By now most have heard about the upcoming "QE2", or Quantitative Easing Part 2. Unfortunately I'm pretty sure most people have at best a very foggy notion of what is going to happen.
The problem starts with the term - Quantitative Easing. Kind of sounds not too bad. Quantitative - that's numbers stuff. Easing - that's making things easier, smoother, less tight. Hey - what's not to like?
Well .... this is another great case of a benign term covering up a very dangerous idea (think Patriot Act, No Child Left Behind etc.)
Here courtesy of luckydawg is a different take on what QE2 really should be called
It sounds so scientific, so knowledgeable, as if trained professional economists are steering the ship through the treacherous shoals, and we'd best just sit back and thank our lucky stars they are watching out for our best interests. It wouldn't sound so good if they called it "Monetary Debasement" or "Currency Assassination" or "Spray'n'Pray" or something like that. This way, it's all good.
Here is what is really going on:
- For the last several years China has been running trade surpluses. Usually when a country does that its currency will appreciate over time, making its exports less competitive and thereby evening out the imbalance. But...
- China has also been pegging its currency to the US dollar, forcing the imbalances to get bigger and bigger. These imbalances show up as huge foreign exchange reserves. Think of FX reserves as a huge pile of IOU's. China has sold a whole bunch of stuff and we have paid with IOU's. But China, instead of spending these IOUs on US goods has instead just decided to sit on them (or actually they have lent them back to the US government so that it can run a deficit and keep the economy running so folks can buy more Chinese stuff).
- Now that China has a huge pile of IOUs and refuses to let its currency appreciate it looks as if the Fed has finally decided to push the issue (QE2). That push amounts to simply printing a whole bunch more IOUs, thereby making all those Chinese held IOUs worth less and less. Effectively the Fed has declared war on trade surplus producing countries.
- The upshot is that the US dollar will lose value (as more dollars are printed, each one will buy less). So now you are seeing grain prices soar, oil prices soar, and soon crap from China will soar too.
- This basically means a guaranteed decline in the US standard of living. So QE2 is not such an innocuous exercise. It has real implications for everyone. Everyone's standard of living will fall.
By design this is a very simplified approach to the issue. For more detailed and excellent commentary on this issue I would suggest a couple of articles that have come out over the last day or two.
- Currency wars are necessary if all else fails - by Ambrose Evans-Pritchard.
The atomic bomb, of course, is quantitative easing by the Federal Reserve. America has in effect issued an ultimatum to China and G20: either you stop this predatory behaviour and agree to some formula for global rebalancing, or we will deploy QE2 `a l’outrance’ to flood your economies with excess liquidity. We will cause you to overheat and drive up your wage costs. We will impose a de facto currency revaluation by more brutal and disruptive means, and there is little you can do to stop it. Pick your poison.
This is what QE2 means, though Fed officials prefer to talk of their "mandate" of supporting employment. It is nothing like QE1, which was emergency action to halt the economic free-fall of late 2008 and early 2009. This time the Fed is using QE as a long-term tool to manage America’s chronic ailments.
- The Final End of Bretton Woods 2? by Tim Duy.
The first chart is of imports market share, or imports as a share of what we purchase in the US. In the second quarter of this year imports market share rebounded to about where it was at the pre-recession peak, or about 16% of consumption. Since the early 1980's when the US started borrowing abroad to finance its two structural deficits -- federal and foreign--trades share of consumption has risen from about 6% to some 16%. Normally this has a small negative impact on the US economy, but sometimes you get quarters like the last quarter. Last quarter real domestic consumption rose at a 4.9% annual rate. That was an increase of $162.6 billion( 2005 $). But real imports also increased $142.2 billion (2005 $). That mean that the increase in imports was 87.5% of the increase in domestic demand.
To apply a little old fashion Keynesian analysis or terminology, the leakage abroad of the demand growth was 87.5%. It does not take some great new "freshwater" theory to explain why the stimulus is not working as expected, simple old fashioned Keynesian models explain it adequately.
To conclude I would like to ask for reader suggestions for a new term to use instead of QE2. Any ideas????