Quantitative Easing Explained… (I Really Mean It!)

On the stockguy22 forum a member gave me a link to the following website.

I am going to say that this a misguided video. It is misguided because it mixes commentary with supposed facts. This is what kills me with respect to our current society in that we don’t quantify anything, or look at the facts. Yes these folks are trying to be funny, but having seen their other videos produced by these folks I get a distinct cutting undertone.

So without further ado I will start to pick apart the arguments made in this video.

The Fed is printing money


Yes the Fed is printing money, but the real question is if it is bad or not needed? The Fed is buying Federal treasuries and those treasuries are from the US government, which then takes that money and distributes it through the various social programs.

Of course many will say that the government is out of control and spending too much. Looking at their numbers I completely agree that the federal government is spending too much. No debate there, but where are you going to cut? A committee that was willing to say that things need to be trimmed was ripped apart by the government.

Amanpour asked Conrad if he would be willing to get on board with one of the more controversial parts of the proposal; eliminating so-called tax expenditures. Conrad said he’d prefer to raise revenue through other means.

Oh now is that not interesting. Whenever somebody comes up with something specific somebody in the government says, “lets do it another”. But that other way is?

“Fundamentally, if we’re going to raise revenue, I don’t think the way to do it is to raise rates. I think the way to do it is to eliminate some of the loopholes that exist in the system,” the senator said.

Yes, “eliminate” some undefined loophole. Good one! This is why Fed has NO CHOICE but to print money. The American people are not willing to make the hard cuts, but are more than willing to complain about how bad the Fed, and the government is.

While fewer than half of Americans say they favor raising taxes or cutting benefits to address the economic problems they foresee from the government’s major entitlement programs, 62% do support one approach or the other. Specifically, 12% favor both options, 30% favor a tax increase but not benefit cuts, and 20% favor benefit cuts but not a tax increase. Still, the data show that there is little consensus on how to address a problem most Americans see looming, and more than one-third of Americans (35%) oppose both options. [full report found here]
Read more: http://www.businessinsider.com/entitlements-cake-2010-10#ixzz14DRMv7RE

If the Fed were not to buy the treasuries the bond vigilantes would go after the US and thus starting a spiral of higher interest rates, and less social programs.

Many will say good, and I say to close this point are you willing to dramatically cut back your military, cut spending and increase taxes? Just like Greece you know. Because if you have magically found a recipe to cut spending tomorrow I am all ears. And I am not talking about cutting taxes so businesses and people can spend as that takes time. And between then and now the Fed HAS, and I REPEAT HAS to buy treasuries and print money.

Deflation is good…

This argument is completely incorrect because it implies that your wages will remain where they are today. In an idealized world that would work and be a good thing, but the reality is that is not how it works.

Let me illustrate with an example of where deflation became very very problematic in recent times, Germany. Germany had been living beyond their means for decades, and the Germans were not willing to admit it. When the walls fell and Germany was reunified the catalyst for Germany’s self-destruction was started. Germany ran out of money about a decade later, and had very little to show for it.

As a result jobs were scarce, and to keep the few jobs they had the Germans halted their wage increases. Combined with the East bloc production costs were dramatically lowered and the new slogan became “Geiz is geil”. Translating, “cheap is cool”. But the lower prices had a hidden costs in that companies would not pay their employees more. People were required to cut wages as the “Geiz is geil” mentality swept across Germany. This was only natural because German companies had to cut somewhere, and that somewhere is in wages.

This spiral is in full force in America. For example an America company is not even thinking of hiring their own people.

Ryan Janssen, CEO of New York based SetJam.com started his company 18 months ago. His first challenge was to build a team of quality developers but, according to how he sees the tech scene in New York, finding the developers who work in lighter, agile frameworks was not so easy. The startup-oriented Django/Python/Scrum skill sets are hard to find in a city where majority of programmers work in more enterprise-friendly methodologies, with .NET, Java and C++ as core languages.

Today SetJam employs six full-time developers and three quality assurance specialists, all of them based in Poland (pictured), while the CEO, business people and project manager are located in the New York office, 6 hours away in terms of time zone difference. Though it might sound odd for a young company to delegate its entire product development to people found somewhere in the Internet who live 4300 miles away, Janssen says he is extremely happy about the way the work gets done in the team.

Just think about this for a moment? This guy is saying that it was impossible to find 6 programmers somewhere in America to code for reasonable priced conditions? I doubt that! Yet what is left in America are the overpaid managers. But the argument from many will be the American consumer benefits because they get cheaper products. Yes but what if there are no consumers? Then even free is too expensive. I am not trying to be a socialist, nor am I talking about erecting trade barriers. I am talking about being sane and a realist. I am talking about how I find it completely improbable that this work could not be done in America.

This starts what is the so-called deflationary cycle and it is extremely dangerous, as is the inflationary cycle. People while initially benefiting from deflation will there after suffer from it. What made the situation worse in Germany is that people kept holding off big purchases because they thought, “oh I can get it cheaper in the future”. This is why Bernanke wants inflation as he wants people to stop sitting on their money thinking that tomorrow will provide a cheaper opportunity to purchase.

While you might say that now Germany is for the better, I would argue yes, but only because German deflationary cycle eventually stopped. Though the cost of it was devastating for the German population.

CPI is lower, but Food and Energy is higher

Many people critique the fact food is not included in the calculation of inflation. While I am more interested in inflation figures that includes food I can understand why the Fed does not want it. It all goes back to elastic demand and whether or not there is true inflation.

Let me illustrate on why food or energy inflation can be taken out of the equation.

Let’s say for one reason or another pig farmers decide to jack up their pork prices by 100%. If the meat market were made of beef, pig, and chicken farmers then there would be an overall inflation of 33%. Sounds bad, right?

Not so quick because and here is where the Fed has a point, will the consumer accept the 100% price increase in pork? Answer is no, as the consumer will not buy pork, and will buy either beef or chicken. Thus that 33% inflation increase in meats is absolutely irrelevant in the context of inflation.

Now what about energy? After all we always need fuel, right? Again not so quick, this only affects those companies that are required to spend monies on fuel like corporations. For if consumers are affected with higher fuel costs they drive less, or buy more fuel efficient vehicles. It does affect trucking companies, and they can either swallow the costs or pass them on.

And here is the entire crux of the argument by the Fed. If there is inflation companies will increase their prices and hence the CPI included companies will show the inflation. This price can be due to the increase in wages or running costs. Thus inflation does not need to include food or energy.

In Conclusion

The fault of the US money supply, or the deficit does not lie in the Fed, or the socialist programs of Obama. The fault completely lies with the people of America. Just like in the early 90’s the fault was completely with the people of Germany. The following image is an assessment of where the deficits came from:

Three things killed the US: Tax cuts, Iraq War and Medicare Part D. So in the end if you want to mock something then mock who is responsible for problems. Don’t mock the person (Bernanke) who has his hands bound and is trying to do the best thing in a very very bad situation.

Posted in General Trading