Obamanomics III — QE-3

There are two primary tools the Federal Government has to affect the economy, monetary policy and fiscal policy. Fiscal policy is undertaken in the hope of stimulating economic activity by adjusting tax rates and spending. More about that another time, except to say that President Obama is not alone in believing that increased government spending and higher taxes are a formula for success.

Monetary policy is undertaken in the hope of growing the economy through the manipulation of the money supply.  There are at least two schools of thought concerning monetary policy but Ben Bernanke and President Obama share the theory that increasing the money supply reduces interest rates, helping business and personal borrowing,  increases the amount of money for people to spend, and makes our goods cheaper overseas.

All three, the idea goes, stimulate the economy by putting more money in the hands of private business and individuals.  Enter quantitative easing.

Quantitative Easing is defined by Wikipedia as:

an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money, in order to inject a pre-determined quantity of money into the economy. 

Here is a video explanation of the dilemma facing the Federal Reserve:

And here is a summary of the current US economy:

And more:

On September 13th, Federal Reserve Chairman, Ben Bernanke, announced a third round of quantitative easing consisting of buying $40 billion worth of bonds a month, perpetually. Because of that, some call it QE-infinity. QE-3 is the most definitive statement yet, and by the Obama Administration no less, that Obamanomics has been an utter failure. If, as the Administration and the media have told us, relentlessly, the private sector is doing fine, why would the Fed think more stimulus is necessary?

Will it work, meaning, will QE-3 help the economy? Well, that depends on who you ask. There is a weak consensus that QE-1 may have helped to stabilize the banking system but QE-2 had almost no result. And QE certainly did not work for Germany in the 1020’s.

I don’t remember who it was, perhaps Milton Friedman, who quipped that he did not understand why some people thought they could grow an economy by simply printing little pieces of paper.  Here is a more complete summary of Milton Friedman’s explanation of why quantitative easing, that is, increasing the money supply, does not help the economy.

I predict the result of QE-3 will be higher stock prices, lower bond prices and more, hopefully modest,  inflation. I think there will be no change in employment. I believe any positive effect will be small because previous results have been small and because the idea that cheap money will save us has run out of rope. If money were any cheaper banks would have to pay us to take out loans. If interest rates were 15% then perhaps moving them to 10% would have an effect. But when rates are less than 4%, there is no place left to go.

But Mark Steyn, in August of 2011, had a much more dire prediction of the result of Administration monetary and fiscal policy, taken together.

More about that another time.

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One Response to “Obamanomics III — QE-3”

  1. Obamanomics IV — Armageddon « LibertyPhysics Says:

    […] wrote, in Obamanomics III, about quantitative easing and the US monetary policy. Today I want to write about fiscal policy, […]

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