Quantitative Easing Revisited Transcript

Did you hear about the Fed?

did they announce another round of the quantitative easing?

they said they are ready to do more quantitative easing down the road

they still call it quantitative easing?

yes

but we exposed that as a fancy way of saying printing money

quantitative easing still sounds better at coctail parties

why would they want to print more money?

unemployment is still too high

isn’t that what the first round of quantitative easing was supposed to fix?

yes, but it didn’t, and that’s why we had the second round

so round 2 was supposed to fix round 1?

right

then why would we need a round 3?

to fix round 2

what if that doesn’t work?

there is always round 4.

this is starting to sound like an abbot and costello routine

except the outcome is more tragedy than comedy

why?

each round does certain kinds of damage to the economy that needs to be fixed by the next round.

what kind of damage?

artificially low interest rates hurt those that rely on interest income like the elderly and pension funds, and printing money hurts consumers by making things cost more

has the fed announced any other policies?

they announced they will keep short term rates at zero for years

have rates already been at zero for a long time?

how did you know?

I have figured out the formula for predicting all the feds actions

what is it?

first, you take a past policy by the fed that has been a complete bust

then what?

then you double the size of it, and do it for twice as long

you would make an excellent economist

does the Fed still think inflation is too low?

yes

have prices fallen since the last time we had this conversation?

no, the prices of necessities have gone even higher

so how could the Fed claim we don’t have an inflation problem?

because the new Ipad costs the same as the old ipad, but runs faster

you must be joking

no, someone asked a fed official what he thought about rising grocery prices, and he said they are offset by better i-pads

isn’t all this money printing supposed to help the unemployed?

yes

but if you are unemployed, you probably aren’t buying a new i-pad

no

and you certainly aren’t buying one every year to appreciate how the new i-pads are faster but cost the same

definitely not

but the unemployed still have to eat food, and pay for gasoline

of course

so how is all this money printing that drives up food and gas prices but doesn’t impact i-padd prices supposed to help unemployment?

it doesn’t. last year as prices surged some companies had layoffs to offset higher raw material costs.

but there must be some benefit to all this money printing for the fed

it makes the stock market go up

really?

yes, when asked about the accomplishments of the quantitative easing, the bernank often points to rising stocks

do unemployed people own a lot of stocks?

no. most stocks are owned by the wealthy

what does the fed think these wealthy people will do now that their stocks are higher?

maybe they’ll buy more i-pads.

have higher stocks resulted in significant hiring?

not really

why not?

because you can put lipstick on a pig, but you cannot make it create economic value

what does that mean?

it means it matters why a stock is going up

so if stock prices go up because the Fed is printing, its not as beneficial as if they go up because the economy is better

exactly.

is there a downside to fed actions driving stock prices?

the stock market has become more unstable, and many individual investors refuse to participate

why?

because they would rather make investment decisions based on business factors, not which way the wind blows in washington

but you said stocks have been going up

they have also been having wild fluctuations, so even when they end a year flat most people lose money

that sounds just like a casino

except there are no pretty women serving free drinks

are big institutions still investing in stocks?

some like the big pension funds have no choice

why not

they have to make a minimum return each year

can’t they just buy safe treasury bonds?

no. thanks to the quantitative easing treasury bonds don’t pay enough interest

so what can they do?

they have to buy stocks and other risky investments

does the Fed say it will do the quantitative easing forever?

no. they say eventually they will reverse the quantitative easing

then what happens to the stock market?

it might crash

so the quantitative easing is doing both harm and good, but the Fed interprets the harm as a need for more quantitative easing

right

and its also driving people to buy stocks

yes

at the same time, the quantitative easing is also making stocks more dangerous

yes

and after everyone has bought a lot of stocks, the fed might crash the stock market

exactly

are you sure this isn’t some episode of the twilight zone?

I am starting to wonder myself

—–

you are about to enter another dimension

a dimension of policies and effects

a dimension of dollars and cents

you are moving into a land where those that have failed the most in the past get the most power in the future

you just crossed over into, the bernankee zone

 
 

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