In his column “Me and Sarah on the QE2”, Gil Smart attacks the Federal Reserves initiative of “quantitative easing” as follows:
“But there are some big downsides to the move. In flooding the system with new money, the value of existing money falls. Because your government, see, doesn’t want you sitting on savings… So the Fed is basically kicking you in the pants: Don’t keep cash on the sidelines while the dollar fades! Spend it or call a broker.”
WATCHDOG:
As Smart later acknowledges, the amount of inflation is uncertain. In fact, there may be no inflation whatsoever so long as much of the economy remains dormant and unemployment and near-unemployment hover around 15%.
What Smart doesn’t recognize (or appreciate) is that “quantitative easing” is a form of ‘Beggar your neighbor’ policy, an attempt to make USA goods cheaper as compared to foreign goods and thus increase exports and generate employment. As we learned when such practices were adopted as a run up to the great Depression, this leads to counter measures by other nations which can negate the Feds’ action…or even start a downward spiral of the value of all currencies and actually prove harmful.
As described earlier, the Fed’s action (which its leaders even acknowledge) is like a “Hail Mary” in football. They are putting ball in the air because we are running out of time to get people back to work and conceivably avoid a “double dip” and Congress refuses to provide fiscal stimulus through a second Recovery Act. Whether the ball is caught, intercepted or hits the grounds… no one knows.
What is tragically not understood by the majority of the public (and thus constrains our elected representatives) is the only way to stop deficit spending and begin the process of reducing the proportion of national debt to the Gross National Product is to bring back prosperity. First you take the medicine (deficit spending), you get well, you get back to work, and then you pay down your debts.
Growl. Not for Smart. But for the publics economic ignorance and those who exploit it for political gain.
Editor, Your scenario, the mantra of socialist economists, sounds reasonable, until you realize that never have, or will, governments find the discipline to repay debts. With the typical Keynesian mantra, you plead for the government to continue purchasing power destroying policies. It is unarguable that when the citizens of a country allow its government to have a fiat currency, that all roads ultimately lead to inflation.