Archive for the ‘Quantitative easing’ Category
By Greg Ip
Friday, November 12, 2010;
Washington Post Outlook
The Federal Reserve’s announcement on Nov. 3 that it will buy $600 billion worth of Treasury bonds to help boost the struggling U.S. economy reverberated around the world this past week, with condemnation from critics as varied as Sarah Palin and the president-elect of Brazil. Yet much of what the Fed and its chairman, Ben Bernanke, have done is shrouded in confusion and misperceptions.
1. By printing money, the Fed will create runaway inflation.
The Nobel Prize-winning economist Milton Friedman issued a famous dictum nearly 50 years ago: “Inflation is always and everywhere a monetary phenomenon.” His belief has become widespread over the years, to the point that even many non-economists assume that when the Fed prints money, higher prices inevitably result. But the link between money and inflation is weaker than people think. Read the rest of this entry »
Nov 11th 2010, 22:48 by G.I. | WASHINGTON, DC
[Greg Ip] BEHIND today’s hand-wringing over currency wars is the fear that it’s one small step from currency intervention and capital controls to traditional, noxious protectionism: tariffs, quotas, subsidies, etc. For example, Gerald O’Driscoll at the Cato Institute writes:
The Fed’s announced purchase is an exercise in monetary protectionism. It has already produced countermeasures in terms of capital controls by Brazil and perhaps others. It may lead to trade protectionist countermeasures. Monetary protectionism breeds trade protectionism and risks a global meltdown in trade as occurred in the 1930s, which paved the way for World War II.
And Alan Greenspan obliquely makes the same point today in the Financial Times.
But is it true? Does monetary protectionism breed traditional protectionism? I could argue the opposite. If monetary protectionism softens the pain felt by the trade sector, it weakens demands for the traditional variety. When America succeeded in devaluing the dollar against the yuan in 2005, it stopped the momentum of anti-China trade bills in Congress.
The original blog post is linked here.
FS: Does the Fed print money? If so, how?
GI: Yes, and I’m surprised to see Pragmatic Capitalist dispute this.
It’s true that the Fed is not literally printing the $20 bills that end up in your wallet. As acommenter on your own blog has noted, that’s the job of the Bureau of Printing and Engraving. But money includes both currency in circulation and the reserves that commercial banks keep on deposit at the Fed. By that definition, the Fed is indeed printing it.
Here’s how QE works. The Fed buys a $100 bond from Bank of America. The bond gets added to the Fed’s assets. Bank of America has an account at the Fed. The Fed, with a keystroke, puts a $100 into B of A’s account. Where did the money come from? Thin air. Bank of America can visit its friendly neighborhood Fed branch and withdraw that $100 in the form of bills and coins. So for practical purposes the distinction between currency and reserves is meaningless; the monetary base includes both. Read the rest of this entry »
Nov 5th 2010, 19:45 by G.I. | WASHINGTON, DC
[Greg Ip] IN COURTROOM dramas, the prosecutor often dredges up some seemingly irrelevant fact about the accused by arguing, “It goes to motive, your honour.”
That’s where the Fed finds itself in today. Quantitative easing is fully justified by high unemployment and falling inflation at home, but the Fed is being pummeled in the court of public opinion because its motives are suspect: other countries think the Fed is trying bludgeon them into assuming more of the burden of global growth via a vastly depreciated dollar.
The latest indictment comes from Sebastian Mallaby, fellow at the Council on Foreign Relations and formerly of The Economist. Mr Mallaby articulates the diplomatic case against QE. America, he notes, has long urged China to allow its currency to appreciate so as to reduce its trade surplus and thus its contribution to the global savings glut and the world’s current-account imbalances:
The Fed’s return to quantitative easing threatens to create a glut of liquidity reminiscent of the mid-2000s savings glut… Already, countries from Brazil to Thailand have responded to the flood of incoming capital by imposing controls and taxes, retreating from the idea of financial globalization. Even before the Fed’s action this week, there was much loud talk of currency war. This now seems sure to intensify, and the United States has lost its moral authority to broker currency peace.
I agree that this is how the world perceives what the Fed has done. But it’s wrong. Read the rest of this entry »
“Quantitative easing” is unloved and unappreciated—but it is working
Nov 4th 2010 | WASHINGTON, DC
[Greg Ip] EVEN before the Federal Reserve unveiled its second round of quantitative easing (QE) on November 3rd, critics had already denounced it as ineffectual or an invitation to inflation. It cannot be both and it may not be either.
The announcement of “QE2” was hardly breathtaking. The Fed said it will buy $600 billion of Treasuries between now and next June, at about $75 billion a month, although it also said it could adjust the amount and timing if need be. That was about what markets expected but far less than the $1.75 trillion of debt it bought between early 2009 and early 2010 in its first round of QE. Yet QE2 seems already to have exceeded the low expectations it has aroused. Since Ben Bernanke, chairman of the Fed, hinted at it at Jackson Hole on August 27th, markets have all done exactly what they should (see chart).
The original article is linked here.