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Quantitative Easing Explained

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  • #31
    Re: Quantitative Easing Explained

    Originally posted by Andy_M View Post
    We can't afford to wait for jobs to come back. It's a chicken-and-egg problem. Jobs aren't coming back until we can get this problem solved. There are going to be some hard times. I agree with Peter Schiff completely... there is no way around it. Debt service is currently 8% of the Fed budget. Better to take our medicine now rather than wait 10 or 15 years when it will be 30-50% of the Fed budget. Then all we will be able to do is lament how great the US once was.

    Regarding the chicken or egg debate., NOT QE, but stimulus.(I agree QE is relatively ineffective, but strategically placed stimulus is, this is Bernanke's point as well)

    I don't want to get into a lengthy supply side discussion, God knows we'd both bore the forum even more than we already are, and only be rehashing an ageless debate.

    My point, we've been largely focused on supply side for as long as 40 years and seem to have been miscalculating the other end of the spectrum, assuming supply side policy alone balances out the whole (trickle down).

    If we're in the midst of a painful lesson that economics isn't just supply side alone, this would explain the extremes in consumer debt, as well as wage stagnation over this period, which is why I mentioned Marriner Eccles in an above post, you should look him up, his economic views changed radically through the 14 years he was Fed chair after dealing with the throes of the Great Depression.

    He went from young millionaire conservative banker to ranting about wage equality and the need for wealth balance.

    I also agree with Schiff's acknowledgement of the problem where he saw the housing and credit bubble years in advance, I just think he oversimplifies the solution as most Austrian economists do in a recession, not that I have a perfect idea either, but austerity measures at this point would be a very bad idea when our economy is 70% consumption.

    If we leave things where they lie and let the free market adjust...

    You'd be right, there would be some pain, but I think you might underestimate just how much, we're talking Great Depression 2, where whole families wander the country knocking on doors to do yardwork for a meal.

    The best reference I can give you is to look at a chart of debt to GDP over the last 100 years.

    During WW2 our debt to GDP makes the current debt look like small potato's.

    Yet in short time we went into one of the best bull markets of the century in the 1950's.

    We need to look at why the debt from WW2 actually sparked a recovery. (hint, jobs, the multiplier), opposing the "end of days" threats we currently hear about.

    This isn't to rationalize mindless spending, but to make the point that spending in and of itself isn't the guarantee of economic crisis some are saying it will be.

    The message of "stop spending" comes from those who worry their taxes are going up to offset the budget in light of spending, which is the likely outcome after decades of lopsided wealth creation where in just the last ten years the number of billionaires went from roughly 300 to almost 1200.

    Rupert Murdoch and the Koch brothers were caught via a leak, giving the chamber of Commerce tens of millions to spread the message of fear about government spending to influence the mid-terms.

    I 'm not making the case for QE, I'm actually siding with Bernanke and Krugman in this instance....maybe you missed it, but Ben himself seems to be trying to tell the public QE isn't adequate. he seems to prefer the government use stimulus instead.

    At the very least we need a reformed tax code that's no longer lopsided to the extent we're discussing cutting VA medical care or social security cuts to offset lost revenue's from the high end who are supposed to be using the tax cuts to invest or hire in America, but are only sending the money to China, India, Brazil...the list goes on.

    Ben also addressed loopholes in the tax code last night.

    If we're going to give tax cuts to billionaires because they claim it creates jobs, cuts should only be given when they actually do create American jobs, it's that simple, no more convoluted freebies for the wealthy that are extracted from those who are already in a very bad way is as.
    Last edited by DuckButter; 12-06-2010, 03:12 PM.


    • #32
      Re: Quantitative Easing Explained

      You say "during WW2 our debt to GDP makes the current debt look like small potato's."
      The chart below shows that it's less than 30% lower. Hardly small potatoes.
      Last edited by Plumbus; 12-06-2010, 03:56 PM.


      • #33
        Re: Quantitative Easing Explained

        Originally posted by Plumbus View Post
        You say "during WW2 our debt to GDP makes the current debt look like small potato's."
        The chart below shows that it's less than 30% lower. Hardly small potatoes.

        Again, I'm not condoning deficit spending, I think the solution is to redo the tax code, but I am saying with the "end of days" scare tactics we hear, we may want to explore the agenda of the source of those statements, spending will lead to taxes for those who have the money to campaign against it using scare tactics to continue the status quo of a diminishing middle class and increasing wealth for the minority..Andy see's something similar with the Fed.

        Relative to QE, the R.O.I. on targeted stimulus spending (not money & tax breaks blindly given to corporate campaign donors, but spent to create actual jobs) is much greater than QE in terms of job creation, economic growth and tax revenues.

        Hopefully this chart shows what looks like small potato's compared to WW2 to me, it's definitely interesting to observe what happened at the inception of Reaganomics, despite being told he cut the budget or that high end tax cuts worked.

        Last edited by DuckButter; 12-06-2010, 04:48 PM.


        • #34
          Re: Quantitative Easing Explained

          Here's another one from Ritholtz just today that shows a wider time frame and the more recent spike.


          • #35
            Re: Quantitative Easing Explained

            Duck, I think we have beat this one to death. I agree with you that cutting spending isn't a great idea right now. But it's also true that deficit spending of any type devalues the currency - a bad thing. Having said that, I don't see how to get out of this mess without spending... I would institute austerity for the purpose of redirecting the funds to more productive uses - like reindustrialization - not federal debt reduction. THat's tragic, I know... but the magnitude of the problem demands it. There is room for budget revisions that make sense. There will be a knothole to go through. Some cuts to discretionary spending that are associated with giveaway programs wold be fine. There are complete agencies of the Federal Government that need to be either completely revamped or eliminated. The wars have been an economic disaster. It does make sense redesign the entitlements. It's immoral to reduce promised bennies to those that have earned them, but just plain stupid to continue the same insanely expensive entitlements to people just entering civil service. And lastly, unemployment benefits are costing the governement a fortune.

            Unfortunately when Bernanke (or the Obama crowd) talks stimulus, they're talking about the indiscriminate pumping of money into the economy. Insofar as, at the margin, every nickel of such spending has to be either borrowed or printed, the stimulus devalues the currency. But more importantly, we have tried this from time to time, and as recently as last year on a massive scale. It simply doesn't work. Demand side stimulus, popular tax cuts, etc in the current situation are poorly leveraged use of money since consumer goods are overwhelmingly imported. A trillion dollars, along with the Bush tax cuts, made no dent in the problem. But China sold a lot of flat screen TVs last year. This is one of the biggest problems I have with the current Washington crowd -- they believe that their task is to decide who to throw money at rather than how to devise a program that will get results.

            I think Schiff has his eye on the ball and have quite the opposite opinion than you do about him and for that matter Ron Paul and some of the other economists of that ilk. I do not agree that they are over-simplifying... it is the plethora of circular logic promoted by the Fed and the Keynesians that have led to the disastrous and ineffective meddling that helped get us where we are. Perhaps it is my exposure to Sowell, but fact is I strongly believe that fundamental principles of economics, which actually are pretty simple, do apply. 40 plus years of Keyensian nonsense, Greenspan double speak, and the service economy has created a nightmare from which we may not recover.

            Bernanke commented that he believed that without his actions the unemplyment rate could rise to the level seen in the Great Depression - 25%. Actually, I think he is effectively arguing against his own policies, since we are almost there today. The true unemplyment rate is IMO possibly double the Government reported figures. When you consider the underemployed, the overall level of loss may rival that of the 30s. On top of that, the jobs that have been lost tend to include a heay percentage of good paying jobs in manufacturing industries. The jobs that have been created are dominated by low-paid service sector jobs. I don't see that we are much, if any, better off today in terms of employment than we were in the 30s. I appreciate you concern in avoiding Great Depression II, but in my view Keynesian policies are ensuring it, on a cataclysmic scale.

            I certainly can't argue against some reasonable revision of the tax code. But it isn't the solution to the problem. Taxes do not create wealth, they are a parasite. All economies are based on the notion that people have the ability to create wealth through work. So, the solution is production.


            • #36
              Re: Quantitative Easing Explained

              Andy, in the last two years there's one thing I've learned.

              In politics or economics, fixed idea's mixed with conviction can be dangerous.

              I'm actually a Libertarian, I'm almost "required" to be a member of the Church of Freidman, dead set against taxes and government. (please, spare the Bill Maher jokes)

              To blindly stand firm by this set of ideals, I wind up getting into a boatload of far fetched re-interpretations of the constitution, the powers of Congress and basic economics that equate to a free-for-all similar to the old wild west.

              When the "tea party" started out, it sounded like a great idea, but at a point I started to think twice about who was funding the message of decreased upper class/corporate taxes and less government.

              Turns out corporations, like Koch industries and Rupert Murdoch (Fox network) were footing the bill to spread this message, which then leads to conclusions on the agenda for this "grassroots" movement.

              An example, in an early Tea Party in FLA, a tea party group protesting higher taxes was asked to show hands for everyone that makes more than $250K, not a hand went up.

              They were then informed they were protesting their own tax cuts, they were led to think their taxes had been increased.

              My point, Keyensian, Austrian, or Monetarist ideals, as well as left and right politics, can also be distorted to suit agenda's.

              Each economic ideal has it's time and place, there should be combinations of each theory timed for their purpose, instead of a single fixed idea.
              (where would we be if we thought transistors alone were the best way to build electronics?...turns out capacitors, diodes, resistors, etc combine to create incredible things)

              For all the fear we're fed about Keynesians as a debt riddled, spend happy ideology, the status quo (those who stand to pay higher taxes for the deficit they created and profited from) will have us only see that side of Keynes theory.

              The other side, the "tighten the belt and save money when times are good" side, was exemplified by Clinton perfectly, I think you know how Clinton left his term, or you can check the chart I posted above where he'd actually started reversing Reagan's debt.

              I find it interesting that 7 figure salaried talking heads, like Larry Kudlow and any of a number of his regular guests who are staring at a tax increase themselves, as well as just about any Fox commentator, will feed the masses with fascinating theoretical economics like the "laffer curve", yet conveniently "forget" to mention other theories like "Hauser's law"

              If you're not familiar with Hauser's law, look it up and pull a reference chart of historic tax rates to the performance of the economy/market, the correlations to higher upper class tax rates and booming markets are very surprising, quite the opposite of recent claims of killing job creation and domestic investment.

              What I'm saying isn't intended as absolute, but to put in perspective a lot of potential misinformation and confusion that's been spread.

              Andy, we may not agree on some points, but for what it's worth, it's been an interesting chat regardless.
              Last edited by DuckButter; 12-07-2010, 02:20 PM.


              • #37
                Re: Quantitative Easing Explained

                The problem with Keynesian econ is that it is hands-on, promoting maniipulation.

                Anytime - absolutely anytime - you allow this, you invite abuse. In this case the result has been the milking of wealth of the the global economy more or less in general and of the US in particular.

                With fiat currency, and the ability for the financial people (Fed) to manipulate policy without control, transparency and no accountability, isn't it more or less naive to assume that they will act in anything OTHER than their best interest?

                The result of a good long run of this sort of policy is that we have a global economic crisis, the widest gap in wealth between the haves and the have-nots in history, and a United States that is a shell of the industrial dynamo it was just thirty years ago. We're not talking about speculation.... this is, at this point, history. It's already happened. We don't have to be Ph.D.s in econ... we only need to look around to see it.

                The financial industry and Bernanke have become so emboldened as to cite reasons for their manipulations that fly in the face of basic economic theory as well as the results we're experiencing every single day. They are banking (pun intended) on the fact that people in general have limited to no understanding of economics, and they obfuscate their actions behind jargon, like "quantititive easing" and "expanding their balance sheet" and "monetizing the debt". Not understanding this gibberish doesn't require one to be stupid... it's all double talk that they don't want the people to understand.

                I have spent waaay too much time on this, but here are some great examples of Bernanke wisdom. Bernanke claims that deflation discourages savings. The exact opposite is true. Inflation is the condition that strongly discourages saving. Under inflation, you have much less money available for savings in the first place, becauseyou need that cash to buy the necessities. Moreover, if you do have a couple bits left to save, you're socking away dollars that have a defined value (purchasing power) today and withdrawing inflated money - much less purchasing power -tomorrow. Why would you save the money if you know that you will be able to buy less stuff with it in the future? May as well blow it today and get more bang for your buck. Savings in inflationary times is a loser, so what the heck is Bernanke spewing about? Moreover, the biggest single factor that discourages savings is HIS artificially low interest rates. At 0.7%, the doubling time for your money is 100 years. Now that is going to discourage savings. The notion that inflation will create jobs is similarly just wrong. It won't. Fundamental supply and demand says that higher prices results in less consumption, not more. Obviously, this is true. If pizza goes up to $50, we're all buying it once a month instead of once a week, right? If there is less demand for pizza, we need less pizza makers, and fewer pizza ovens. Where are the jobs coming from?

                Inflation is a scam to heighten the depression in this country, cost more jobs and hasten the erosion of the standard of living in the US, and everythign that the Fed and the Government is doing - everything - is leading to massive inflation.


                • #38
                  Re: Quantitative Easing Explained

                  Andy, I'm not sure why you went into "the Bernank", but I was talking fiscal stimulus, not monetary.

                  I noticed your statements on devaluing currency, and I agree that there is a labyrinth of ways to manipulate the system for those in power to use Keynes at the expense of rest of us, no debate, that can easily be done.

                  But, it can be done various ways, either through Keynsian spending, monetary policy, government deregulation, the same manipulation can still be done many ways, this isn't just a problem of Keynesians or monetary policy (the "Bernanke").

                  Again, transparency is the key, it's also why I keep at the top of my favorites list, I like to know who's' buying my laws, even if I'm helpless to stop it, I can at least vote or tell friends.

                  This entire collapse of trust can be fixed in one simple action, campaign finance reform along with transparency, disallow individual finance and put all funds into a general escrow for qualified candidates enforce laws that prohibit conflicts of interest, nepotism and revolving door jobs.

                  Make all meetings with lobbyists public, give us all a list of what they met about and whether they offered anything in return.

                  Problem solved.


                  • #39
                    Re: Quantitative Easing Explained

                    Duck, I mention Bernanke because he is calling for additional stimulus.

                    Stimulus is deficit spending and has the same negative, devaluing, inflationary effects on the economy. Deficit spending comes at a very steep cost. It needs to be targeted with well-defined, measurable objectives. I would support proper spending that would result in sustainable job growth, but it is not clear that the Government has any motivcation in that direction nor any idea what to shoot at or how big the bullets need to be. I do not support the Obama/Bernanke method of throwing money at the problem, and that is what, unfortunately, they are talking about.

                    I feel that changes in trade policy rules that level the playing field will be effective whereas more Obama stimulus will just hasten the collapse of the dollar. If trade policy in particular is revised to make domestic production financially attractive, then the corporations will solve the problem. They are all about making money. Stimulus is a political move to gsatiate voters. Mass money giveaways didn't create jobs before, and they won't do so now. How many times do we have to fail to learn this? Apparently not enough times yet for Bernanke.


                    • #40
                      Re: Quantitative Easing Explained

                      Ahhh, gotcha on "the bernank" as it relates to his suggestion on fiscal.

                      I guess what concerns me is putting too much focus on a single entity, like Ben or the Fed alone, that maybe we've found a target, a scapegoat, while ignoring the reality that the common problem is much, much more massive than any single politician, political party or organization such as the Fed, greedy home flippers or Congress alone.

                      For example, many attribute the crash of '08 to easy monetary policy, if we stop there we miss the entire picture, like removing Glass Steagall, which in my opinion was a bigger problem as well as ratings companies and the SEC's blindness over the way ratings co's blatantly lied to the public in exchange for money, allowing banks and insurance co's to originate, rate and then sell the assets they created as if they were triple A, when in fact, they were 90% sub-prime liar loans.

                      This problem of fraudulent origination has just now started peeking it's ugly head in the midst of the "fraudclosure" scandal, where we're learning Fannie and Freddie may have been taking loans that weren't qualified to be on their books in the first place, the coming Wikileak should be revealing, maybe explaining why Joe Lieberman is working so hard to shut it down.

                      Hopefully you see my point, rather than engage in potential splitting hairs over which evil is the most evil, I prefer to step back and see all the evil. (I suddenly feel like I'm s'posed to imitate a monkey covering my eyes or something)

                      Ironically, the solution is amazingly simple compared the the actual problem, starting with transparency, and then using common sense to step in the way of political corruption, conflicts of interest and hypocrisy.

                      Last edited by DuckButter; 12-07-2010, 05:59 PM.


                      • #41
                        Re: Quantitative Easing Explained

                        Yes I do see your point, and I agree with you for the most part.

                        However, in the here-and-now, my Buddy Ben is actively doing things that are stealing my money and irreversibly damaging the economy. He is the mouthpiece for the Fed. The Fed is comprised of... well, we really don't know, do we? And that is the problem. Everything they are doing and have been doing serves one master and only one master - the global financial moguls. None of it makes a modicum of sense in either economic terms or in terms of the results it has obtained.

                        Yes I am narrowly focused on the Fed, because right now it is the Fed that is giving it to us, so to speak. Which really means, ironically enough, taking it away.

                        The danger with focusing on too much amd to many effects is that we are likely to let these little disastrous gems go unnoticed. If someone has a gun to my head, I believe it is somewhat unwise to focus on the history of firearms or the nuance of criminal law. I am going to focus on the problem (the gun and the person holding same) and the fundamental relationships governmeing my continued existance - namely, that I need to do something to prevent the trigger from being pulled or to get out of the path of the bullet. If I fail to recognize these fundamentals, I will soon be nlikely to be able to do anything, at all. The similarity seems painfully clear to me.

                        I have let my representative in Congress know that this is not going unnoticed and that I hold her personally responsible. One voice means nothing. We are 300 million. I urge everyone to do the same.


                        • #42
                          Re: Quantitative Easing Explained

                          Step back, take a deep breath and contemplate transparency, campaign finance reform incorporating a general campaign fund for all qualified to run with no individual donations, regulate and prevent personal conflicts of interest, nepotism and revolving door policies as well as other common sense blatant forms of hypocrisy.

                          Clean sweep, apply to all, job done.

                          The rest falls in place when the government and those in power suddenly realize the only job they have to do is the one they were elected to do.
                          Last edited by DuckButter; 12-07-2010, 06:19 PM.


                          • #43
                            Re: Quantitative Easing Explained

                            Of course. Everything you say is perfectly true.

                            Unfortunately, it isn't going to happen, at least not until the excrement and the impeller undergo spacial convergence. Campaign reform (modest steps, but steps in the right direction) were on the ballot in CA here a couple of times already. I have never heard anyone say that they don't want to see the political ethics questions addressed. Yet, based on some incredible fabrications in the election pamphlet and a barrage of blatant lies on TV, these measures lost.

                            So while I agree with everything you said, the sad fact is that the financial community is running the show. This means that the very effective improvements you suggest are not going to happen anytime soon. But QE2, probably another ineffective stimulus, certainly continued deficit spending, the selling off of American industry for pennies on the dollar, and low interest rates that are making huge sums for Wall Street and the banks at We The People's expense are planned to continue.

                            We enjoy the opportunity to get Washington's attention now. They are sweating bullets after the midterms. I get responses, not form letters. The key to being heard is focus. If you ask for the world, you will get a form letter back. If you ask for action on ONE thing, you are far more likely to get some attention.


                            • #44
                              Re: Quantitative Easing Explained

                              I hate to say it, but in the respect that we'd be expecting thieves and liars to vote against an unConstitutional system that enables this to continue at their own gain, you may have a point.

                              One alternative outlined by the co-founder of Reaganomics isn't very pretty, a short but eye opening read -

                              He feels it may have to boil down to a revolution or civil war.

                              I prefer to think if the topic becomes glaringly obvious to the extent it's watercooler fodder or common household conversation, then enough campaign platforms will start to use the topic, and finally some of the elected are cornered into actually doing something.

                              It's happened before, with womens rights, affirmative action, labor and others, I can't see why it has to come to what Mr Roberts seems to think in the above article, at least that's what I hope.


                              • #45
                                Re: Quantitative Easing Explained

                                Women's rights, affirmative action, etc were largely resolved, you are right. However, each of these was what I call an emotional issue. Not to say that there aren't legitimate moral, ethical or other grounds involved. What I mean is that the fight is fueled by emotion. An analog today would be gay marriage, a particularly hot topic in California. The bankers could not possibly care less either way.

                                Monetary policy is not an emotional issue. It's an economic issue. Throughout the history of the planet, when money is involved, things get ugly. Otherwise-reasonable people go to war. It's not inconceivable.

                                I wasn't being tongue-in-cheek when I mentioned shotgun shells. It might be of interest to some to note that they are a commodity with an very long shelf life, as long as they're kept dry.