The real danger of QE
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.