September 15, 2012

Desperate Argumentation?


..view (opposing QE) only makes sense if you believe that the problem with our economy lies on the supply side – that workers lack the incentive to work, or are stuck with the wrong skills, or something. And that’s just not what the evidence says; instead, it points overwhelmingly to an insufficient overall level of demand.

The above appears to me as the most naked attempt at pulling down straw-men.

"Insufficient overall demand" appears to me a simplistic, even false, view of a situation where demand for existing private sector goods stands saturated. The only pent up demand for these goods is with people that are unemployed, and they obviously have insufficient income and neither propensity nor worthiness in the eyes of the bank to get credit to satiate this demand.

Does QE help this situation at all? The QE worshippers believe that doing this thing will raise inflationary expectations, while reduce the real cost of borrowing for investment and consumption. So both of these will take off. People that have been sitting at the sidelines of investment or consumption will now take the plunge, lest their savings be lost to raging inflation.

But if the demand is already saturated with those that have income, what for will there be real investment, and who's there to borrow and spend that has the ability to borrow?

The things where there is less supply than need is in healthcare and public interest goods, especially teachers and schools. Only the marriage of unemployed to the areas of deficit demand can deepen the economy. If the skills don't exist domestically, importing professionals for these areas will help, the unemployed can then find absorption in service and recreation sectors that'll need to expand to grab the business from the skilled newcomers. In that situation, no QE will be needed. Just low'ish interest rates will suffice for investment to take off, and will harden as they do take off.

Meanwhile, there is QE, like doubling down on Tylenol when the headache has been diagnosed to be brain tumor. Not sure if it'll hurt like an overdose of medicine meant for some other situation, but it's not going to 'help', other than forcing people to take their money from their petty yield (I fondly remember the time a few years ago when FDIC-backed Internet Banking gave me a good 4.7%, term CDs a little higher) savings accounts into the stockmarket, and then lose it in the next crash. No one till date has succeeded in forever sustaining a bull run in share and property prices forever. The manipulations with monetary acrobatics, to lean on "wealth-effect" spending have always eventually crashed. I am not even sure how much of fictious wealth-effect spending one can get. Maybe one could buy the iPhone 5 (something one will buy even without a QE3) and take one extra vacation every year. Other than that...?

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