You remind me of a kitten instantly seized with excitement chasing the red dot of a laser pointer. At best pie fouled out, so far he fails to explain his primary assertion. I really am trying to see the magical logic of toothfairy economics and I defy anybody from you to paul krugman,mike norman or any other leftist luminary to invalidate my common sense approach.
I'm going to address your argument piece by piece, sans the first paragraph where you go on about efficient markets outside of the topic of QE. If you would like to discuss this unrelated issue somewhere else, start a thread on it and I'll join in. But until we first argue the topic on whether QE helps recovery, it will only cloud the issue. Let's pause right here, because it's important to realize that you just described what QE is, and what it is intended to do in theory. I'll not argue the theory of QE, as I think you've stated it accurately. However, much like the academics at the Fed who you defend, your statement is nothing more than reading from an Econ article on Japanese Monetary Policy in the last decade (let's remember that Japan has been doing this for a lot longer than we have. If it worked, it would have worked for them long ago). What you are so conveniently ignoring is the fact that the Federal Reserve cannot force money into the economy like you said. It has no direct delivery method. It can only provide this expanded money supply to primary dealers through it's purchase of treasuries from these said big banks. That's it. It has no forceful method to make these dealers then go ahead and issue loans to small businesses or individuals, and even less ability to make these businesses and individuals take out a loan in the first place. So in periods of significant deleveraging, like we have now, the attempt to make businesses and individuals "releverage" is spotty, at best. All one has to do is look at the amount of reserves the banks have parked at the Federal Reserve. That's where the trillions of dollars that have been printed sit. Banks have taken it and used it to shore up embattled balance sheets, protect against future housing losses (which have been given reprieve for the time being by a suspension of Mark to Market accounting by FASB), and used it to speculate in asset markets, driving up stocks, commodities, land - anything with perceived return. About the only thing banks have done to drive money into the economy is to buy stocks, which has given some of that money to the companies issuing that stock, and allowed them to turn that cash into other economic uses - equipment purchases, margin compression, etc. QE has largely remained in reserves and not in the economy. It has failed. If you dispute this, explain those trillions of dollars resting at the Fed, owned by banks. Where did that come from and how is it helping the economy sitting there? Yes, clever. Artificially keeping interest rates low, and becoming 75% of the bond market, the Fed has essentially done three main things that will have massive repercussions in the very near future. 1. The Fed has enabled politicians to spend without any concept of worrying about debt, or making that spending efficient. Congress doesn't care about debt because congress doesn't understand what is going on. All they know is rates are quite low and they believe this is because the bond market is OK with them borrowing forever. They don't get that the bond market is actually not ok at all (see point #2) and that the Federal Reserve is cornering the market, giving the impression all is well. 2. Indirect bidders on debt have all but bailed on the treasury markets (see my references earlier in this thread regarding record low indirect interest). If the Fed wasn't buying 75-80% of debt, rates would be much, much higher. But the lifeblood of the international market appetite for debt is rapidly disintegrating. 3. The exit plan for getting out of crisis mode is next to impossible, as the first whisper of hint that the Fed will reverse it's purchases, or even end them, will send investors fleeing to the exits and markets crashing. So unless the Fed agrees for permanent QE, all they've done is to buy time. What's worse, everyone knows there will be an eventual exit, and everyone is waiting for that shoe to drop. Thus companies are not believing in the smoke and mirrors economy, and everyone knows the Emperor has No Clothes. Please stay on topic. I am not here for a lecture. I am here for a debate. The topic is not the Great Depression, it is QE. And equilibrium theory - and your extension of argument to "Free market" economies has nothing to do with the crash in 2008, since that crash was due to meddling by the government and the Fed in the first place. Want to discuss that stuff? Wait until we're done with QE or start another thread. In relation to QE, you might also want to explain how QE brings about lower unemployment, as even the Fed has likened this to "pushing on a string". The short answer is, it can't. The Fed has no control over unemployment, which is why every single other central bank in the world does not have that as part of their mandate (even the socialist country ones). Congress got it in it's head during the 70s to make the Fed responsible for unemployment so THEY wouldn't have to be. But there's just no way. And tying employment goals to the end of QE is just another way of saying "We're going to do it until we want to stop." Worthless political partisan commentary, not related to the argument. Medical and Military spending are irrelevant to the discussion. You're not going to succeed with distracting me, so please stop trying. QE is the topic. The dollar is a relevant segue, as it is directly related to QE. Restoring confidence in the dollar while at the same time openly abandoning sound dollar policy is absurd. Thanks for the editorial closing. I would counter that the danger our country faces is people like yourself that believe that the only reason Keynesian policy hasn't worked yet is because it was not big enough. Always increase spending, always increase QE. Get the government to do everything and the private sector to suck it up. I'll end with two comments. First, Japan has been doing this for a lot longer and is still in the same place they were when it began. And now they're going to do the mother of all QE's, so we'll get to watch as idiots across the ocean do "it's not big enough" before idiots here that think like you bring it home. My second point is that you have - in absolutely no way in all that text you wrote - proven anything about how QE helps a recovery. Please feel free to try again or debate my counter points.
I am both teacher and student, depending on the day of the week. I take and teach Jutjitsu and Katana classes.
Thank you, Tsing Tao, for reading my long post in its entirety. And I especially thank you for making well-considered responses and reasonable counterarguments. Something too often missing from this particular forum. I'll try this time to be brief. I agree with your general assessment of what can go wrong with QE and the general path the Fed has decided to follow. In particular, your comments regarding how difficult it is to get the money "created" moving into the economy. The Fed has commented on the problem of excess bank reserves. But nevertheless much of the money does, in fact, find its way into the economy via government spending. I also agree in general with your comments regarding the difficulties faced by the Fed in creating full employment. I agree that that responsibility is misplaced. The Fed can only help by creating favorable economic conditions. Congress must play the equally important role of providing a favorable business climate and employment opportunities through intelligent legislation. I think I made it clear with regard to equilibrium theory that we both can't possibly be right. Either you and Friedman and Greenspan are right, or Soros and I are correct. I think I made a fairly strong case for equilibrium theory being wrong, but we can agree to disagree on that. And much of the correctness of your additional comments hinge on that one issue. And that's why it is important. Either the supply-side laissez faire ("Free Market" to you) economists are right, and equilibrium theory is correct, or they are wrong, and equilibrium theory is not correct. That makes all the difference. I am satisfied that the data has proven equilibrium theory to be wrong. I can't comment intelligently Re Japan. I need to do much more reading re the Japanese economy. I know only this really, and that is that in Japan the debt is held to a very large extent internally whereas the U.S. debt, while held mostly internally, is held to a significant extent externally, and surely the distribution of debt must play a role in determining how much inflation can be tolerated and the desirability of monetizing. But that is as far as I can go on that issue. You seem to be much better informed in that regard than I. All in all I want to thank you again for reading my long post and an intelligent counter argument, but one which I nevertheless believe is faulty.
There can be no argument here, it does indeed make it's way into the economy via government spending (funded by the Fed as previously mentioned.) However, unless you can argue that the government is more efficient at driving economical growth than the private sector, then all you're really talking about is more spending - which can be done without QE. So again, QE is not responsible for recovery. We agree. The issue of supply-side, etc. has nothing to do with your statement that QE drives recovery. This is the issue I put in question, and the one issue you still have not proven. I have pointed out the flaws in your QE argument, and you even agreed to my commentary. So unless you rescind your statement, there is still a point that must be debated. You really need to look into Japan, as they have done all that we are doing, and have nothing to show for it. You are welcome. I don't mind good debate, and it's obvious that both of us believe that the other's point of view is faulty. But the point of the debate is to show how that view is faulty. Thus far, I posed you a question, and you tried to answer it. I gave you counter points as to why the information you posted is incorrect. It is now your turn to answer these counter points and show why they are incorrect. If you cannot, then you can bow out and say you disagree. But believing someone's view to be faulty and actually proving it is two different things.
A well-reasoned basically-polite debate on the merits of policy. Who ever thought it would happen in the P&R forum of ET. (This is ET right? I did not get an url re-direct to an alternative universe, eh?).