With permission, I reproduce below Jeff's comments. In them, he writes that QE2 may be a ruse. Since Jeff is one of the few who understands what really went on with QE1 (His upcoming paper on "Friedman versus Bernanke" will blow away the thinking that the explosion in the monetary base in late-2008 to early 2010 was all about Fed money expansion.), his thoughts can not be taken lightly.
At this point, my view is that Bernanke is doing a full out money blast that will translate into huge price inflation, however, the confirmation, as Jeff states, will be in the numbers. If Bernanke drains from other parts of the balance sheet to sterilize his Treasury asset purchases, then Bernanke is indeed pulling a fast one on the country. The numbers will tell all.
Here are Jeff's comments:
Thanks so much for sharing this Bernanke quotation with me, which I hadn't yet seen. It partly confirms what I had suspected from the outset: QE2 is a ruse.
Bear in mind that the Fed's announcement of November 3 http://www.federalreserve.gov/newsevents/press/monetary/20101103a.htm)
said nothing about "quantitative easing" or even increasing the base.Rather it merely said the Fed was going to buy $600 billion in long-term Treasuries. If you look at the Fed's balance sheet, over the two weeks since the FOMC meeting, it has acquired about $30 billion of additional Treasuries. But that has been offset by a $13 billion fall in its holdings
of mortgage-backed securities plus more modest declines in other assets including foreign currencies and Maiden Lane, so that there has been almost no net effect on the balance sheet or the monetary base.
And now Bernanke denies that the term QE applies. As I argue in my "Bernanke vs. Friedman" paper, Bernanke's first alleged quantitative easing turned out to be no such thing, given that the Fed expanded its balance sheet (and the base) by explicitly borrowing a big chunk of the money and implicitly borrowing the remainder through paying interest on
reserves. Bernanke appears to be attempting something similar again--centrally allocating credit and manipulating the structure of interest rates WITHOUT affecting the money stock.
So why hasn't he been more straight-forward about this? One, because he wants to increase inflationary expectations, and all the talk about QE2 will help do that without any actual QE. Two, as suggested here (http://blogs.forbes.com/investor/2010/11/16/bernanke-to-banks-unwind-your-carry-trades-now/),he is really trying to induce more private lending by banks.
Yes, it could all blow up in his face. But right now, I don't see much danger of inflation. In any case, we will know more after the Fed releases the FOMC meeting minutes on November 23, as well as see what happens to the Fed's balance sheet over the next few weeks. If my suspicion continues to be confirmed, I will blog about it at Liberty & Power..