QE – the case against

Scott Johnson at Powerline has put up a post in which he quotes a mate of his which is In Defense of QE. It is a defence put together by a “professional investor” using “investor” in its modern sense as someone who takes people’s money and invests it in some form of monetary instrument, not someone who actually builds productive assets. No doubt QE has made him a tonne of money. Shame about everyone else.

I will make only two points since this gets into such esoteric argument that no one can follow any of it.

Firstly, a long part of the supposed defence is a defence of central banks and the role of the Fed during the height of the GFC. Well when it comes to that, the actions taken by the Fed during the GFC seemed essential to me at the time and on thinking things over ever since, I have had no reason to think otherwise. It was a very fast moving story but all told, you could not let the conflagrations in financial markets just burn themselves out on their own. QE had nothing whatever to do with the Troubled Asset Relief Program, the TARP. With QE we are not talking about troubled assets or dealing with an emergency. It is just straight out inflation.

Second, inflation has now come to mean rises in prices when once it meant printing money. The Keynesians switched the terminology to movements in prices in the 1930s so that their policies would no longer be immediately described as inflation (discussed in the 2nd ed of my Free Market Economics [FME2] pages 406-408). But let’s not quibble about this. What ought to be understood instead is that the effect of inflating the money supply to fund public spending has a number of possible effects of which higher prices is only one. Without militant unions and continuous labour market pressures to push wages up, inflation in the form of price increases is subdued. And whatever else may be the case at the moment pretty well everywhere, only those in very protected environments are in the mood to be pushing for significantly higher wages that would put their jobs at risk.

The real issue is that the way in which the re-direction of expenditure to the public sector is and will continue to manifest itself in a crumbling capital stock (see FME2: p410). The economy of the United States is falling to bits. It will take a longish time since it has a massive asset base but it is being eroded fast enough, which is evident in the median income data and elsewhere. The data are from the Federal Reserve.

median income us

QE is just part of the wreckage that the shift of aggregate expenditure from private investment to government waste is causing. I don’t normally quote from the World Socialist Website, but these are again data from the Federal Reserve which, based on the actions it has taken, is probably itself now a member of the Socialist International:

The yearly income of a typical US household dropped by a massive 12 percent, or $6,400, in the six years between 2007 and 2013. This is just one of the findings of the 2013 Federal Reserve Survey of Consumer Finances released Thursday, which documents a sharp decline in working class living standards and a further concentration of wealth in the hands of the rich and the super-rich.

The US economy, along with most other economies, is falling apart and there is hardly an economist in the world uninfected by the Keynesian virus and therefore hardly an economist able to understand what is going on. If for no other reason than just to get this other perspective, let me again recommend my FME2, “a must read for serious economists” as one reviewer described it, and that was the first edition. This one is better.

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