Why quantitative easing can't work as a long term solution.
After listening to the game plan to control inflation, I finally realized that the government's plan will work, it just won't work for long.
We have pumped a record amount of money into the system and most of that went to the banks. We are upset at the banks because they are hoarding that money and not lending it and slowing the velocity of money for recovery and thus slowing recovery itself.
We made a huge commitment to recover, but the fact is that we made the wrong commitment. If we would have focused on making money more liquid than it is now, we would have not needed to pump as much money into the system. All money should have been given to the lowest rung on the ladder. (The consumer) In fact, I think if we would have let all the banks fail, we would be better off. If I were President, I would have done it like this...
"My fellow Americans, we are going to let all of our banks fail because they did bad things. You shouldn't worry though, because we are going to guarantee all of your deposits with every bank. On top of that, if you have any loan with any failed bank, that loan will be considered to be paid in full. Now the bad news is that credit from this point on will be much harder to come by, but in the long term we think that will be a good thing.The current system asks you to pay more if you are a higher risk. The new sytem will be yes or no question. You'll either qualify for credit, or you won't. We will spend a large amount of government money on credit education, but the biggest thing we'll be looking at is personal savings."
Now, back to the current situation. After ignoring the importance of the velocity of money to recover, the Keysians are counting on slowing the velocity of money to combat inflation. The problem is that even when you slow the velocity of money, the money still exists. The Keysians need to understand how to come full circle. If you increased the speed of money, you have to slow it down, and if added money to the system, you have to take it away. Try taking money away from anyone and let me know how it goes. I expect that we eventually have a short term recovery followed by a worse mess than we have now.
No matter what else happens in the world, there is still no such thing as a free lunch.