Friday, September 14, 2012

QE3 is Doo Doo Economics

Give Me Liberty of Give me Debt!

The study of Economics is not genius. 

Macro economics is simply thinking about how a reasonable person would react to a particular economic policy in a free market. Thinking about this question leads to differences in opinion. Economics, the study of capitalism, is based upon reason and logic but tempered by insights into culture and human nature.

The Liberator Today has a nice summary as to why printing money, known as Quantitative Easing (QE) is Doo Doo Economics for America, just as it was in Japan during the 1990's. (italics ours):

  • Low interest rates make it harder for retirement eligible to actually retire, they are getting little return for their money. (Less retirement leads to less hiring and fresh ideas.)
  • Interest rates are a measure of the time value of money. By setting it at zero, there is no urgency about investment decisions.
  • Because those who live on fixed savings, have less to spend, they spend less, harming the economic recovery.
  • Investment isn't increasing at zero rates, because once rates fall below the rate of inflation, the only consideration is whether the principle can be paid back. If inflation is at 2.5%, then reducing interest rates from 2.5% to 1.5% or even zero percent will have no effect on investment, so there is no offset to the fact that savers have less to spend.
  • Zero rates allow otherwise worthless loans to appear to be performing, as the borrower can make nominal payments. But it delays the necessary economic unwinding necessary for real economic recovery. (Bad investments are not reallocated.)

Lets add to this pile:
  • Older Americans traditionally own homes, but because of low fixed incomes they are being forced into "reverse mortgages." These Americans are selling their biggest asset at the currently depressed market value. This is a net destruction of wealth on main street. Wall Street buys up the homes at cheap prices and further concentrates wealth. Banks and financial professionals who benefited from TARP and other bailouts leverage tax money to beat main street.
  • The fear of the fiscal cliff, uncertainty about regulations and future costs associated with ObamaCare are not addressed by printing money. 
  • The new money is injected into banks in the hope that these banks will use the money to spur economic growth. This is logical, but has not panned out. It is the basis for the charge that "trickle down does not work."  Trickle down works when wealth is kept by individuals because they efficiently use the additional money to create new wealth. Large banks are regulated to ensure that they protect wealth. 

We want to add one more insight because we have not seen it anywhere. If you have seen a better explanation, please let us know!

Monetary Policy is not suited to dealing with unemployment.

The Fed has been tasked with lowering unemployment. This is a new development during the Obama administration. Traditionally the target of Fed policy is low inflation. Monetary policy is not suited to reducing unemployment.

Reaganomics was the supply side answer to the problems caused by demand site Keynesian policy that dominated economic theory through the great depression and the 1970's. The goal was to end "stagflation,"  high inflation and high unemployment. However, the success of Reaganomics included monetary policy focused upon lowering inflation and eventually lowering interest rates.

Keynesians believe that unemployment and inflation exist as an inverse relationship, IE The Phillips Curve. This belief worked during the post WWII era of American economic dominance and mostly full employment and moderate inflation. However, this idea meant that stagflation was impossible, yet it happened and is possibly starting again today.

The Fed can control inflation, but reasonable people looking for employment take into account inflation when considering wages. There is no employment trade-off in raising the rate of inflation except in the short run. It does not reduce the cost of employees. This is the reason that Richmond Fed President Jeffrey Lacker dissented against this policy. The short run is over.

America has a shrinking labor force and high unemployment. A shrinking labor force puts pressure on employers to find qualified employees. Employees become more valuable and harder to replace. Employees become more scarce, unemployment should fall and wages should rise. We hear that there are over three million open jobs in America that lack qualified employees, so this holds during the Obama (Doo Doo) Economy.

However, the median income of Americans has fallen under President Obama, 1.5% just in 201153% of college graduates are unemployed. Overall, 8% of Americans are unemployed and 17% are underemployed.

Workers take into account inflation when considering compensation. Government welfare programs act as an alternative to work and are adjusted for inflation. Crime is an increasingly viable alternative to work. When employment is high and interest rates are above inflation, additional money supplies can entice workers into participating to get a piece of the new wealth. When available workers cannot keep pace with inflation and fail to see wealth creation around themselves, there is no significant incentive.

It is my contention that because interest rates are below the level of inflation, there is a negative influence upon traditional asset investments, and worker's investment in their own skills. It is not reasonable to invest money in an asset that does not generating wealth. It is not reasonable to invest in an asset that is paid through welfare and cannot increase its generation of wealth. Money supply does not influence this.

Lets call this what it is, an excuse to devalue the dollar in order to deal with the massive Obama deficits. It is a hidden tax. It has little to do with employment, and Ben Bernanke knows it.

Give me liberty or give me debt.


B-Daddy said...

Thanks for the link. Well said and nice extension. The Fed is not going to save the economy, we are the only one's who can save the economy by restoring limited government.

K T Cat said...





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