You should write some story about what's happening with the US economy. I see a lot of positive economic data, but I don't really buy it.
How exactly is Bernanke's money printing reducing unemployment? I don't see any relation between those two... I mean sure - people have more money to spend for a moment, but this will soon go away, as inflation hits.
I think there are several forces at work here. The first, as you eluded to, is that Bernanke's printing is reducing the desire of firms and individuals to hold cash as its value is falling (rapidly) due to the excess money printing. Any firm holding cash is going to look to invest it as the returns on holding cash will be negative. Likewise for individuals. In an inflationary environment iPads, cars, homes, stocks, commodities etc. look much more desirable than checking and savings accounts denominated in dollars.
The thawing of the demand to hold cash will begin showing up on the income statements of many firms who will then reinvest the money in new property, plants, equipment and labor.
Bernanke's money printing is also distorting the capital structure of the economy. Cheap money and credit allows managers, CEOs and entrepreneurs to take risks they otherwise would not have. When money and credit are flowing out of the FED like water down the Amazon, a new business venture seems less risky.
Keep in mind, however, that the money is not hitting all places at once. The process will be slow since it isn't as if the FED is simply doubling everyone's checking accounts. QE2's bond purchases will hit the sellers of those bonds first. This includes mainly the FED's primary dealers. Hence, the run up in equities and commodities as the primary dealers funnel the newly printed money into stocks, commodities, real estate, etc.
The pouring of newly printed money into equities and other assets is giving these companies newly available capital to invest. Capital which exists nowhere and was created out of thin air by Bernanke and which will be used to hire new labor.
Cheap money go into a whole set of activities not limited to speculation. A lot of cheap money made available to VCs for example would spur some start-ups. A lot of cheap money made available to commercial banks would spur some commercial lending activities.
In the past, Bernanke was fighting a liquidity trap in that there were no good opportunities. Businesses didn't see the need to expand because they weren't going to get any additional business by expanding. People were saving money and businesses were cleaning up their balance sheets instead.
Once the businesses see an increase in opportunities, the readily available money makes it very easy to expand operations. The cheap money gives business owners very low inhibition against trying out their own ideas. They don't have to be so careful in planning and operations since the lower interests gives them much larger room for error and they will be competing against firms that have the same access to loans.
Basically, an environment of easy money emphasizes time-to-market and hitting the opportunities first instead of more careful and solid preparation when expanding. In a way, you might call entrepreneurs a bit more hasty. The sectors of the economy, the money flows has to do with what Wall Street sees as good opportunities. In a free market, they would be performing a very important task of allocating resources. In a distorted market, they mis-allocate resources. It was the tech bubble. Then, it was the housing bubble. Now, it's the bond bubble and commodities run up.
You should write some story about what's happening with the US economy. I see a lot of positive economic data, but I don't really buy it.
ReplyDeleteHow exactly is Bernanke's money printing reducing unemployment? I don't see any relation between those two... I mean sure - people have more money to spend for a moment, but this will soon go away, as inflation hits.
@Anon
ReplyDeleteI think there are several forces at work here. The first, as you eluded to, is that Bernanke's printing is reducing the desire of firms and individuals to hold cash as its value is falling (rapidly) due to the excess money printing. Any firm holding cash is going to look to invest it as the returns on holding cash will be negative. Likewise for individuals. In an inflationary environment iPads, cars, homes, stocks, commodities etc. look much more desirable than checking and savings accounts denominated in dollars.
The thawing of the demand to hold cash will begin showing up on the income statements of many firms who will then reinvest the money in new property, plants, equipment and labor.
Bernanke's money printing is also distorting the capital structure of the economy. Cheap money and credit allows managers, CEOs and entrepreneurs to take risks they otherwise would not have. When money and credit are flowing out of the FED like water down the Amazon, a new business venture seems less risky.
Keep in mind, however, that the money is not hitting all places at once. The process will be slow since it isn't as if the FED is simply doubling everyone's checking accounts. QE2's bond purchases will hit the sellers of those bonds first. This includes mainly the FED's primary dealers. Hence, the run up in equities and commodities as the primary dealers funnel the newly printed money into stocks, commodities, real estate, etc.
The pouring of newly printed money into equities and other assets is giving these companies newly available capital to invest. Capital which exists nowhere and was created out of thin air by Bernanke and which will be used to hire new labor.
That's the idea. I think.
Doesn't cheap money tend to favor speculation over investment?
ReplyDeleteCheap money go into a whole set of activities not limited to speculation. A lot of cheap money made available to VCs for example would spur some start-ups. A lot of cheap money made available to commercial banks would spur some commercial lending activities.
ReplyDeleteIn the past, Bernanke was fighting a liquidity trap in that there were no good opportunities. Businesses didn't see the need to expand because they weren't going to get any additional business by expanding. People were saving money and businesses were cleaning up their balance sheets instead.
Once the businesses see an increase in opportunities, the readily available money makes it very easy to expand operations. The cheap money gives business owners very low inhibition against trying out their own ideas. They don't have to be so careful in planning and operations since the lower interests gives them much larger room for error and they will be competing against firms that have the same access to loans.
Basically, an environment of easy money emphasizes time-to-market and hitting the opportunities first instead of more careful and solid preparation when expanding. In a way, you might call entrepreneurs a bit more hasty. The sectors of the economy, the money flows has to do with what Wall Street sees as good opportunities. In a free market, they would be performing a very important task of allocating resources. In a distorted market, they mis-allocate resources. It was the tech bubble. Then, it was the housing bubble. Now, it's the bond bubble and commodities run up.