Friday, September 14, 2012

Quantitative easing should upset the left - it's highly regressive

Anthony Randazzo of the Reason Foundation explains why money printing quantitative easing ought to get the socialist Occupy movement out in the streets. 

Which of course wont happen, since their pinup economist - Paul Krugman - is a fond believer in printing more money and spending more money the state doesn't have, to boost the economy.

No doubt some Democrats will think this is a cunning move to give the US economy a boost before the election, as some Republicans think this also, and are criticising it on that cynical basis.  That isn't a reason to criticise it, because it is unlikely to make enough difference to enough people to have an electoral impact.

So why is it bad?

You see you have to ask the question as to who benefits from the creation of new money and who loses.  Bearing in mind Bernanke has said he will create US$40 billion out thin air, every month, until the economy recovers, this matters.  It's also why the price of gold took a big hike overnight.

The beneficiaries are those whose securities the Federal Reserve is now going to buy with its new money.  Those will include the securities holding debt to the Federal Government or mortgages.  So the immediate winners are investors in those securities who now have a willing buyer.  With such purchases, the recipients are the financial institutions who now have money to reinvest.  So it is the shareholders of those institutions who immediately gain from money printing.  The next beneficiaries are those owners of securities, stocks and bonds that gain such investments, as they suddenly find there is more money available to invest.  Prices for stocks and bonds will rise, so existing holders of them benefit.

Those who own such stocks and bonds are going to be primarily other institutions or wealthy individuals. People who are also aware of the counter-risk of money printing - inflation - and so are able to take steps to protect themselves from what inevitably becomes a new round of malinvestment.  Why malinvestment?  Because the flow of "free money" will see choices made that are dependent on what securities the Federal Reserve buys.  The Federal Reserve will want to sweep up government debt and mortgage securities because they are seen as low value investments, so that there is a preference for stocks and shares.  However, with investors having low confidence in the economy, many also sweep into commodities, because they see any scope for rising demand being seen in rising prices for commodities.

So a speculative bubble emerges, with those who joined at the start - those who gained from state purchases of their securities, gaining the most.  Whether it be energy, food or minerals, another round of malinvestment will create a bubble.

That's where we find the losers.  For the consumers of such commodities, be it in purchasing food, heating their homes or even building materials to fix or extend their homes, they face inflation, and as that grows it means their purchasing power declines.

With virtually zero interest rates, it means savers lose out as with growing inflation, they find they are fighting a losing battle.  They can choose to hop onto various speculative bandwagons, but know it is high risk.  So they mix between commodities, stocks and shares, property and various other equities.  Those who already had property theoretically benefit, but few are likely to realise this gain unless they sell at the right time and convert their depreciating currency into another investment.   Of course for those who largely live on receiving an income, they face inflationary pressure with little hope of relief unless their field of employment can afford to raise their wages.   Those who are saving to buy property or indeed anything, are on a losing streak.

In short, what is called quantitative easing, which is a euphemism for printing money, benefits those who the Federal Reserve buys securities from the most, and actively harms those who are poor, who don't own property or whose savings are primarily in bank deposits.  

Will it work?  Well Randazzo believes that private debt levels remain so high that most people are simply concentrating on reducing their levels of debt, rather than seeking to invest.  So whatever trickles down is likely to be used on that.  

1 comment:


Well QE never worked in the UK, nor in Obamerica to date.