Monday, September 17, 2012

- The Idea Behind QE

Most of the people telling you what they think of QE are either talking up their financial book, or their political book. Either way, you aren't getting a realistic picture of what it means, so let me shed some light. The photo above says it all.

Imagine QE as Ben Bernanke bailing water out of a life boat. You'll get people on one side of the argument saying that we won't get anywhere by implementing QE. That's technically true, it doesn't actually move us forward and we don't know the long term consequences of expending energy doing it. But we do know the short term consequences of not doing it.

In the meantime you'll get people on the other side saying "the equity market is at record high's so all is well." No one reading this is dumb enough to believe that. QE may keep us from sinking, but after it's done we're still in the middle of the ocean. We have no food, no potable water, and no shelter. So we simply cannot stay where we are and believe all will be well. Bernanke knows (and has said) that QE will not be enough to solve our economic issues. He's right of course.

Meanwhile, Keynesians say we need much more deficit spending, but you don't get economic growth by paying people to do nothing. And economic growth is precisely what we need. That growth can only come from the private sector, but Obama and the Democrats have declared a kind of war on private industry. They think things would be more 'fair' if we keep the rich (in this analogy they would be 'the dry') from getting too far ahead (or drier) than everyone else. But that 'getting ahead' is the only growth available to us and should be the goal of everyone.

I think Bernanke is doing all he can - all he's allowed to do, to keep America from sinking over the objections of the Democrats. They think it would be better if we were all floating around in our life jackets equally. A shared poverty divided up by disinterested third parties in Washington who make all the relevant decisions. But they forget that there are sharks in the water.

So I support this round of QE, and I'll support the next one, and the one after that. There will be more I'm afraid, because even the Republicans won't be able to do what they must to our tax and economic policies to generate REAL growth. But since they're the only ones who recognize the actual problem (let alone are taking it seriously) there is little doubt who's position to back.


chess said...

Excellent and well said. I usually type too much so to keep it simple and short--WE ARE TOAST.

Tom said...

Maybe, but certainly not because of QE. We would be without it, but with it we get a little while longer to try to fix things.

We may do that and we may not. but without QE we'd have no choice.

chess said...

I agree that it has allowed us to "muddle". I tell a friend if we can "muddle " for 5 years the market will muddle and take your loot and run...God willing we get Mitt and some growth. Then I want to see Ben or whomever is the next choice head for the dark pools to unload 3 tril on the fed's balance sheet without getting front runned.

ikaika said...

I disagree to an extent. Eventually - the velocity of money becomes a reality. We can avoid deflation - and I believe that is what Bernanke is trying to do.
If the US goes through a massive de-regulation (pipe-dream) we could expand the basal economy beyond the need for Fed tinkering.

chess said...

Thus my statement bout real growth under Mitt... Ben could really run some sell stops moving 3 tril thruogh the pipeline....
Who knew that the Bernank trained under Julian Robertson.!!!

ikaika said...

the unfortunate result of a recessional period with obtuse regulations is the economy cannot function with out Fed actions. No chance of a recovery while business is handcuffed.

I was told repeatedly by liberals that Obama and Porkulus prevented an economic collapse. I reminded them that the economy had indeed collapsed and the markets were bailed-out by risk takers.

Our economy collapsed - completely.
As a result the government removed risk and replaced it with regulation. Huge manufacting concerns were either shut down or sold to the highest bidder over-seas. The contraction in the small and regional banks - at the insistence of the Fedeal Reserve Bank and the Treasury hasn't buouyed the markets, it removed the number of outliers and took risky portfolios from multiple "bad-banks" and through a shotgun wedding, pushed the assets onto a few solvent banks.

In exchange for their compliance, the solvent banks were rewarded with Dodd-Frank and Basal requirements.

It's like someone handing you a pile of money on the condition that you do not invest it.

It will be very difficult for the executive branch on its own to deregulate the economy. We need the senate, but we need republicans that have faith in free market economy. America has boxed itself into economic mediocrity by enacting legislation that limit risk, and scrape away any incentives.

chess said...

Yes.. Bernank has become the man to push yo u into risk.As BHO had regulated everything under the sun the Fed has taken the job of shoving into shit so you can get your di. handed to you again.
I see what i call the frog and a pan of water. Grandma and pa are in "safe" bonds. And then the 10 yr hits 2% and the water gets warm. Then it 2.5 and then 3 and grandma an pa are fighting if they should get out and then 3.5% and they cant take the pain anymore and sell it all and get into the dow at 15000 jus in time to watch it head for 10000. Thanx Ben
I saw grandma selling alot of bank preferreds in 09 with interest rates of 15-20%.Theyr now back at 7 where they belong/...When all this comes together the radio announcer will sound like the Hindenburg again.
Oh the inhumanity