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The real danger of QE

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June 01, 2013 – Comments (16)

We are, of course, as you all know, in the middle of the largest financial engineering experiment in human history, in absolute terms but in inflation-adjusted terms as well.  The US Federal Reserve, by setting nominal short-term rates at zero and then manufacturing money to buy billions of dollars in home mortgages and Treasury bonds at artificially elevated prices, has artificially inflated the money supply of the country, braked a severe recession, and caused the US to show GDP growth for the past few years.

Let me try to explain what I think is the real danger of doing this.  I'll give an example from my experience.  It is now commonplace among my friends - not only the wealthy ones - to spend hundreds to thousands of dollars on expensive surgical operations and medications for pets, small mammals who are already well beyond their expected lifespan.  When my wealthy friends do it, they use money they gained from their profitable employment, mainly at companies that produce something of value to society.  The pets usually die a few weeks later; the wisdom of operating on them in the first place set aside for a moment, I think we can agree that buying a few more weeks of life for an elderly pet at the cost of $100 a day is not adding a great deal of value to society at large.

In other words, a reasonable person might find that money to be misallocated.  However, it is my friend's money, and he or she made it by his or her gainful employ; so he or she can spend it as he or she wishes.

80% of the US economy at this point is service oriented.  When I refinanced my house, a good 2% of the value of the loan got diverted to the loan servicers.  That money benefits no one except the loan servicers.  In the modern era of computers it probably could have been done away with or shrunk considerably; but it has not been.  However, due to the Fed's policies, the entire land is refinancing.  Billions of dollars in refi fees flowing to the banks; no one really benefiting very much.

Whole industries, in fact, springing up due to the easy-money policies; which would not exist if all this funny money was not floating around the system.  Whole graduating college classes of seniors, who have studied hard to get jobs that produce little or nothing of worth, in areas that contribute nothing to the economy.

The general idea here is that easy money policy causes misallocation of assets - capital, yes; but also land and labor.  Misallocation of labor is a sterile phrase used by the NBER; in reality it means tragedies, wasted lives, alcoholism, suicide, families going broke and having to move far from their loved ones.  

And in the long run, it means a nation not ready to meet the technological and educational challenges of the new century - not ready to compete on a level playing field with neighbor nations that pursued even a slightly more sensible fiscal path.

I am not worried about the Fed unwinding QE, or the national debt being unrepayable, or the dollar becoming a busted currency; the financial engineers running the show have plenty of tricks (sorry, "illusions") left over in their cabinet, and they are backed by the US Armed Forces should something go too terribly wrong.

I am worried about a nation of young people being taught that it's a waste of time to study science, or math, or engineering; that it's a futile endeavor to try to save money, or invest in real assets, or purchase a home; that they oughtn't have kids, because every coming generation will have it a little worse off than the one that came before; that they needn't aspire to something better than their parents had, because there is no chance that those dreams will ever come true. 

I hope they unwind the darn thing as soon as is feasible, and devil take the nation's stock portfolios.  I hope we can soon feel confident that when a thing is priced in dollars, that thing is truly valued with respect to objective reality.  And I hope that we all have a future to look forward to, one we can be confident will be better than yesterday.

It's in your hands, Mister The Bernank.  Don't screw it up. 

16 Comments – Post Your Own

#1) On June 01, 2013 at 6:42 PM, ikkyu2 (99.29) wrote:

Spot the Arrested Development reference for a gold star!

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#2) On June 01, 2013 at 10:45 PM, Mega (99.96) wrote:

http://www.youtube.com/watch?v=X1WSH0VzoaM

 

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#3) On June 02, 2013 at 12:25 AM, MoneyWorksforMe (< 20) wrote:

Confusing post. I actually started out liking it quite a bit but as I progressed I found several contradictions and poorly linked transitions and by the end I was just scratching my head.

What really has me perturbed is you ending this post with: "It's in your hands, Mister The Bernank.  Don't screw it up.", after mentioning so many things that are already screwed up and are in the process of getting worse . 

 "...that they oughtn't have kids, because every coming generation will have it a little worse off than the one that came before; that they needn't aspire to something better than their parents had, because there is no chance that those dreams will ever come true."

This is reality. Much fewer people will be owning homes and having children. Why? Because they can't afford it! Things are progressively getting worse for each succeeding generation. I have long ago accepted the fact that it's going to be 10x's as hard for me to achieve the material wealth and quality of life my parents enjoyed. Hope is NOT GOING TO DO A DAMN THING. People need to wake up and actively change the direciton of this country. Sitting back, and HOPING is what got us here in the first place.

"I am not worried about the Fed unwinding QE, or the national debt being unrepayable, or the dollar becoming a busted currency; the financial engineers running the show have plenty of tricks (sorry, "illusions") left over in their cabinet, and they are backed by the US Armed Forces should something go too terribly wrong."

This "US is the strongest nation and need not worry attitude" has so much of the nation complacent it's not even funny. China will be the largest economy by 2020, if not earlier. India will surpass the U.S. economy shortly thereafter. Both countries  are importing hundreds of tons of gold per year. A dollar backed by nothing but a promise from a relatively smaller government wont stand a chance. Yes China is gathering power and readying itself for the day it can unveil the new reserve currency while America weakens itself and squanders its wealth. You might also find it interesting that while young Americans believe they will not be able to have kids, a home or the same quality of life as their parents, the young chinese feel the exact opposite. America is being destroyed from the inside out.

And do you really think that the US Armed forces will force foreign countries to purchase US debt? I don't see that happening. And if no one but the fed is buying US debt, we have a huge currency problem on our hands... 

"They call it the American Dream because you have to be asleep to believe it." - George Carlin 

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#4) On June 02, 2013 at 12:41 AM, jiltin (27.19) wrote:

Good Title, but final message made me scratch my head !

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#5) On June 02, 2013 at 8:32 AM, jerryguru69 (94.83) wrote:

The real danger of QE is not the effect it will have on individual spending, but the spending habits of Uncle Sam. Almost all of the QE funds are being used to buy Treasury debt, teaching that fiscal profligacy is free and w/o negative consequences. 

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#6) On June 02, 2013 at 4:04 PM, awallejr (85.51) wrote:

Almost all of the QE funds are being used to buy Treasury debt,

That is incorrect.  40 billion of the 85 billion is used to buy mortgage backed securities. 

I do have to agree with some about the confusing message of the initial blog.  My concern is not over monetary policy, it is over fiscal policy.  Bernanke has been doing his best but Congress needs to help as well.  And it can't.  It has become completely partisan and dysfunctional.

The Republicans are hell bent on going down a path set by a dinosaur named Grover Norquist.  He wants to take us to a "survival of the fittest" society with a strong military to keep the masses in check.  Today's Republican party is certainly not the same as under Eisenhower, Nixon or even Reagen.

Instead of working together to help the struggling masses, they are now sidetracking with a continual concentration on scandals.

 

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#7) On June 02, 2013 at 4:51 PM, ikkyu2 (99.29) wrote:

MWfM, you actually did a pretty good job of illustrating just what I'm talking about - your attitude.  That attitude doesn't exist in the USA without endless central bank interference.

For those of you who find my point confusing: I stand by my comments.   

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#8) On June 02, 2013 at 8:08 PM, tomlongrpv (71.09) wrote:

ikkyu2  Should society decide what is and what is not of value?  And are manufactured things automatically of more value than services?  The problem with easy money is the possibility of inflation, not the qualitative choices people make as to how to spend their money.  I may well spend a lot on veterinarian bills that you think are unproductive.  You on the other hand may spend money on a sports car that I find affirmatively destructive to our ecology.  But it is a thing and therefore presumably of more value I guess.  If we really think people are spending money in the wrong places, the way to shape that is with tax policy, not with the money supply.  Grant credits to things you want to encourage and impose duties on those you want to discourage.

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#9) On June 03, 2013 at 12:08 AM, awallejr (85.51) wrote:

Ikkyu you can stand by your comments but sorry they are mixed and hence confusing. I think my response is far more on point.

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#10) On June 03, 2013 at 10:52 AM, Valyooo (99.53) wrote:

I could not disagree more with the notion that each successive generation will have it worse and worse.  When my mom was growing up, she could not "google it", she could not use her GPS when she got lost, she could not use her cell phone to tell her friends she was running late after she left the house.  Cars were much less efficient, much less flashy.  Much less was known about the world.  New york city (where she grew up) had much more violence.

Is the government robbing us?  Of course.  But the progression of humans overcomes even that.  We could be much better off without a federal reserve.  But a bank playing with paper will not completely overcome any increase in the quality life. 

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#11) On June 03, 2013 at 10:52 AM, Valyooo (99.53) wrote:

I could not disagree more with the notion that each successive generation will have it worse and worse.  When my mom was growing up, she could not "google it", she could not use her GPS when she got lost, she could not use her cell phone to tell her friends she was running late after she left the house.  Cars were much less efficient, much less flashy.  Much less was known about the world.  New york city (where she grew up) had much more violence.

Is the government robbing us?  Of course.  But the progression of humans overcomes even that.  We could be much better off without a federal reserve.  But a bank playing with paper will not completely overcome any increase in the quality life. 

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#12) On June 03, 2013 at 11:38 PM, MoneyWorksforMe (< 20) wrote:

Valyooo,

Really Valyooo? Even if the vast majority of American's cannot afford these new available technology and services?

So If we wanted to simplify this complex issue just by focusing on technology and the US: what about the technology that you and I can afford but others from the same society can't? Hmmm...so as the wealth inequality grows, the quality of life disparity grows...And those with less feel more depressed, angry and stressed, hence they have a far lower quality of life.

So is your theory more related to technology or wealth inequality?

 

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#13) On June 04, 2013 at 2:19 AM, Valyooo (99.53) wrote:

Everybody in America can afford these things.  There are libraries with free internet, free cooling centers with air conditioning, there are people with very little money, even on welfare, that have cell phones.  There is a medicine for almost every disease.  There are replacement organs for nearly every organ in the body.  There is a wealth of new information about food, science, math, the environment.  

An analogy I would give to the way I view things would be as follows (the numbers are not exact at all, just using them to make a statement:

 

I believe that progress adds about 3% per year to the wellbeing of humans, and that the government/fed subtracts about 1%.

 

So imagine a world where the wealth started at 100.  After 10 years, with government, it would be at 100 x 1.02^10 = 122.

Now with no government: 134

 

The world would be 9% wealthier without government.  So yes it is a huge deal.  But people are still better off.

 

You don't think people from the booming days of 1920s would easily switch to live in the recession of 2008 where people have plasma flat screens, range rovers, the internet, cell phones, television, satellite radio, new medicine, new surgeries, new robotics and genetics, better music clarity, faster transportation, new foods, etc?  I would take that over working all day in a factory to drive my Ford model - T to my non temperature regulated home.

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#14) On June 04, 2013 at 8:32 AM, MoneyWorksforMe (< 20) wrote:

 "You don't think people from the booming days of 1920s would easily switch to live in the recession of 2008 where people have plasma flat screens, range rovers, the internet, cell phones, television, satellite radio, new medicine, new surgeries, new robotics and genetics, better music clarity, faster transportation, new foods, etc?  I would take that over working all day in a factory to drive my Ford model - T to my non temperature regulated home."

I can sincerely say I believe most people would rather live then as oppose to now. In fact, I'm young, and I frequently wished that I was born one hundred years ago, in a time when none of this existed. I hate to break it to you, but life is much more than technological innovations. Don't get me wrong, the internet is great, but I can very easily make a more compelling argument on how technology is gradually tearing society apart. But this point is more philosophical than objective, and the real meat of the problem is NOT technology but wealth inequality. You can try to argue this point, but there is plenty of scientific evidence disproving everything you have said above.

This chart through 2007  http://southwerk.files.wordpress.com/2010/11/income-share-us.jpg

 http://www.dailykos.com/story/2013/05/22/1210744/-American-culture-is-failing-us-right-now-We-need-to-evolve

 http://www.businessinsider.com/standard-of-living-middle-class-2010-10?op=1

 http://www.csmonitor.com/Business/2011/1019/A-long-steep-drop-for-Americans-standard-of-living

And this from wikipedia: Quality of Life 13th out of 111 and Human Poverty Index of 17th out of 19

From the " Social Class" section:

"Standard of living in the United States varies considerably with socio-economic status"

 

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#15) On June 04, 2013 at 10:34 AM, Valyooo (99.53) wrote:

In these standard of living measurements are they accounting for how much easier it is to cure a disease, get what you want, go where you want, find out what you want, be what you want, how much less physical labor has to be done, how much more we know about the world?  I personally do not see how you could possibly want to live in a world of slow cars, no television, no internet, no cell phone, insufficient medicine, more expensive food, poorer housing with less temperature control, more blackouts, etc.  I just don't see it, but like you said, it is philosophical

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#16) On June 08, 2013 at 7:55 PM, ikkyu2 (99.29) wrote:

Valyooo, the things you mentioned are not available to 50% of Americans - none of those things are.  

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