QE stands for Quantitative Easing, the government’s euphemism for printing money. They call it buying back debt, but they have no money to do that and borrowing it would be beyond government stupid. So they print the money to retire the debt.
There have been two QE programs with the last one ending at the end of June. Printing money and flooding the economy (the private sector) with it stimulates spending, reduces the value of the dollar, stimulates exports and grows the value of the stock market, but there are risks.
Inflationary risks. By devaluing the dollar by increasing its supply, everything, especially commodities (which have intrinsic value) get more expensive - like gas and food. Too much cheap money creating too much inflation will bring interest rates up, which will further slow the economic activity.
QE is a last ditch effort to get things going after an $800 Billion failed stimulus package of which about 80% went to save state government jobs that are once again in jeopardy because the money ran out.
The shaded areas of the chart are periods of money printing and if Bernanke does according to plan, QE3 will kick in around S&P 1100.
The ammo that the federal government has to stimulate the economy is limited: deficit spend, lower interest rates, devalue the dollar, and cut taxes. This QE thing is new and in uncharted territory.
Deficit spending was (and is being) done - the money was spent on one-time projects and a temporary propping up of state governments.
Interest rates can’t get any lower than 0.
The dollar is low and getting lower. QE3 will drive it down farther.
The tax cuts were anemic and non-recurring from the stimulus. The token and inadequate temporary 2% cut in payroll tax has been eaten up by gas and food prices caused by QE1, QE2, and government crop subsidies.
If there is a QE3, gas and food prices will increase again along with other commodities to start. The potential for much higher increases in all prices, without any corresponding wage increases is huge. Increases in interest rates in the midst of a house value depression will follow. This will further stifle business activity.
Here’s the crux of the problem: We are afraid of the deficit. Government spending and tax cuts are stimulative if done right, and the reversing of these actions to balance the budget was a significant failure during the Great Depression and will fail again.
The government may be out of bullets, but we have not reached the last resort. Stop all the government agenda-meddling with the economy and bring it back home to the private sector. The nature of government is to not understand economics at best and the people in charge now are, at the very least, suspicious of it.
No comments:
Post a Comment