Monday, October 18, 2010

Quantitative easing - printing money to win

There's been a bit of a kerfuffle lately about the USA printing money, but it doesn't appear that unreasonable to me.

What are the key issues that arise from printing money?
  1. Inflation
  2. Devalued dollar
  3. Potentially, increased spending
These are all good outcomes for the USA.

While inflation will most likely be an issue in the States in two to three years, the US currently has a far more pressing issue - stopping negative price growth (deflation). Price growth is still well below the long-run average and, with the US economy struggling to show signs of life, the Fed is concerned that prices will return to negative growth. In its view, anything that can ensure the price growth stays positive is a good outcome.

The devaluation of the dollar would also appear to be a reasonable step for the USA to take. While volatile, the US dollar has stayed reasonably strong over the last few years. This is surprising considering that the USA was one of the main contributors to the GFC. While there was an initial run on US dollars, when the rest of the world crashed we saw a 'flight to quality' (i.e. everyone bought US dollars). This flight to quality led to an appreciation in the US dollar and has hampered the US's ability to get out of the recession. A devaluation of the US dollar (as we are currently experiencing), while painful for some investors, would appear to be in the best interest of the US economy.

Finally (and intrinsically linked to inflation), the whole idea if expanding the money base is to increase activity in the economy. If nothing else, the threat of future inflation should in itself encourage people to spend their money rather than save it.

This guy and this guy appear concerned about the quantitative easing, but they also both have vested interest in keeping the US dollar high, not in improving the US economy. The first guy looks suspiciously like a Wallmart employee to me - maybe the Tea Party suggested that he get a suit and camera off the shelf in his lunch break and make a video.

Anyway, I'm all for the US printing money - let's just hope that it works.

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