More on Quantitative Easing
I don’t entirely understand it, but there is an interesting article in the NY Times today:
“Stimulus by Fed Is Disappointing, Economists Say” – New York Times, 4/24/2011
The NY Times is not talking about the “Stimulus” spending package passed two years ago by Congress. They are talking about the Federal Reserve’s latest wholesale printing of $600 billion worth of cash out of the sky blue in a process called “Quantitative Easing“. This latest version, called QE2, will be over in June.
It raises issues that I find frightening.
The idea, I think, is to make enough credit money available to businesses at a lower interest rate in order to spur economic growth and create jobs. The problem. Its not working anymore.
But by doing so it increases The Fed’s long term debt burden which is definitely NOT a good thing. That limits actions The Fed can take to respond to future economic challenges.
In other words, if we have another economic stress, like 2008, were toast.
Its different from the National Debt but it is debt just the same. The Fed is selling Treasury Bonds backed only by the good credit of the US government that grow in value. Buyers, like China, will eventually cash them out and we the people will have to shell out for that when they do. If we can’t then China and other investors will essentially own our government.
You can only keep using the printing press so long as your credit is in good standing. Ours isn’t so much anymore and slipping at an alarming rate.
The long term credit outlook for the US government was downgraded from neutral to negative by Standard and Poor’s. That hasn’t happened since 1941. If we don’t get our debt under control soon things will get ugly. We could go into another Depression.
Ironically, corporations are sitting on record levels of cash reserves – liberals call it “hoarding” – because of the uncertainty in federal fiscal policy and where it will lead. Businesses simply don’t know if they need to hold on to that money to pay increased taxes. They won’t know that until the government comes up with a clear strategy to handle its own debt.
The uncertainty began with President Obama’s vilification of big business that continues to this day… expanded with the mucking up of federal regulations with the Dodd-Frank Wall Street Reform Act last year whose real financial impact nobody has figured out yet… the uncertainty caused by the Bush Tax Cut debate last December which was not resolved but only extended… and now the protracted debate on how the government will solve its budget and debt problems.
All these things have a dramatic effect on business finance so they are holding onto reserves rather than re-invest in new growth right now because they are pretty sure they will have to shell out big bucks. They just don’t know how much yet.
Business is in wait-and-see mode.
Then you have some on the far left who call for taxing off the current cash reserves to pay government’s daily expenses now and then, as some suggest, tax their ASSETS as well as their profits to pay government bills as a long term solution to the nation’s debt problem.
In other words, some people think we should make businesses sell off their physical assets to pay taxes! How can jobs be created and an economy grow when you do that?
Taxing assets is the wrong solution at the wrong time and would produce the wrong result.