Jun 7th 2011, 17:06 by Buttonwood
THIS is the final month for the QE2 programme and, with the economy slowing, there is already talk of QE3 being required. My colleague on Free Exchange has little doubt that QE2 worked, proclaiming that
I am not quite so sure; when Ben Bernanke unveiled his plans for QE2 in August last year, the unemployment rate was 9.5%, now it's 9.1%. Is this an improvement on what might have happened anyway? The counterfactual is hard to prove. The dollar hasn't collapsed but is 6.8% lower on a trade-weighted basis since the start of last August; the equivalent of a modest devaluation under Bretton Woods. As to the inflation point, some would say that emerging market inflation owed something to Fed policy. Certainly QE2 revived the equity market but if it carried Wall Street to an overvalued level (which would appear to be the case if one uses the Shiller p/e), then the effect may be temporary if prices revert to the mean.
It is safe to say that the politcal consensus is not as confident about QE2 as Free Exchange. This may present the Fed with a problem, as neatly summarised by Alan Ruskin of Deutsche Bank.
The Fed is in a no-win situation. There is market chatter that if the Fed does QE3, it is an admission that QE2 did not work...... If they don't do QE3 in the face of economic weakness, it would more realistically be seen as an admission that they do not believe QE works.
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Honestly, if the only thing QE2 produced was a devaluation of the dollar, that seems like pretty fair economic policy. But I hope for less canny intervention from the Fed going forward.
Not doing QE3 doesn't have to be an admission that they think QE doesn't work. It could be an admission that they don't think that *more* QE will work.
the same myopic short term idiocy could be said about massive deficit spending. "hey while we were shoveling money out like there was no tomorrow the economy did slightly better, but now we've stopped, so only a moron wouldn't keep shoveling money out."
then of course tomorrow happens. it makes me angry how blithely dismissive the economist has become about anyone who wants to think about some day that isn't today. as far as I can tell free exchange is LITERALLY saying that QE works only as long as QE is actually going on, like heroin even. and in some kind of sanity deprived stupor comes to the conclusion that all america needs is to be on heroin all the time and it'll be great.
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