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Tuesday, November 16, 2010

Q and A on QEII. It is not cut and dried what will happen.


http://blogs.wsj.com/economics/2010/11/03/qa-on-qe2-what-a-fed-move-would-mean/

1 comment:

Jeffrey said...

"That, the theory goes, would encourage more spending and investing and less saving." This is the flaw in their thinking.

I agree that what they are doing will encourage further spending and more refinancing and more debt. But you have to see that there is a limit to the amount of debt people can sustain. While you may be able to start a business with a loan, you cannot start a bank with a loan. Real savings is ALWAYS the driver behind real investment. Continuing to spread thin what little savings there is will not lead to a recovery. QE is a direct tax on savers (in an attempt to create more debt and spending). Whether it is to fight deflation or to create inflation it hurts savers. Savers are the driving force behind all real investment and job/wealth creation.

Interest rates should naturally be high right now because there is a lack of savings and therefore a lack of supply of loanable funds. What would encourage banks to lend more than a high rate of return on lending? What would encourage an increase in the supply of loanable funds more than a high rate of return on savings accounts? What would help fiscally responsible businesses right now more than a stronger dollar - which would further increase savings rates and purchasing power?

The people who are in financial trouble (big bank or otherwise) are the problem - they are the ones who misallocated resources. We do not want to allow scarce resources to continue to be hogged by people making poor decisions. Falling prices helps the responsible people to buy up the assets of the irresponsible - this is the process of reallocation.

One's ability to produce (something of value to others) determines one's ability to consume. Say's law does not in any way claim that supply determines demand. Keynes IS wrong. Any law that applies to a barter economy still applies today - money is simply a score keeper. Trying to change the score is like trying to control the outcome of a sports game with the scoreboard. You can give the losing team the ball, you can give them more points but it won't make them better players.