Dave’s Top 10 Reasons Why QE Won’t Help the Economy

Inner Workings ^ | Dave Goldman

[Pride_of_the_Bluegrass]

Another Gem from Dave Goldman on the Inner Workings blog at Atol. Enjoy

[Pride_of_the_Bluegrass]

10. No-one to whom banks want to lend wants to borrow.

9. The kind of businesses that create jobs, namely start-ups, need equity rather than debt in any case.

8. The Fed will flatten the yield curve out to five years, competing against the banks, reducing their profitability and their capacity to lend.

7. The deflationary tendency in the US, such as it is, is mainly demographic: as the Boomers retire, they sell real assets (the US may have a 40% oversupply of large-lot family homes by 2020), and buy financial assets, just like the Japanese during their great retirement wave of 1990-2000 (which coincided with the lost decade). It has nothing to do with monetary policy which has been extremely lax throughout.

6. If you keep interest rate slow in the advent of an enormous retirement wave, then people will save more and spend less, because they expect to earn less income on their savings.

5. If you increase the inflation rate, prospective retirees will save more and spend less, because they expect to have less future purchasing power. That is the opposite of what the Keynesian short-term model predicts, namely that inflation prompts people to spend money (why keep it in the bank if its value is falling)? That’s the trouble with the Keynesian approach: it’s a blindered, short-term view of things. But some times the long-term, for example demographics and the retirement cycle, affects the short term.

4. QE has raised inflation expectations without causing much inflation: the price of insurance against inflation, e.g. TIPS and gold, has risen, while housing prices, wages, and so forth continue to fall. That’s the worst of both worlds. Rather than shift portfolios from “safe” assets like Treasury bonds into real assets, which the Fed hopes, investors may simply shift their portfolios into stores of value like gold and foreign currencies (which is precisely what I have been doing).

3. Inflation, as even the Fed will admit, helps some people and hurts others. The idea is that it will help more people than it hurts by forcing investors to buy real assets. The kind of inflation that QE is likely to cause will have an almost entirely damaging impacta on the US. In fact, the devaluation of the dollar and the rise in raw materials prices will hurt every American household and most American businesses; it will benefit Middle East oil producers, Vladimir Putin, Aussie mining companies, and all sorts of people who don’t live in the United States.

2. With 22% of the adult non-institutional population unable to find full-time work (according to the estimable Shadow Government Statistics website, no reduction in interest rates will persuade Americans to go back to the borrowing binge of the 2000s.

and Dave’s Top Reason why QE won’t work is:

1. It undermines the dollar’s world reserve currency role. That’s why gold keeps going up. If the US were Greece or Ireland, we’d be in front of the International Monetary Fund in sackcloth and ashes right now. But we’re the world’s only superpower, and the central banks of the rest of the world have to hold their reserves in dollars. Why? Because there isn’t enough of anything else (unless the price of gold were to go to $10,000 an ounce, which I doubt) and because they hate each other more than they hate us — at least for the moment. With Obama shrinking America’s strategic footprint and the Fed behaving like the neighbor whose septic tank overflows onto everyone else’s lawn, Washington is testing the world’s patience. It will have consequences.

[ari-freedom]

If you have a job that still makes a lot of money, you might not mind 9.6% unemployment and high taxes. But everyone will be affected by inflation. It is something that is in your face every single day.