To QE or not to QE, that is the question…

Brad DeLong debates Jim Grant on the great investment question of our time…(h/t Jesse)

David Llewellyn-Smith


  1. Something inside me wanted to grab Brad de Long by the scruff of the neck, and try to shake some sense into him.

  2. Alex Heyworth

    Are you suggesting that the Bernanke should “light blue touch paper and retire”?

  3. As someone reported their kids went to see Romeo and Juliet (I think). When they arrived home the mother asked them what they thought of it. The reply was ‘Well it was Ok but it was so full of cliches’

  4. Not sure if I missed it but neither Delong or Grant picked up on Bernank’s belief that the economy and job growth can be lifted VIA the stockmarket. He sees it as a means to an end.

    Also,’deleveraging’ doesn’t seem to be in the American lexicon.

  5. So let me see QE1+QELite+QE2, and the FED did get some upward movement in the major Market Indices (DJIA, S&P500, NASDAQ e.g.), but mid April with all the liquidity they’re falling. If you believe the non government analysis the US is loosing jobs.

    So no structural changes to the economy, and most likely QE3 in the form of capped 10 Year Yields, and this is going to work?

    No inflation to speak of yet as the cashed up banks are not lending, and there is no Plan B.

  6. QE can be compard to a painkiller which interferes with your nervous system signalling function and allows to push your body harder for a while. As soon as you stop taking it the pain comes back and unless you undergo a painful operation there is no hope of ever getting off the drug and reaching your full potential.

  7. The question whether to ease or not misses the point as far as I’m concerned. The question we should all be trying to answer is how to stimulate income growth? Adding to our stock of debt is fine, as long as it results in an increase in demand for goods and services, generating a return to employment and income growth.

    QE puts cash in the hands of entities who are in the best position to hoard it – the banking system. The entities in the economy that really need to spend – cash strapped households and governments – get nothing from QE.

    So the question really should be, if we are going to hand out free money, why not hand it out to households? Why not pay negative interest to every cheque account-holder….along the lines of ‘If you promise to pay us $0.90 in two years we will advance you $1.00 today.’

    There is no reason this cannot be done.

    That would be QE that is aimed at reducing the debts of households, at improving consumption, at expanding employment, rather than at changing the portfolio mix of the financial gods.

    • David, Structurally though real jobs are not being created from the stats I’ve seen, and don’t we need sustainable job growth as well? Don’t we need to get full employment, and not if you work one hour a week you’re employed? Also, structurally where it’s easier to outsource than to employ locals, and the list goes on. The education system needs to be fit for purpose.

      There are many issues as I see it that need to be sorted.

      There is a crisis for the US in 401K and retirement funding in general, and much of it depends of the stock market which is currently falling.

      I’m not qualified to know all the answers, but industry, education, and employment of locals rather than outsourcing should be addressed. I know the economic reasons why it’s outsourced, but how do you solve that?

      • I don’t confess to fully understand the Fed’s insistence on it’s current policies – apart from the balance sheet rebuild perspective and some direct or indirect support of the derivatives market.

        However, now, if more hundreds of billions are to be spent, further debt, surely it is time for the sort of programs that do impact employment – namely fixed asset infrastructure renewal and development. It is the only way. I understand from David’s previous post that this is not an area the Fed can directly act but to my mind, there seems no alternative – a way must be found. I seriously doubt the ability for the US to drag itself out of this recessionary fog without some sort of old-fashioned direct action. And I don’t mean a war. Build bridges, improve and extend highways, rejuvenate public buildings, repair and build dams and waterways and a myriad of other activity. These projects are manpower intensive. I have read that there is a belief that the beneficial effect of this type of spend is slow to feed through – well couldn’t be slower in terms of employment than QE1&2. Sort employment, of such fundamental importance for any healthy economy, and all else will flow from that.

        • As I understand it the FED has a dual mandate, and it’s price stability, and promote maximum employment. I understand they should do that via monetary policy so that is fine, but ther seems to me to be a conflict, and that’s where I’m coming from. I’m not sure how it’s done, but I would imagine the US congress needs to be part of this policy. The banks which are cashed up due to QE could via business loans, and other federal infrastructure projects get the money supply expanding, and Ben might get the type of inflation he’s after. There seems to be a missing policy link with QE such that the banks can benefit, but the general economy does not/may not.

          • I think you’re right – part of the reason H&H referred to Summers’ view, which included an infrastructure component.

            I saw an interview with a municipal bonds trader on one of the business channels (apparently a well-regarded bloke) also saying he didn’t object to debt (for infrastructure) but was opposed to deficit (for what?). Perhaps the zeitgeist is changing?

            The US needs to grabs its real-life economy by the balls and act. At some level it seems that globalisation erodes the ‘middle’ of economies, only obvious in non-prosperous times, and if continued will be damaging to the point of ruination.

  8. I believe it’s time to start seeing this as a global problem, which needs a coordinated global solution. The deficit and debt problems faced by the US, the UK and the PIIGS are at least in part the other side of the same coin as the surpluses of Germany, China and other European and Asian nations. Global currency arrangements are not meeting the needs of the world’s people.

    I don’t know what the solution is, but I know it’s not what we’ve got at the moment.

    The other part of the issue, as far as the US is concerned, is the more long term concern of excessive contingent health and social security liabilities. To address these, they need to make their health system more efficient (eg protect doctors better from frivolous malpractice suits, which would mean far fewer unnecessary tests and lower income required by doctors to pay the insurance bills) and look to increase the retirement age.

    Both the US and the UK also need to take a long hard look at the bloating of their bureaucracies. In both cases, whole departments could be done away with without anybody noticing anything except beneficial effects. (Same here in Australia of course.)

  9. > Global currency arrangements are not meeting the needs of the world’s people.

    Global currency arrangements have been put in place to meet the needs of capital not people who sell their labour. Let’s face it, although in democratic countries politicians are elected by the popular vote, the real influence on government policies comes from narrow power groups and at the moment, especially in the US, it is the finance lobby.

    Unless they somehow restore the balance of power and embark on structural reforms that will subordinate the banking system to broader social interests, nothing is going to change and efforts such as QE will be only benefiting the banks who will be the first in line to obtain cheap money that they will only use to speculate.

    Banks are not going to finance public infrastructure projects since the returns on such investments are very long term and uncertain. Also, unless there are some real industries built at the same time, jobs created by public infrastructure programs will disappear as soon as the projects are completed. Real long term employment and prosperity can only be created by innovation and building capital structure. Innovation requires R&D expenditure and again banks are not going to fund it when they can make a quick buck by pumping and dumping assets or resources.

    Going back to my nervous system analogy what is happening at present can be compared to a nervous system parasitizing the body rather than coordinating it to the advantage of the whole organism.

  10. Jumping jack flash

    +1 David.

    Businesses are not inflating wages. But it is chicken-egg. What comes first, the spending/profits or the wages?

    In my opinion this is the reason the models failed. Many places told me when I was asking about how much I could borrow 5 years ago, that wages will go up so don’t worry too much about the size of the repayments.

    Wages haven’t really risen significantly above inflation for 3 years and so the economy is being crushed by the debt.

  11. That “debate” was a classical example of someone thinking they’re right by spouting a theory and someone knowing their right because they’re in the real world seeing what’s going on.