Quant Easing Explained



I COMPLETELY agree with the points made by Bill Gross in this article.  Here is an excerpt and the link:

“Faced with these two decidedly different routes to “level the playing field” it seems obvious that the United States is opting for “Easy Street” as opposed to “Buckle Down Road.” Granted, “The Ben Bernank” as a YouTube cartoon rather hilariously labeled him, has for several months importuned Congress and the Executive Branch to institute substantive reforms, while he attempts to keep the patient alive via non-conventional monetary policy. But very few others are willing to extract their heads from the sand. The President’s debt commission with its insistence on low personal and corporate income tax rates and a mere 15 cent increase in the gasoline tax was one example. The Republicans’ reluctance to advance detailed ideas for budget balancing is another. And the Democrats’ two-year focus on the biggest entitlement program since Social Security – healthcare – as opposed to fundamental reforms to counter our lack of global competitiveness – is perhaps the most grievous example of lost opportunity. Unlike the United Kingdom, where Prime Minister Cameron has championed fiscal conservatism, or even Euroland, which is being forced in the direction of Angela Merkel’s Germanic work ethic, the United States seems to acknowledge no bounds to what it can spend to bolster consumption or how much it can print to support its asset markets. We will more than likely continue to “level the playing field” via currency devaluation and an increasing emphasis on trade barriers and immigration, as opposed to constructive policies to make this country more competitive in the global marketplace.”



The links below present two opposing conclusions on the second round of quantitative easing (QE2), which began today.

Quantitative easing refers to a process that involves the Fed printing new money to buy long-term treasury bonds.  The practice aims to stimulate demand and prevent deflation by lowering long-term interest rates, but QE also has many other effects.  QE raises the risk of inflation, distorts risky asset prices and disturbs currency markets.  Low US interest rates have created a “carry trade” where investors borrow dollars at superficially low rates and invest abroad.  This does nothing to help the US economy and has the potential to distort foreign asset prices.  Finally, to cap it off, QE supports our current fiscal irresponsibility by keeping the government’s borrowing costs artificially low.

I side with Feldstein on this one.



Also note the international implications:


Stiglitz presents a very different perspective on US-China trade:


Hmmm… BS.

“Chinese Premier Wen Jiabao on Sunday warned other countries that pressuring China on currency policy was equivalent to protectionism and insisted that the renminbi was not undervalued.

Mr Wen said China would continue to reform its currency system. But he pushed back strongly against international pressure on the level of the exchange rate, which is becoming a major flashpoint in relations with the US.”


It’s Mr. Wen’s own currency subsidy that constitutes a potent form of protectionism.  If the Chinese authorities are so confident that the renminbi is fairly valued – which they probably know full well is quite unlikely – then they have no reason to maintain a peg policy.