November 2, 2010

Quantitative Easing

The Fed and the financial/economic community call the printing of money to buy treasury securities "quantitative easing." What a marvelous term of art to describe spending money we don't have by printing more of it. I am no economist or financier, but this seems a high risk approach in an attempt to stimulate the economy. Bond prices will rise and interest rates will decline. The long term effect may be decidedly negative as the United States continue to run up its debt, a bad policy move.

A person whom I greatly respect, Bill Gross, a recognized expert in bonds has this [click the link to read the whole piece] to say in an essay entitled, 'Run, Turkey Run:'

"There’s another important day next week and it rather coincidentally occurs on Wednesday – the day after Election Day – when either the Donkeys or the Elephants will be celebrating a return to power and the continuation of partisan bickering no matter who is in charge. Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing – a polite form disguise for “writing checks.” The market will be interested in the amount (perhaps as much as an initial $500 billion) as well as the targeted objective (perhaps a muddied version of “2% inflation or bust!”). The announcement, however, has been well telegraphed and the market’s reaction is likely to be subdued. More important will be the answer to the long-term question of “will it work?” and perhaps its associated twin “will it create a bond market bubble?”
Whatever the conclusion, not only investors, but the American people should recognize that Wednesday, even more than Tuesday, represents a critical inflection point in determining our future prosperity. Of course we’ve tried it before, most recently in the aftermath of the Lehman crisis, during which the Fed wrote $1.5 trillion or so in “checks” to purchase Agency mortgages and a smattering of Treasuries. It might seem a tad dramatic then, to label QEII as “critical,” sort of like those airport hucksters, I suppose, that sold whale blubber for a living. But two years ago, there was the implicit assumption that the U.S. and its associated G-7 economies needed just an espresso or perhaps an Adderall or two to get back to normal. Normal just hasn’t happened yet, and economic historians such as Kenneth Rogoff and Carmen Reinhart have since alerted us that countries in the throes of deleverging can take many, not several, years to return to a steady state."
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