Will Quantitative Easing Spur Inflation? Job Creation? Credit Expansion? Do Anything?
by ilene - August 6th, 2010 11:14 am
Will Quantitative Easing Spur Inflation? Job Creation? Credit Expansion? Do Anything?
Courtesy of Mish
St. Louis Fed James Bullard’s proposal to start "quantitative easing" is creating a stir. Chris Ciovacco at Ciovacco Capital Management (and many others) propose the Fed can and will use quantitative easing to induce inflation. I disagree.
The following are snips from Chris Ciovacco’s article, Reading Between The Lines: James Bullard’s Seven Faces of “The Peril” followed by my point-by-point replies.
The titles in "bold red" below are questions Chris Ciovacco proposed and answered. My answers are quite different.
What could all this mean to me and my investments?
Chris Ciovacco: Let’s start with quantitative easing, where the Federal Reserve buys Treasury bonds. Using a hypothetical example to illustrate the basic concepts, assume a typical American citizen has some Treasury Bond certificates in a shoebox under their bed. If the Fed offers to buy those bonds, they will be exchanging paper money, not currently in circulation, for a bond certificate. After the transaction, the American citizen has newly printed money and the Fed now has a bond certificate. It is easy to see in this example the Fed has increased the money supply by buying the bonds. The Treasury Bond represents an IOU from the U.S. Government. When the Fed buys bonds in the open market, it is like the government buying back its own IOU with newly created money. This is about as close to pure money printing as it gets.
Mish: The typical American citizen does not have Treasury Bond certificates in a shoebox, under their bed, or anywhere else. Those who do have treasury bonds, more than likely have them in a mutual fund portfolio or treasury EFF and they probably do not even realize they have them. The very few who hold treasury bonds outright, are highly unlikely to sell them.
How is this policy any different from lowering interest rates or increasing bank reserves?
Chris Ciovacco: Lowering interest rates and flooding the banking system with cash has one major drawback; if the banks won’t issue loans or customers do not want to take out loans, the low rates and excess bank reserves do little to expand the supply of money in the real economy. Therefore, these policies can fall into the "pushing on a rope" category. Quantitative easing, or Fed purchases of Treasury bonds, injects cash directly into…
Looking Beyond Tomorrow’s Non-Farm Payroll Number To Spot A Negative Shift In Structural Unemployment
by ilene - August 5th, 2010 6:36 pm
Looking Beyond Tomorrow’s Non-Farm Payroll Number To Spot A Negative Shift In Structural Unemployment
Courtesy of Tyler Durden
Goldman chief economist Jan Hatzius has created a useful preview of tomorrow’s NFP number (consensus +90,000 private, -65,000 overall), explaining why Goldman has a more negative outlook on the number than most (+75k and -75K, respectively). Jan’s conclusion on tomorrow’s, and recent trending data :"Our view remains that the primary job market problem is a shortfall in labor demand." More relevantly, Hatzius does an extended analysis of the Beveridge curve (i.e., the relationship between unemployment and job vacancies) to determine if there has been a shift in the overall level of structural unemployment


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