Here. My comments follow each quote.

Quantitative easing (QE) is when the Fed “prints money” — really just bytes in Fed and Treasury electronic bank accounts — to buy longer term bonds, either Treasuries or mortgage bonds with the goal of lowering interest rates and stimulating more economic activity. They’ve done two rounds so far and estimates suggest they lowered long term interest rates by somewhere between 60 basis points (0.60 of a percentage point) to more than 1%. (Scholars of intermediate macro: they’re pushing out the LM curve!)

Were the two QE programs worth the cost? The Fed’s balance sheet has increased dramatically. What is it going to do with those bonds? Inflation usually results when the Fed “prints money”, aka monetizing the debt. Maybe that will occur in a few years, but it seems unwise to create a problem later by solving a problem now. That’s basic politics and I’m sick of it.

First off, faster inflation lowers the real interest rate — that’s the nominal rate minus inflation. So if a business is thinking of building a new factory, and the interest rate on the loan it needs is 4% and inflation is 3%, then the real rate faced by the borrower is 1%. That’s especially germane right now with corporations sitting on fat cash reserves. A little more inflation in the system could nudge them off of the sidelines.

In other words, the true cost of building the factory is distorted — it is lower than what it should be. The price of borrowing money is distorted. That could lead to overinvestment. This hypothetical factory needs to be built based on what the corporation thinks potential customers will buy. Does Mr. Bernstein think having corporations spend their cash reserves based on distorted financing costs increases wealth? It might temporarily create jobs but the corporation would not earn a return on the investment in the factory. The factory would end up with a white elephant.  This is what politicians do when they agree to build sports stadiums, and airports that don’t get used.

That said, a commenter the other day raised a good question about this: how can I, as someone who actively worries about real wage losses, advocate higher inflation, which all else equal, means lower real wages?

It’s the “all else equal” part — lower real rates and more deleveraging means faster growth and lower unemployment, which itself should help boost job and wage growth.

While we wait for this speculative idea to balance out, lower real wages buys fewer goods as the price of those goods rises. That means stretching the family budget even more. That’s what we’re experiencing now with higher grocery, clothing, and gasoline bills.

I have no idea if this is where Gov. Perry is coming from, but what’s really behind conservatives’ view on this issue is that the wealthy get hurt a lot more by inflation than by unemployment, and visa-versa for the middle class. (Remember, I’m talking 2-4% inflation here, nothing higher.)

I don’t know where Perry is coming from either but this is fine-tuning central planning run amok. So instead of 0-2% Mr. Bernstein wants 2-4%. He has more faith in central bankers than I do. These are macro, national numbers. People who live in different regions of the country, have different buying habits and preferences in their family budgets, and on the margins will be impacted differently. Note also regulations and fiscal policy can have an impact on prices. See, for example, the price of corn as a result of subsidies and regulations to encourage using corn for ethanol fuel. The combination of monetary, fiscal, and regulatory policy impacts prices.

For those living off of capital (versus labor) income, inflation erodes their assets, their wealth, their capital. So lower real interest rates, faster growth, lower unemployment ain’t what gets them out of bed in the morning. That’s also why the editorial page of the WSJ, for example, permanently campaigns against anything that would “weaken” the dollar.

The middle class has investments, ie turning their savings into capital — stocks, bonds, real estate. If it hurts those living off of capital, it hurts the rest of us. Worse, Mr. Bernstein divides people into groups. I guess some people can be sacrificed for others and we’re not in this together.  Mr. Bernstein wants stagflation again.

Advertisements