB]

allowing further disinflation is a much worse senario than no or increased inflation. Increasing inflation will also help those people who are "drowing in debt".

Disinflation is inflation a lower than desired rate of inflation, but not deflation, which you seem to be implying it to be.

Inflation does NOT help those in debt! It helps those who have securities tied to inflation hedges think gold. If you have enough gold, then you can let your money "appreciate" and pay the debts off with cheaper money. It does not help those who do not have assets.

People who are "drowning in debt" means that their debt stays about the same, while the cost of everything goes up. This gives the person with little or no assets no assistance in paying off debt. It also makes the money they earn not be able to spread as much since the cost of everything else is more.

 

[Ahlevah]

I would ask that if you can only respond with little snipes like your last paragraph, please go to a thread that welcomes that sort of trite attack.

My comments were directed at no one in particular. Milk toast is not my writing style. My style is to be a general smartass, and, as an almost senior citizen and member of AARP, I reserve the right to be one and doubt I'll change it.

 

[Missed AB]

I am not an economist but like many have an interest in the subject.

Not an economist either, but I have done quite well for myself through stock trades. I also own a small business which mainly involves exports to Europe. Take it for what it's worth, but my money is where my mouth is, and I live a comfortable lifestyle.

It appears that the hope is to raise asset values including housing and exports. The latter will help exports to some extent so the hope is that translate into wage inflation, etc

I have noticed an increase in exports over the past 3 months with my business. I think this is driven more by the recovery in other countries than our QE. As the EU dropped around 1.2 in mayish there was little change in exports vs domestic sales.

Wage inflation will not occur unless there is job demand. A 10% unemployment with no long term improvement in sight will not force any increase wages.

An example being what we have seen the last 4-6 weeks with price increases in metals and grains

Price has increased in ALL currencies including the Ausi which is not using QE which is signs of demand from improved economic conditions parts of Europe and Most of Asia and Australia.

Will the Fed be able to revitalize or at least increase the price of houses.

No. IN general, prices will continue to fall or at the best stabilize at current levels for the next 5 years as the rest of the sub-primes work their way through the system

Will we get the wage inflation that the fed expects.

Not with 10% unemployment which includes skilled and "white collar" jobs and no prospects for any sigificant decrease in that number.

will we get higher inflation but in undesired places.

Yes. As noted earlier this week the CPI has been flat if you exclude energy and food... So basically anything you NEED already costs more.

Higher costs of imported goods

That one depends on a few things... for example what currency is the export in, demand for the product in the home nation, and how much desire does that company have to sell to the US market.

 

[Ahlevah]

I had never heard that the first time the Feds went into the market anyone said it could/ would cause hyperinflation.

This is from October, 2008. It's almost comical:

YouTube - 10/13/2008 - Peter Schiff On Glenn Beck: Inflation Nation?

What it comes down to is this:

For QE2 to work, a renewed borrowing and lending cycle must take place, resulting in a further leveraging of the already highly overleveraged U.S. economy. Such additional leverage would not be beneficial since increasing indebtedness from these levels ultimately leads to economic deterioration, systemic risk, and in the normative case, deflation, as documented by Rinehart and Rogoff in their book, This Time Is Different. Therefore, at best QE2 can be nothing more than a short-term panacea exacerbating the serious structural problems already facing the United States.

http://www.hoisingtonmgt.com/pdf/HIM2010Q3NP.pdf

 

[washunut]

Not an economist either, but I have done quite well for myself through stock trades. I also own a small business which mainly involves exports to Europe. Take it for what it's worth, but my money is where my mouth is, and I live a comfortable lifestyle.



I have noticed an increase in exports over the past 3 months with my business. I think this is driven more by the recovery in other countries than our QE. As the EU dropped around 1.2 in mayish there was little change in exports vs domestic sales.

Wage inflation will not occur unless there is job demand. A 10% unemployment with no long term improvement in sight will not force any increase wages.


Price has increased in ALL currencies including the Ausi which is not using QE which is signs of demand from improved economic conditions parts of Europe and Most of Asia and Australia.



No. IN general, prices will continue to fall or at the best stabilize at current levels for the next 5 years as the rest of the sub-primes work their way through the system

Not with 10% unemployment which includes skilled and "white collar" jobs and no prospects for any sigificant decrease in that number.

Yes. As noted earlier this week the CPI has been flat if you exclude energy and food... So basically anything you NEED already costs more.


That one depends on a few things... for example what currency is the export in, demand for the product in the home nation, and how much desire does that company have to sell to the US market.

Thanks for your response.

 

[washunut]

This is from October, 2008. It's almost comical:

YouTube - 10/13/2008 - Peter Schiff On Glenn Beck: Inflation Nation?

What it comes down to is this:

Seems like he was talking about QE2. My statment regarded QE1.

 

[drz-400]

Disinflation is inflation a lower than desired rate of inflation, but not deflation, which you seem to be implying it to be.

Correct, the proper terminology would have been no change in inflation or increased inflation.

Inflation does NOT help those in debt! It helps those who have securities tied to inflation hedges think gold. If you have enough gold, then you can let your money "appreciate" and pay the debts off with cheaper money. It does not help those who do not have assets.

People who are "drowning in debt" means that their debt stays about the same, while the cost of everything goes up. This gives the person with little or no assets no assistance in paying off debt. It also makes the money they earn not be able to spread as much since the cost of everything else is more.

I agree with the first half of your post. Debt is written in nominal terms. If there is inflation the real cost of the debt will go down. However, I disagree with your conclusion. Less inflation bad news for those who are in debt, as it makes it harder for them to repay their loan. Why do you think there have been so many delinquent home loans? The price of houses has gone down considerably since its peak during the bubble and the real burden of their home morgages went up. Inflation helps debtors and hurts creditors.

 

[Missed AB]

However, I disagree with your conclusion. Less inflation bad news for those who are in debt, as it makes it harder for them to repay their loan. Why do you think there have been so many delinquent home loans? The price of houses has gone down considerably since its peak during the bubble and the real burden of their home morgages went up. Inflation helps debtors and hurts creditors.

It depends on the assets held.

lets assume you went on margin and bought 1000 shares of GLD or about 80 pounds of gold. In a period of hyper inflation maybe that gold would triple in price. That allows you to pay back your loan with cheaper money and have more left over for other debt repayments.

Lets assume the only asset you own is the house and have other debts, then inflation of other needed items decreases your ability to reapay as you noted above.

In periods of deflation, assets such as houses decrease in value. This decrease leads to people walking away from the home.

 

[drz-400]

Lets assume the only asset you own is the house and have other debts, then inflation of other needed items decreases your ability to reapay as you noted above.

I think we are confusing different kinds of inflation what kinds of inflation the fed has control over. QE2 would cause monetary inflation, which should increase prices generally. The type inflation that you are talking about that increases the prices of important goods (like food/oil) would be called cost-push inflation, which usually arises out of a supply shock.

 

[Missed AB]

I think we are confusing different kinds of inflation what kinds of inflation the fed has control over. QE2 would cause monetary inflation, which should increase prices generally. The type inflation that you are talking about that increases the prices of important goods (like food/oil) would be called cost-push inflation, which usually arises out of a supply shock.

The changes in the consumer price index is how inflation is measured. Oil and food are included in the measurement.

The Fed has no control over the prices items sell for. What the Fed can do is regulate monitiary policy which can stem inflation or stimulate it. However this is also compared to other currencies and their countries fiscal outlook on FOREX. The exchange rates and global demand are what drives inflation.

 

[Missed AB]

Correct, the proper terminology would have been no change in inflation or increased inflation.

The proper terminology is disinflation.