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Old 12-28-2011, 07:39 AM
Parallax Parallax is offline
Join Date: May 2011
Posts: 219
Default Re: Katherine's pants are on fire

Originally Posted by badhatharry View Post
Well, I'm glad I was able to spot the difference between fiscal and monetary stimulus. And certainly one should be distinguished from the other but doesn't the Treasury borrow from the Fed to finance the debt? And who will be paying that back? Aren't the taxpayers the borrowers in this case? So you're definitions aren't quite so black and white.
Let me add several things:

1. Quantitative Easing (QE) is basically Fed trying to simulate negative interest rates.

2. You can do QE in different ways. One thing Fed tried (in QE 1 & QE 2) was to increase its balance sheet by buying more securities (treasuries and MBS). What it is doing now (aka Operation Twist) is to sell short term treasuries and buy long term ones of equal value. So the size of the balance sheet is not changing with this stimulus.

3. Buying MBS is specially useful as it will lower the mortgage rates more than Fed buying treasuries. This is basically directed at reviving the housing sector: right now the 30 year fixed rate mortgage stands at 3.98% and the 15 year fixed rate is 3.29%. The lower those numbers the better for the housing market.

4. As far as I know the Fed has not bought treasuries directly from the US government anytime recently, they always buy it on the market. Not that there is anything wrong with the Fed getting the bonds directly.

But other than that, this monetary stimulus sounds like a win-win. Make money out of thin air, juice the economy and have someone else pay for it! No down-side at all.

So, according to this guy, in apparently lots of ways, the taxpayer does end up eventually paying for monetary expansion.
What is wrong with a win-win? You would not tell your doctor: "you mean this pill fixes my liver and I can drink again? But there is no such a thing as a win-win so the pill can't work!" You would be just happy that you will get to drink that vintage Bordeaux red you bought 6 years ago.

Monetary stimulus has one cost: inflation. If you measure since 2007 inflation has been well below the 2% per year target since. So even if there is some extra inflation for a few years there has been no cost (well except for the suffering of all those unemployed b/c some people at the Fed are slow to act).

I should also mention that monetary stimulus will devalue the dollar against other major currencies. And this is a good thing! A weaker dollar means cheaper US goods, which means more exports and more jobs. Why else do you think all the emerging economies complain when the Fed goes for another round of stimulus? Because they know their exports to US will take a hit. Why do you think China keeps its currency artificially low compared to the dollar? To keep the price of Chinese exports to US down.
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