November 17, 2010

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Today we concentrate on QE2 (quantitative easing) opening with misgivings from Streetwise Professor.

The Federal Reserve has launched a second round of “quantitative easing”–QE2.   How is it that this “easing” leaves me uneasy?

Macro is not my thing.  But economics is economics, and I know enough to have serious questions about quantitative easing.  I may not be able to tailor a magnificent macro suit, but I can pretty much tell when the king is naked, and I think that’s the case here.

Bernanke is arguing that easing is needed because of deflationary concerns.  But has there ever been a deflationary episode during which commodity prices spurted ahead?  Definitely not during the 1930s.  Not in the 1920-1921 crash (which at its outset was more severe than the Great Depression).  Not in 1893.  In all of these episodes, commodity prices crashed.  So if this is deflation, it is a weird deflation. …


Peter Schiff is next.

While it’s true that history repeats itself, the patterns should always be separated by a generation or two to keep things respectable. Unfortunately, in today’s economic world, it seems the cycle can be counted in months. 

On July 24, 2009, just as the Federal Reserve unleashed its first quantitative easing campaign (now called “QE1” – an echo of the reclassification of the Great War after still more destructive subsequent developments), Fed Chairman Ben Bernanke wrote an opinion piece in the Wall Street Journal to soothe growing concerns about excess liquidity. He assured the public that the Fed had an “exit strategy.”

In a response entitled “No Exit for Ben”, I called the Chairman’s bluff. I argued that the Fed had no exit strategy, and that Bernanke was trying to fool the market into believing that quantitative easing was not debt monetization. 

Just 16 months later, Bernanke is at it again, penning another op-ed to defend his second round of QE. Except this time, instead of feigning an exit strategy, he just outlines a path to expand the program in perpetuity. …


Spengler (aka David Goldman) takes a turn. 

Treasuries and gold tanked together on Friday, evidently in response to news reports that Asian countries may impose exchange controls to hold back the septic tide of dollars bubbling out of the Fed’s printing press. Never before has the world displayed the sort of public contempt for American policy that Germany, China and others expressed last week. Wolfgang Schaueble’s Spiegel interview last week describing quantitative easing as “clueless,” followed by Federal Chancellor Angela Merkel’s open attack on it during the G20 meetings, is entirely new, as is the Chinese and other Asian threat to simply keep dollars out.

The rest of the world is right and the Fed is wrong. QE2 is turning into Titanic II …


Alan Reynolds in the WSJ.

Federal Reserve Chairman Ben Bernanke may be an excellent economist, but he is not a very good bond salesman. Since his Aug. 27 speech at an annual Fed symposium in Jackson Hole, Wyo., he’s been telling us that he thinks inflation is too low and long-term interest rates are too high. In a quixotic effort to “maximize employment,” he’s begun purchasing up to $600 billion worth of long-term Treasury obligations to push inflation up and bond yields down.

If it worked as planned, this would flatten the yield curve, meaning it would narrow the spread between short-term and long-term interest rates. Since banks make money by borrowing short and lending long, the effect would be to discourage bank lending. That seems an unpromising way to stimulate the economy. But the whole notion of simultaneously raising inflation and lowering bond yields presumes bond buyers are docile fools. …


An article from Business Insider has more.

It’s never a good thing when another country calls your financial policy clueless. It’s particularly bad if that other country is one of the world’s leading economies, and if it also happens to be right.

“With all due respect, U.S. policy is clueless,” German Finance Minister Wolfgang Schaeuble said recently, referring to the Federal Reserve’s decision to throw $600 billion at our sluggish economy.

The Fed can create as much money as it likes, but the U.S. economy is presently unable to productively put that money to work. By setting near-zero interest rates, the Fed has established that money in this country has no real value. We give it to the banks for nothing, and the banks lend it back to the deficit-ridden U.S. Treasury for almost nothing. The result is a guaranteed profit for the banks, but no incentive to lend cash to creative entrepreneurs or expanding businesses.

The Fed’s $600 billion intervention will make this foolishness more efficient by cutting out the middleman. …


Robert Samuelson writes on how we might avoid Japan’s mistakes.

It’s hard to remember now that in the 1980s Japan had the world’s most-admired economy. It would, people widely believed, achieve the highest living standards and pioneer the niftiest technologies. Nowadays, all we hear are warnings not to repeat Japan’s mistakes that resulted in a “lost decade” of economic growth. Japan’s cardinal sins, we’re told, were skimping on economic “stimulus” and permitting paralyzing “deflation” (falling prices). People postponed buying because they expected prices to go lower. That’s the conventional wisdom – and it’s wrong.

Just the opposite is true: Japan’s economic eclipse shows the limited power of economic stimulus and the exaggerated threat of modest deflation. There is no substitute for vigorous private-sector job creation and investment, and that’s been missing in Japan. This is a lesson we should heed.

Japan’s economic problems, like ours, originated in huge asset “bubbles.” …


Unemployed actor in New York? WSJ says you can look for bed bugs.

… Never mind the bar-tending. There’s a new side job for the aspiring actor: bedbug buster.

“Actors have great personalities and follow directions well,” says Janet Friedman, owner of Bed Bug Busters NY, who employs many people from the theater world to clean up the vermin. She favors entertainers, she says, because they can improvise, work quickly and are used to the drama of a stressful situation.

Meagan Gilliland, a 25-year-old actress who moved from Chicago to New York in September 2009, secured a gig with Bed Bug Busters before arriving.

While she’d rather be acting, she says her new job doesn’t bug her.

On the contrary: Ms. Gilliland says she uses her acting chops while she goes through every inch of a person’s apartment. In a particularly dusty apartment—sometimes clients are hoarders—she puts on a smile trying to “pretend to be OK, like you’re still having a good time with friends and stuff, while you’re choking on a lot of dust.” …

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