Quantitative Distressing

Reading news about the recent QE 3, I never encountered even one writer giving a positive assessment of the FED’s action. This includes both professional journalists and bloggers. I think I read more or less 20 articles on this topic and I was surprised hearing a unanimous voice about the destructive effect of quantitative easing. In this post, I just want to collate relevant ideas I encountered from few of those articles. And allow me to start with a definition of quantitative easing.

Quantitative easing as defined by Investopedia is “a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market.” The goal in quantitative easing is to increase “the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.”

Quantitative Easing

With the above definition, we understand that the overall goal in QE is to stimulate the economy by increasing the money supply. QE 3 shows that the previous QEs have not reached the intended goals despite the fact that in QE 1, a total of $1.7 trillion had already been pumped into the economy and in QE 2, $600 billion more had been added. And now in QE 3, the official announcement of the FED is to purchase $40 billion worth of mortgage securities a month until it reaches its goal of creating jobs for unemployed Americans. Actually, all the combined efforts of the FED to stimulate the economy will amount to $85 billion a month. This shows that the FED will not stop its “economic solution” not until it achieves its goal.

I think there is no question about the sincerity of Bernanke to aid the economy. The real problem lies in his basic misunderstanding of the economy due to his Keynesian-monetarist perspective. Compared to the solution offered during the 1930s Great Depression, the present strategy of the FED is in between the Keynesian and monetarist approach. As a Keynesian, Bernanke is incapable to see the FED as the source of the crisis. On the other hand, as a typical monetarist solution, the FED now is avoiding the mistake in the 1930s and increasing the money supply to provide liquidity.

The first article I read about QE is the one written by Dr. Ron Paul yesterday. He said, “Any further quantitative easing from the Fed, in whatever form, will only make our next economic crash that much more serious.” In Rilaly’s blog, the writer simply defines QE as basically printing more money and the blogger in Evil of Indifference describes it as debasing the purchasing power of the dollar. I made a comment that this Keynesian-monetarist scheme of hiding inflation behind acceptable term actually misleads both the public and most professional economists. For me, it is better to replace “easing” with any word opposite to it for that is more accurate and honest. Checking the Thesaurus, you will come up with antonyms like distress, worsen, aggravate, and upset. So I think it is more appropriate to call the recent Fed action as “quantitative aggravating” or “quantitative distressing” for that’s what QE actually does. In the short-term, its detrimental effect on the economy is difficult to see, but if all the critics of QE are right (which I think they are), better prepare for a long rough ride ending to an economic crash.

Related Articles:

Trump: Fed Tactics Creating ‘False Numbers’ in Stock Market

Description: For me, I consider it new to hear the voice of Donald Trump criticizing the Fed for its action. For Trump, though the recent QE would certainly benefit billionaires like him, the artificial boosting of the stock market by weakening the dollar through QE will not do long-term good not only for the US, but also for global economy.

QE will Destroy the Economy, Use this Rally to Prepare for the Worst

Description: What calls my attention to this article is the picture of a little girl throwing lot of dollars out of the window. I think that is the appropriate picture describing the recent action of the FED.

Where will QE3 take us?

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6 Comments

  1. Pingback: 2nd Week of September 2012 | Studies in Economics

    • Inflationary policies would enable the entrepreneurs to expand production, the unemployed to find jobs, and consumers to purchase products. This is the primary argument of pro-inflation as I understand it. However, with my elementary knowledge of Austrian economics, I see the real impact of inflationary policies to the economy as follows: 1. The new money pumped into the economy will cause business boom in selected industries. This boom misleads investors and entrepreneurs. 2. This boom is short-term not until the new money reach the economy as a whole. 3. The boom will certainly end in bust. It might take several years to feel this shift depending on diverse factors. One thing is certain, breakdown in business is an inevitable outcome of credit expansion. We just do not know when as long as the creation of new money continues, but for sure such creation cannot be sustained indefinitely. In fact, for more than 30 years, Congressman Ron Paul has been warning the US Congress about this, and lastly, 4. The creation of new money gives unfair advantage for speculators, bureaucrats, and the special interests favored by the government over savers and fixed-income laborers. If you are to believe the Tea Party Congressman, inflation is actually a subtle and invisible act of robbing the “orphans and widows, the aged and the poor, the thrifty and the hard working”.

      • “The creation of new money gives unfair advantage for speculators, bureaucrats, and the special interests favored by the government over savers and fixed-income laborers. If you are to believe the Tea Party Congressman, inflation is actually a subtle and invisible act of robbing the “orphans and widows, the aged and the poor, the thrifty and the hard working”.”

        Exactly. And we’ve SEEN this already–we’re living in the aftermath of it’s disastrous results! If you’re not a bank receiving the Fed handouts, you are screwed! And you’ll have to pay for the further devaluation of the currency to boot! Interests rates are already at an all-time low–lowering them further will do nothing for the economy and will cheat people out of their interest on their savings accounts, CDs, etc. The only winner is the banks (as well as associated corporations and speculators)–they get guaranteed phantom “business” brought to you by the taxpayers via the Federal Reserve!

      • You are correct–this is a world crisis. Counties whose economies are interdependent with the US are also suffering. Other countries such as Japan and the UK are also following the lead with similar, printing-money-out-of-thin-air inflationary policies.

        The only country actually prospering from this worldwide, artificially induced economic crisis is China (and the large multinational corporations). Because people can’t afford to buy what they used to due to their devalued currency (and the resultant high prices), the multinational corporations have turned to China to provide them with all the finished and unfinished goods and all the raw materials (including produce). China, the country with the most manpower–and the most willing to exploit their own people for mere pennies.

  2. Thank you for a more elaborated explanation of the impact of inflationary policies. It’s good to know that increasing number of Americans have now seen this economic anomaly. As for me, the intellectual revolution must continue to put pressure on your legislators to really work for genuine economic and monetary reforms (if the Americans still believe in the outcome of election). I envy you for having a Ron Paul. We do not have a politician like him. As for us living in the “developing” countries (3rd world countries), people have little knowledge of this. Most people do not see the connection of US inflation and debasement of the US dollar on global economy. Perhaps, our people think it’s just an American crisis and has nothing to do with our country.

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