QE_{\aleph_0}
September 13, 2012 8 Comments
As you might know if you read this blog closely enough to know these things (I doubt anyone is in this category) I predicted and had no doubt a semi-aggressive, slightly-in-the-direction-of-NGDP-targeting “QE3″ would happen so today’s action is not a surprise in the slightest hence I have very little to say about it either way. I suppose the one interesting thing about it is that ‘stimulus’ fans are hailing it as big and substantial; for the first time I can remember, this lays down the gauntlet because if it doesn’t accomplish what they say/think it should, they won’t have ‘well, it just wasn’t big enough‘ as a fallback excuse.
Oh, wait. I should have read Scott Sumner first:
…my hunch is that we are a bit too little and too late to significantly affect this business cycle … The bad news is that 100 points on the Dow is indicative of a really small change in the RGDP growth rate, basically within the margin or error. So we’ll never know any more than we know right now about whether the policy will “work.”
See what he did there? By the Sumner Criteria we can never know whether this was a good or bad policy, so don’t even try. Well hedged, sir. Well hedged. You have totally outplayed the Yglesiai of the world, who have left themselves wide open to actual disproof. Fools!
Anyway, I’m noticing an inability to be surprised lately. This wasn’t surprising. It wasn’t surprising that the German court ruling a few days ago ok’ed the latest & greatest Europe Solution. Nor will I be surprised in the slightest when President Obama wins re-election in November.
I seem to have discovered an ability in myself to easily predict such things by simply taking what I would prefer to happen, and inverting it. I don’t know if this is a superpower I was born with, or obtained via spider-bite or the like, but I hereby pledge to use the power for good not evil.
Trouble is, in the meantime, it makes following the news pretty boring.
JP Morgan could learn a thing or two from a hedge like that.
“These weren’t prop positions! It’s way too late for that!”
I can’t figure out if this is supposed to make interest rates go up or down. But I’m sure it will do something to them.
If you figure it out let me know. I think primarily it’s supposed to make us all feel stupid if we all don’t buy a house within the next week or two, which (in turn) will automatically make there be more jobs. I’m sure some of my other commenters could elaborate further.
I’ll have to read those QE links when I get a chance. So far I’ve figured out that it’s supposed to drive down long-term interest rates, and it’s also supposed to allow higher inflation which drives up long-term interest rates. I think.
Sounds like you’re getting it. Similarly, the Fed being so credible that it will keep long term rates down for so long is supposed to push us all into riskier assets and away from safe assets like Treasuries, as we saw in…rising 10y yields. The resulting curve steepening should work quite nicely with “Operation Twist”, which was all about curve flattening.
There’s something Zen about all this.
I admit, I have no idea what QE is. I’m led to believe it has something to do with printing money, but what happens to the money afterwards is a mystery. I could understand if they just printed enough to double the money supply, then gave everyone enough to double what they currently have. But instead, the printed money seems to be handed out to a small cadre of billionaires. Things are apparently bought, but by whom, and from who? If the bought things have some profit associated with them, who collects this profit?
I’m sure I’m thinking about this the wrong way, that I should treat it as a brilliant monetary policy rather than a well disguised racket, but when a government organization has no transparency I have a bad habit of assuming that they are stealing everything that isn’t nailed down.
Rest assured I will be the last one to lecture you that you should be thinking of this as a brilliant monetary policy.
I think, according to the theory, the ‘cadre’ you’re looking for starts with bond traders/financial institutions who front-ran this (telegraphed) announcement, thus made money and are ecstatic about it, and works outward from there. ‘Trickles down’, if you will. Lefties are all for it. No irony there.
The things that they hope will get bought are, primarily and immediately, houses. That’s because telegraphing that you’ll be buying up mortgage bonds = indiscriminately and dumbly lending money to homebuyers at low low interest rates (if only after the fact).
So, basically, you’re supposed to be tricked into thinking that another housing bubble is coming and rates will never be lower, that’s supposed to get you to buy a house, and when home prices reflate because everyone’s buying a house on that same theory, you’ll check Zillow and your household balance sheet will feel flush again, so you won’t think twice about consuming zillions worth of dumb purchases. From there, it’s but a short step to JOBS!
One natural question that arises at that point is, if/when home prices *do* reflate, and we get back to the ‘NGDP target’, won’t the Fed have to slow down their purchases, i.e. stop lending indiscriminately/cheaply, and stabilize/level out home prices, thus stealing the football away from all the home buyers they hope will rush out tomorrow to buy homes expecting huge equity gains? In other words if QE ‘works’ on the promise that these homebuyers will pocket huge equity gains, won’t the Fed have to ultimately break that promise? And, do we really think they’ll stick to that?
Anyway, that’s the theory as I understand it, that’s how it will ‘help the economy’. I’m holding my breath aren’t you?
Pingback: QE4eva « Foseti