Quantitative Easing

[Beet]

The problem with the "commodities will rise" argument against quantitative easing is that it applies not only to quantitative easing but to any scenario where demand recovers; in other words, any scenario where there is economic recovery sees final demand pick up sharply and hence the price of commodities rising. After all, the price of commodities only collapsed in the first place in 2008-09 because of the economic contraction.

Yes, the prices the poor paid in 2009 were lower than 2008 for certain basic goods, but the poor were still better off in 2008 than 2009. Witness the rise in poverty rates or the amount of uninsured. The poor are the ones who pay the most in a depressed economy, because they are the most vulnerable. The loss of a $600 a week paycheck means more for the unskilled laborer than the loss of $10 million for the hedge fund manager. If QE is too regressive (which, I don't see why the conservatives would complain, given that they have long argued for the regressive sales tax, so when did they start opposing regressive taxes?) then the solution is for government to make this up in transfer payments; or, as opebo suggests, for QE to be invested in ways that directly benefit the poor.

As for the decline of the dollar, at free market prices the dollar would decline sharply with or without QE. It is being artificially propped up by the central banks of dozens of countries around the world. Some 60% of the world's foreign exchange reserves and held in dollars, and their amount far exceeds the $600 billion QE announced today. A free currency market under a floating exchange regime would be a self correcting mechanism to current account imbalances; unfortunately that is not what we have.

[Beet]

In the long term, the Solow model is broadly, intuitively correct (and yes, they were still teaching when I was in school too about 5 years ago now); even though the empirical evidence for the Solow model is somewhat lacking. (According to the Solow model, the lower you are on the curve of capital and technology the faster your growth, but real world data has not born this out). The only evidence that has been found for the Solow model's prediction of convergence thus far as been between Western Europe, Japan, and the Anglo nations. Of course, with emerging markets now growing fast, perhaps the reason evidence hadn't been found is that not a long enough time-line was given. I accept the Solow model as a very long term (50-100 years) model.

But what Keynes pointed out is that we don't give all that much of a hooey what happens 50 to 100 years from now. We might never know. So opebo (and more importantly, Bernanke) is referring to the medium term. There is a lot of criticism out there about QE. But much of it is junk, frankly, including the ft alphaville article you linked. You'll note it's a long article with a lot of charts and graphs, but what it boils down to in the end is the author's repeated predictions of massive CPI inflation, which has not borne out. Had the author of that article been right about inflation, the Fed would never have done QE, no matter what the bankers wanted. And should he prove right about inflation in the future, the Fed will stop QE, no matter what the bankers want. But the author is not right about inflation, and the rate of inflation now is at its lowest since 1955.

All the criticisms of QE boil down to inflation, but we don't have much inflation, in the aggregate. This is true whether you go by CPI, core CPI, or various trimmed means. In fact, if we could get inflation up to about 3%, the rate at it was in the 1990s, we might be better off.

[Beet]

Well of course once fast growth starts, you can retroactively say they've 'gotten into gear'. But it's not like there's very strong legal or property rights in China, or financial transparency, or intellectual property, or independent judiciary and legal system. Besides, economic structure isn't captured in the Solow model.

[Beet]

Where to begin. I understand that quantitative easing is criticized as hurting the poor by raising import prices. But that's nonsense. Quantitative easing will only have the effect of stimulating the economy by keeping interest rates low, leading to more borrowing and spending by both businesses and consumers. There's really no demonstrable disadvantage for them to be doing this, but there's potentially an advantage. When more businesses and consumers invest and spend due to lower interest rates, the economy will begin to see a pickup in final demand, and stocks will rise. [Insert empirical evidence: stocks were up big on Bernanke's decision] The prospect of inflation won't tank stocks because there is no inflation.

When you increase the supply of money and it's injected into the system, the worst thing is that it has no effect. But that's not a reason not to do it. That's neutral. And banks aren't not lending because of regulation, they're not lending because of lack of loan demand coupled with a need to repair their balance sheets. QE can't lead to excess inflation, because if it does the Fed will pull back. But frankly, I'd rather have 5% inflation and 5% unemployment than what we have now.

Keep in mind, the first thing FDR did was devalue the currency. That was the first step in recovery from the GD.

[Beet]

Lol at the notion that the G19 cares about what's best for the US. The G19 cares about what's best for the G19. They don't have to answer to the problems in the US. We are the ones who have to answer. Ben Bernanke will have to answer to the effects of his own policies, and he knows this, that's why he cares about getting it right. For decades, the US has sucked up the trade surpluses of other countries. First it was Europe, then Japan, then the "Four Asian Tigers", then China, now Brazil, India, Germany all want to export to the US. Finally, Bernanke is saying "No. America can no longer afford to be your pig. We are broke." That's what's got them in a tizzy. As for Germany, they are screwed. Just watch.