He writes:
Conventional monetary policy involves buying short-term government debt; it has no traction now because interest rates on short-term debt are near zero.He doesn't flunk because he realizes that the Fed is doing something a bit different this time. They are buying Treasury securities with longer maturities.
So now the Fed is buying longer-term debt — but still only 5-year debt, with a current interest rate of slightly over 1 percent. How much more effective is that likely to be?
And $600 billion really isn’t a lot when you’re trying to move a $15 trillion economy.
One more thing: the Fed statement basically reaffirms the existing inflation target, it doesn’t raise it. So not much traction on the expectations side either.
In short: meh.
Hardly anyone in mainstream media gets this. They are all writing about the Fed "buying more bonds". WTF? Buying bonds is a new thing.
Krugman gets this. He writes:
Conventional monetary policy involves buying short-term government debt;From there, it's all downhill for PK. He writes:
And $600 billion really isn’t a lot when you’re trying to move a $15 trillion economy.
His errors here are many. He ignores the the additional money creation of between $200 billion and $300 billion coming from the reinvestment of MBS principle payments the Fed will receive. He completely ignores the fact that the money the Fed is adding is super powered money that is likely, at the money supply level, to multiply at rate of between 2 and 3 times, at a minimum.
Finally, he compares the money injection against GDP, when he should be comparing it to the current money supply (M2). Current M2 money supply stands at just under $9 trillion. Thus even without a multiplier impact, the Fed is printing an additional 10% plus over an eight month period. That's serious money printing that can get the economy going in a manipulated fashion and also stoke price inflation--an inflation that Krugman appears oblivious to.
In short, as an economic analyst, he is seriously lacking. He has no clue that serious inflation is coming-and that should be the warning every economist should be shouting out.
(htNick)
I can't tell you how many times I read in the msm that the Fed is buying Treasury bonds only to find out that the writer meant treasury notes or treasury bills. You would think they would understand the significance of the three terms as they relate to time period.
ReplyDelete"... the fact that the money the Fed is adding is super powered money that is likely, at the money supply level, to multiply at rate of between 2 and 3 times, at a minimum."
ReplyDeleteBob, can you please supply the rationale behind this "fact"?
I am still troubled by the appearance of Tepper, touting stocks and any other assets, just not cash. What a magnanimous thing for him to do, what a public service he is performing, to come out of hiding (where apparently he normally just sits quietly and makes money) to tell me and the rest of the great unwashed that stocks are a can't miss investment.
Another point to add is that if the 900 billion starts to goose asset prices (and even interest rates due to inflation), the banks will have less incentive to keep the other 1 trillion in excess reserves at the Fed.
ReplyDeleteThis could mean the other trillion entering the banking system, thus creating a multiple of M2 before taking into account the effect of the money multiplier.
Double digit inflation by late 2011 is the best case scenario. The geopolitical responses and popular responses to such a situation are likely to be dangerously volatile and unpredictable, perhaps dwarfing the economic strain.
Gold up.
ReplyDeleteSilver blows through $25 & is closer to $26 right now.
That is all one needs to know about this QE2 crap.
@ RatheBFlying
ReplyDeleteIt's too long to explain super money (High powered money) here, but Rothbard does in The Mystery of Banking. Also most intro macro texts do a decent job here.