Us FED's next move ... 'Quantitative Easing'
Posted in Member's Area due to gov't policy content ...
(snip)Let's first talk about what "Quantitative Easing" IS.
That phrase applies to a central bank (in this case our Fed) lowering interest rates to zero. You can't lower rates below zero, so what comes next is to "quantitatively" ease money - that is, "in quantity" print up reserves and buy "assets", thereby throwing yet more money into the economy.
In theory, anyway.
See, the economic theory is that when you lower interest rates people want to borrow more money, because it's cheaper to do so. Therefore, when you want the economy to expand (faster) you lower interest rates, which makes it more likely that people will borrow.
When people borrow they either spend or invest those funds, and both produce more GDP. If I buy a new flatscreen TV on credit that counts in the GDP of the economy, as does the farmer who borrows to buy seed and grows a crop of corn.
The problem is that the flatscreen TV purchase isn't really an increase in GDP; its a TIME SHIFT.
Without borrowing the money, you see, I'd have to earn it first then buy the TV. By borrowing the money I am able to purchase the TV sooner than I would otherwise; ergo, I haven't actually changed demand in total, but instead have changed when the demand occurs.
Of course the downside of this little game is that the TV that I buy today is one I don't need to buy tomorrow. I'm robbing tomorrow's GDP to add to today's.
This is why I have maintained all along that the debt-to-GDP graph (which I know you are probably tired of seeing by now, but here it is again!) is so important:
http://market-ticker.org/uploads/usd...ipityThumb.jpg
Let's take GDP over a longer period of time - say, 10 years, and make a law that says there is no credit to be extended. That is, you pay cash or you don't buy. We add up all the output for the entire 10 year period and put it in a bucket.
That's the total output of the economy over the entire ten year period, along with all the productivity that enabled it.
Now let's add credit to the system. What happens?
Some people will immediately "pull from forward earnings" via credit. That is, they will purchase a TV they want today with earnings that they believe they will have tomorrow.
This is the old "Wimpie" game from the Popeye cartoons - "I will gladly pay you Tuesday for a hamburger today!"
Now, here's the question - has the addition of credit actually added to GDP, or just shifted in time when the GDP is recorded?
If - and only if - the credit extended is used for the purpose of producing additional output, then it is a net additive to GDP.
If a farmer has 100 acres of land but only enough money to buy seed for 50 of those acres, his employment of credit to buy the other 50 acres worth of seed increases net GDP because he is using that credit line for the explicit purpose of increasing the net output of his labor. The credit extended to him is liquidated when the additional output is produced, but the output (less the cost of the credit) remains.
When credit is used in this fashion the debt-to-GDP ratio falls because the amount of debt outstanding remains the same or declines while the GDP increases.
If you instead consume, however, you have only performed a time shift on demand, not added to actual demand. In fact due to interest cost you have shrunk the total (long-term) demand that exists in the economy because interest does not accreate to GDP.
We all recognize Wimpy from the Popeye Cartoons as a scam; why is it that we don't recognize that what Bernanke is attempting to do is precisely the same damn thing and demand that he stop it!"(snip)
(snip)"Some so-called "economists" will argue that lowering borrowing costs acts as a stimulative effect in that interest costs come down. This is only true to the extent that there is unsated demand among unsaturated (by debt) consumers.
We have spent thirty years pulling forward demand at an ever-increasing rate. The graph above proves this. We have too many automobiles, flat-screen televisions and houses for the amount of aggregate demand that exists in the economy and the debt overhang has been left behind on consumer balance sheets - it has not been worked off. The "economics of more" have been pulled forward so far that there is nothing further to pull forward for those who have any hope of being able to pay the bill down the road.
You can take me to the best restaurant in town but if I just ate my fill that $100-a-plate steak is going to sit and get cold in front of me.
The paradox is that ever-increasing stimulus into such a condition will ultimately destroy the currency and economy where it is attempted.
As each attempt at "Quantative Easing" fails to raise demand a more intrusive and expansive one will be demanded. As the velocity of money dwindles toward zero confidence is lost - a non-circulating currency is very difficult to value!
This is what has happened over the last year and a half. Bernanke has cut interest rates from over 5% to zero and yet aggregate demand has fallen in the economy because those who can borrow to consume are sated and those who are either over-leveraged or insecure in their ability to pay will not (or cannot) borrow irrespective of the cost of money.(snip)
mega-thanks to author Karl Denninger at