Surowiecki: QE2 Arguments “Overheated and Hysterical”
Fascinating discussion from James Surowiecki in The New Yorker:
“The German and Chinese governments, Republican congressmen, the liberal economist Joseph Stiglitz, and Sarah Palin don’t agree on much. But they’re united in their opposition to the Federal Reserve’s second round of quantitative easing—or, as it’s known, QE2 . . . What’s most striking about the attacks on QE2 is how hysterical they are. People aren’t just suggesting that the Fed’s policy—which is quite modest relative to the size of the U.S. economy—might be ineffective or mildly inflationary. Instead, they’re accusing the Fed of “injecting high-grade monetary heroin” into the system, pursuing a policy that “eviscerates” the middle class, and potentially giving birth to an “undead homicidal zombie market.”
This response reflects a pervasive sense of anxiety about both the state of the economy and any attempt to fix it. You can see it in the inflation hawks’ conviction that a crashing dollar and higher prices are right around the corner, even though core inflation is lower than it has been in the past fifty years, while the dollar’s value has actually risen in recent weeks. The same kind of anxiety fuels assertions that QE2 is “artificially” elevating stock and commodity prices around the world, as investors take cheap money from the Fed and invest it elsewhere. Never mind that stock prices are virtually unchanged since this spring, and commodity prices have actually tumbled in the last couple of weeks. The simple fact that some asset prices have risen since QE2 was first hinted at is treated as prima-facie evidence that markets are disastrously out of whack.”
Interesting stuff . . .
>
Source:
The Big Uneasy
James Surowiecki
The New Yorker, December 6, 2010
http://www.newyorker.com/talk/financial/2010/12/06/101206ta_talk_surowiecki
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November 29th, 2010 at 9:43 am
European mkts headed down because/in spite of the Irish bailout, I guess they see risk of repudiation or eventual default in Ireland, further bailouts for Port & Spain are pretty much a slam dunk IMO
November 29th, 2010 at 9:51 am
QE 2
Big problem now? Wrong
no problem? Wrong
New Yorker a useful antidote against the QE 2 sky is falling now Other Side,
who say much the same things about deficits.
But this is behavior the IMF used to give banana republic central banks the strongest of lectures about.
Among three big steps available, it runs third behind fixing finance and fiscal in usefulness.
As US keep thumbing our noses at markets
Daring them more and more to pull plug on us
One of these months or years they will
Article misses the other half of QE 2 the bond buyin
cites approvingly how markets buying bonds
w/o mentioning its the government backing them by taking out supply.
Pvt holdings of govvies will shrink a little
total long term outstandings including mortgage backed will shrink a lot
November 29th, 2010 at 9:52 am
It’s interesting how all of our current/prior enemies say the US must maintain a strong dollar:
China has been our enemy since 1949, and I predict we will eventually have to fight a war against them.
Russia has been our enemy since 1917.
Germany was our enemy in WWI and WWII.
Japan has been our enemy since 1937.
Heck, if all of your enemies say something is good for you, it must be true!
November 29th, 2010 at 9:58 am
“core inflation is lower than it has been in the past fifty years”
Says who? Actually I would like to see all the historical core” inflation figures adjustd for hedonic pricing and substitution activity or our currenty numbers adjusted out. But lets not deal in facts…..heck, where is the fun in that?
November 29th, 2010 at 10:04 am
What’s the end game if everyone merely wishes to trash its currency?
November 29th, 2010 at 10:05 am
And then sets out to do so?
November 29th, 2010 at 10:10 am
The crisis had the salutary effect of making the relationship between money creation and the politically preferred groups in society who profit from it obvious. The resulting debate is very much the same as the one engaged in by Nicole Oresme, pitting those who benefit from inflation against those who end up financing it. One major difference in the debate today is the sheer size of the government. Each decade since the creation of the Fed has witnessed an ever larger percentage of the population become dependent on government spending made possible through inflation. Although the government could finance its present activities through current taxes and fees and still reach a size comparable to what we see today, further growth made possible through inflation allows it to avoid the trade-offs necessary when financing one bill (for more guns) requires cutting back on another (for more butter). Such politically uncomfortable trade-offs can be avoided as long as the populace cannot connect the growth in government to the depletion of real wealth across society.
Now that it has reemerged, it is not certain how this debate will be resolved. That it caught the model-prone mainstream of the economics profession by surprise illustrates the current state of a capital theory that does not distinguish well between capital that results from savings and “capital” that is created out of thin air. That it pits those factions who pay for monetary inflation against those who benefit from it is fitting—and consistent—with economic theory and history.
http://www.firstprinciplesjournal.com/articles.aspx?article=1448&theme=home&page=1&loc=b&type=ctbf
Austerian view.
There comes a time in the affairs of man when he must take the bull by the tail and face the situation.
W. C. Fields
November 29th, 2010 at 10:19 am
carleric Says:
inflation figures adjusted for hedonic pricing
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Just wondering, when increased prices are hedonically adjusted downwards given improved ABS braking or
emissions controls or E-glass in homes, i.e., better value for the money…are they also adjusted downwards
for devaluation..such as airline tickets remaining the same but the air travel experience less of a value.
Well, not wondering.
November 29th, 2010 at 10:46 am
Is it me or did the other article “Asked Twice, Answered twice” just posted on currency deflation/Argentina/ et al just disappear?
Or was it deflated away? ; ^)
~~~
BR: Premature e-publication. Its scheduled for later this afternoon
November 29th, 2010 at 11:01 am
price of dollars for bread, clothing and shelter the last 50 years.
if anyone thinks that is deflation, they are stoned on banking spread sheets.
don’t be so gullible boys and girls.
inflation of money printing is battling productivity gains of mankind. but make no mistake, the money has been printed and printed. clear inflation. first owners make out huge.
barry, see andrew jackson for a course in central banking. your analysis is lacking.
November 29th, 2010 at 11:07 am
When QE1 disappeared into covering the hull holes the toxic waste on banks balance sheets as did TARP 1 with GS and AIG in tow, there is a high-probability outcome projected: that the path is clear for more of the same until solvency is reached for the banks on the back of a diluted currency for the public who for 3 years are suffering an effective 90% tax on interest income. Ergo, the banks get clean, and the TPs get hosed. Discuss amongst yourselves while we Repeat.
My conservative neighbor said that he’s just glad they are doing something (inventing fake money?)…the NYawker highlighted piece ends with “Right now, though, doing nothing would be doing damage. ♦
Read more http://www.newyorker.com/talk/financial/2010/12/06/101206ta_talk_surowiecki#ixzz16gfQQn3S
The new social contract is re-engaged…exponential growth of sooner-than-later garbage shall proceed apace and taste good…something for nothing for the entitled former immigrants who were begging to get in the door to work for the gold in the streets. The great sale into slavery willingly enabled by the Chinese Trojan Horse of FREE labor.
Laissez les bon temps roulez. I’m saving my energy for planting season.
November 29th, 2010 at 11:26 am
@Manny re currency trashing:
It’s the modern-day version of mercantilism. It’s parochial and near-sighted. It makes serfs out of citizens, as economic activity gets organized around nationalistic goals with the commoners just swept along for the ride. It’s end result in the nineteenth century was the two great wars of the twentieth century. It is a zero-sum game. It refuses to recognize that expanding the economic pie by trading for those things that others can more efficiently produce ultimately means more for everyone.
Alas, we won’t likely be much able to trash our much currency relative to others without which we destroy the foundation for greenbacks being sought after as the reserve currency. The dollar looks pretty good against the Euro, which will likely not be around after a couple more years. It looks weak long-term against the export-driven economies of Japan, China and Germany (once the Euro is gone). But the Chinese strategy of sterilizing dollar inflows does nothing but keep its own citizens impoverished while exacerbating asset inflation in the US.
Relatively little attention was paid to the role of US trade deficits during the real estate boom, but the Chinese sterilization policies were a direct contributor to US housing inflation. Ironically, they worked so well (along w/ other factors) until the housing market got completely queered up, causing the US economy to tank, causing China to back off on sterilization of dollar flows and focus on internal growth. Which ignited inflation. Which means their currency should weaken. And so it goes around again.
QEII in the Big Picture scheme of things is hardly a pimple on an elephant’s ass. What the objectioners to QEII should truthfully be railing against is the Federal Reserve’s role in central economic planning. Centrally-planned economies ultimately always fail, but the US Federal Reserve’s dual mandate means it becomes more and more like a defacto Politburo, and less like a facilitator of transactions by maintenance of stable measure of value.
November 29th, 2010 at 12:03 pm
The FED, God bless it, is trying to do what the Republicans with their newly-found fiscal rectitude want to postpone until November 7, 2012 and what the testicular-challenged Democrats refuse to try: put some Americans back to work.
November 29th, 2010 at 12:13 pm
FASCIST well into it now , enjoy your riches,
….The Bernank and his boys are only interested in providing a “wealth affect” via pimping of anything and anyone.
The society that accepts this is sick. The parts of society that celebrates, if there is an ultimate justice, will end in tears.
November 29th, 2010 at 12:21 pm
With all due respect, Mr. Surowiecki seems to me to be injecting some of his own political bias into the discussion (“This response reflects a pervasive sense of anxiety,” “You can see it in the inflation hawks’ conviction” – really?). As far as his weighty qualifications on the subject, you be the judge:
http://en.wikipedia.org/wiki/James_Surowiecki
November 29th, 2010 at 12:23 pm
Surowiecki sets up a series of straw man arguments to demolish. None of them hold any water. Monetary policy acts with a lag, so attempting to link QE2 with recent market movements doesn’t prove anything (although Bernanke must be irked that Treasury yields have actually risen since QE2 was announced).
The fundamental objection to QE2 is that the Federal Reserve has openly started buying (i.e., monetizing) large quantities of government debt with thin-air money that it doesn’t actually possess. This process has been going on since its creation, of course. But until now, it was kept discreet — the Fed’s balance sheet typically was being augmented by single-digit percentages annually. Now Bernanke, in desperation, has gone hog wild, and everyone can see it.
More than likely, Surowiecki is just another journo-shill, carrying water for the authorities. QE2 is objectionable because it’s fraudulent and wrong. Hysterical? Speak for yourself, journo-ho.
November 29th, 2010 at 1:10 pm
I agree with machinehead, Mr Surowiecki sounds like a Fed shill to me.
From the article:
“In the circumstances, the Fed’s job is to use monetary policy to try to boost demand. And quantitative easing is how you do that when you can’t cut interest rates any more.”
It’s the Fed’s job to boost demand by printing money? How does Mr Mr Surowiecki ‘know’ that quantitative easing is how you do that? How does the Fed increase comsumer demand? The only way I see is by increasing increasing inflation expecations, the very thing the article minimixes as a risk.
And how does the fact that Republicans would be looking the other way if they were in office make it any less of a fraud for unelected officials to print money out of thin air ?
“… the backlash really shows why QE2 is necessary” , but on the hand he argues the amount is “quite modest relative to the size of the U.S. economy”. So it’s necessary, but the amounts are so small it won’t matter? If the QEII amounts are so modest, why was this all the Wall Street talked about for 2 months?
Strawman – “Opponents of QE2 are effectively saying that the government should do nothing to try to change this.” Total bullshit – Opponents are saying elected officials should do something (or nothing) with a debate and vote for the record.
November 29th, 2010 at 1:12 pm
What is really fascinating is how the two sides of this debate see things so COMPLETELY differently. What is black to one is white to the other and vice versa.
I couldn’t disagree more with Mr. Surowiecki. He chooses to start with the normal name calling, stating that those on the opposite side of the debate are hysterical. Then he proceeds to state that QE2 is really quite modest and that it should garner no intense disagreement.
What liberals like Mr. Surowiecki fail to understand is that the other side is completely fed up with the CUMULATIVE nature of all this government “involvement”. Was TARP necessary to save the system? It does appear so.
But after that, there is little evidence that government action is anything more than using more debt to solve a problem of too much debt in the system. Obama’s “stimulous”, excessive social nets, massive federal spending is nothing other than giving alcohol to cure an alcoholic or giving more heroin to cure a drug addict. As some point the tipping point comes and you just have to do the Nancy Reagan, “Say NO!”
November 29th, 2010 at 1:40 pm
“even though core inflation is lower than it has been in the past fifty years” – James Surowiecki
Others may be “Overheated and Hysterical” but James doesn’t know his arithmetic…or history.
“The concept of core inflation as aggregate price growth excluding food and energy was introduced in a 1975 paper by Robert J. Gordon.[1] This is the definition of “core inflation” most used for political purposes. Core inflation was also developed and advocated by Otto Eckstein, in (Eckstein 1981). ”
…and first adopted in 1982…some…wait for it…28 years ago.
So before James Surowiecki starts a shitfight with name calling, perhaps he should take a chill pill, do a little editing of his bald faced lies and write something civil.
November 29th, 2010 at 1:47 pm
Inflation based on the way it was measured in the 80′s is about 8.5%. Hardly the lowest in 50 years. This is the problem. We are so worried about keeping confidence high that we have lost all perspective.
I believe that the hysteria is generally centered around the wrong subject and topics but I do think underneath that there is a general sense that something is very wrong but they really are not sure exactly what it is and the result is that you see a lot of people flailing about on the periphery.
We have also lost the ability to vet who is an expert and who isn’t. Ergo a lot of what gets said is mostly mental masturbation instead of something important.
November 29th, 2010 at 2:05 pm
The fact is that the Fed has great weapons against excessive inflation (should it ever show its ugly head). A sinking deflationary economy with debt of 350% GDP on the other hand, is something they are pretty defenseless against should it take hold. That problem would require intelligent knowledge-based actions from the same brain-dead clowns that are screaming against QE2 based on some imaginary damage from 600 billion into a 14 trillion/year economy. Indeed, the Fed and society should be a lot more afraid of deflation than inflation.
November 29th, 2010 at 2:19 pm
Good thing I went away for the long weekend because it looks like an epidemic of stupid ravaged this comments section.
November 29th, 2010 at 3:05 pm
“The fact is that the Fed has great weapons against excessive inflation”
This is a huge assertion that the author provides almost no proof for. What weapons are those DeDude? If I recall correctly, the only time the Fed has successfully solved an inflation issue was in the late 70′s/early 80′s and that involved double digit interest rates and a double dip recession. Not sure what was so great about that (unless you were lucky enough to buy treasuries then!).
November 29th, 2010 at 3:55 pm
I don’t know much but I suspect taking the other side of a Sara Palin trade would be a good thing.
November 29th, 2010 at 3:57 pm
I can’t argue that Sarah Palin discussing monetary policy is any way constructive, but how can you post this article without asking how the ludicrous suggestion that “stock prices are virtually unchanged since this spring” is somehow relevant? The only logical starting point is Jackson Hole, not some arbitrary hand picked day in “the spring”. BR you are usually quick to point out such logical fallacy, but why not this time? I won’t even get into what a dramatic understatement “some asset prices have risen since QE2 was first hinted at” is. Fed mouthpieces from the top down are explicitly (not implicitly) stating that they are lifting asset prices higher than they otherwise would be. Some might describe a market where a government hand is manipulating asset prices as “artificial” or even “out of whack”. To attack those who believe so is rather odd and shortsighted in my opinion.
November 29th, 2010 at 4:30 pm
DeDude says, quote:
The fact is that the Fed has great weapons against excessive inflation (should it ever show its ugly head). A sinking deflationary economy with debt of 350% GDP on the other hand, is something they are pretty defenseless against should it take hold.
__________
No Dude, if you have a boatload of debt like 350% of GDP you really don’t have great weapons to fight excessive inflation. Do you think the FED can raise the rates with a boatload of debt like that?
On the other hand the FED can’t fight deflation that much because in the USA non financial sector debt growth is still about 2 trillion a year. So the 600 billion in QE2 money only stabilizes the debt growth for lets say 4 months.
Over the long run this looks like it’s going to evolve into the FED taking in 2 trillion US$ a year in present dollars. The big picture is easy to understand:
–1– Long ago the Federal Trust funds for Medicare & the likes were filled with debt instead of money.
–2– The Dubya tax cuts were supposed to revive the economy, can the tax cuts now be lifted?
–3– Over the last five and a half year average debt growth in the nonfin US sectors was about 500 billion a quater.
–4– Total debt levels always grow faster compared to GDP or total profit growth, Dude mentioned the 350% of GDP number, ha ha ha it grows faster than the GDP.
–5– Over the last 10 years the USA real GDP grew only 1.6% a year.
And so on and so on, but people are always allowed to dream because what is life without dreams?
So they keep on dreaming stuff like a return to real GDP growth of 3+%.
Let them dream, why not.
But for investment you better ignore the dreaming stuff…
November 29th, 2010 at 5:34 pm
It’s not anxiety about the economy and “any attempt to fix it”, but rather about “yet another incredibly misguided attempt to fix it which will instead make things worse, albeit perhaps in unexpected ways.”
And all those “small relative to the size of the U.S. economy” interventions do add up, you know. A trillion here (TARP _ Citigroup loan backstop), a trillion-plus there (QE1), another near-trillion there (stimulus package), now QE2 … Barry himself likes to quote the grand total of all these (mostly misguided) interventions, and they add up to a number which is most definitely *NOT* small compared with the U.S. economy.
November 29th, 2010 at 7:12 pm
I thought of this 1964 article by Richard Hofstadter a few times during the Clinton presidency and the Bush II presidency as well but I’ve been thinking of it more often recently; Surowiecki’s article (and the reaction to it) perhaps being another case in point.
The Paranoid Style in American Politics at http://tinyurl.com/a9edd
“American politics has often been an arena for angry minds …there is a style of mind that is far from new and that is not necessarily right-wind (sic). I call it the paranoid style simply because no other word adequately evokes the sense of heated exaggeration, suspiciousness, and conspiratorial fantasy that I have in mind. In using the expression “paranoid style” I am not speaking in a clinical sense …It is the use of paranoid modes of expression by more or less normal people that makes the phenomenon significant.”
On one level QE2 is entirely a technical issue but on another a nation under duress is neither happy with its technocrats nor the logic they follow and on another still are those (always) who would use discontent for their own purposes. Regardless of motive however the light always seems to become dimmer when the heat rises.
If our international competitors — China, Germany et al — and Ms Palin think QE2 is a bad idea, I’m inclined to let it run its course to see what happens. We are still in a solvency crisis but, apparently, fiscal responses have been politically paralyzed so the monetary response is all that is left. As far as impact on currency goes, I’m fairly persuaded we have actually been in a trade war for some time now and if China is obliged to unload some dollars as a result of more QE with the yuan appreciating that will not be a bad thing for us. JMO
November 29th, 2010 at 7:16 pm
Thatguy; I didn’t say the medicine was easy to swallow just that it was effective in curing the disease.
Reinko: Yes that would send those with high debt into bankruptcy, so it would be a balancing act with first allowing some inflation to bail-out the viable debtors and then hit the hammer on the rest with high interest rates. Anybody who at that time still needed to take on new debt would be screwed, so better get that balanced budget in place. But we agree that the Feds have limited ability to fight deflation. You are also correct with the rest of what you say. Prospects for economic growth are very bad and people with money to invest better stay alert. I would love to see a chart of annual rate of growth of GDP plotted with the rate of growth of total debt in the US for the last 50 years, to figure out when we started growing mostly on debt.
November 29th, 2010 at 7:24 pm
My analysis indicates that there are an array of risks inherent in QE2.
One large risk that lacks recognition is that of the management and potential ramifications of the Fed’s ever-expanding balance sheet. A recent Wall Street Journal editorial “High Rollers at the Fed” does a good job of quantifying some of these risks.
For those interested, I recently mentioned various risks of QE2 in the below post:
http://economicgreenfield.blogspot.com/2010/11/ben-bernanke-on-qe2.html
November 29th, 2010 at 9:33 pm
In reference to the commenter a few posts up above who mentioned that TARP was necessary/mostly paid back: I’m seeing this oversubtle jive gain more and more of a foothold in the general psyche and it really bugs me. TARP, as its typically referred to, was just a small fraction of the total Bailout monies disbursed. It is not the whole story.
Some of you may already be familiar with Sourcewatch, the online Wall St Bailout Cost Table, but for those of you who are not, the link below takes you to a running tally of the total bailout costs to date. It is peer reviewed, and updated monthly. Good reading.
http://www.sourcewatch.org/index.php?title=Total_Wall_Street_Bailout_Cost
November 29th, 2010 at 10:53 pm
it’s not paranoid if they are really after you. the changes in the baseline prosperity of this country in the last 20-30 years make it clear that anyone within shouting distance of the FIRE bomb shouldn’t have standing now. They have been proven as frauds along with their paid off academics and toadies.
Kevin Phillips(Bad Money) had it correct that the financialization of this country is it’s slow death. You can argue for 600Million 600billion it’s not going to help now.
All this shuck and jive is not fooling those who have any small sense of history or who are not buried up to their ears in the scam.
November 29th, 2010 at 11:02 pm
around 2001 was the 3 bucks in to get 1 buck out. Since then it’s only worse.
I like to think of it as Peak Money.
November 30th, 2010 at 3:09 am
Maybe I’m overly skeptical, but it seems to me that since the Fed is using payments from MBS to buy treasuries,..
that is a stealth deflationary tactic. Hardly the reverse. For example if they were using taxes to do eliminate treasuries that is deflationary by definition. Using MBS interest payments to buy Treasuries has the same net effect.
November 30th, 2010 at 12:22 pm
All I am saying is that if I was the Fed I would be a lot more concerned with being X % below target inflation rate than with being X % above target (2%). The effective weapon against deflation is to raiser the minimum wage by 10-20% and that is not something the Fed has any power over. QE is a much less effective way to raise inflation and it has a lot of collateral damage effects that are difficult to control.