The Federal Reserve just bought eight hundred billion dollars of government debt. Conservative talking heads and bloggers are shouting that hyperinflation is just down the road and warn that we will all soon need a wheelbarrow full of bank notes to buy a loaf of broad. The general view in those circles is that Bernanke’s move is more or less an admission that the federal government can no longer pay its bills and the nation is teetering on the brink of a currency collapse.
I admit that huge pile of public debt makes me awfully nervous, but I’m no economist, and a lot of this stuff is obviously scare talk (The economy is collapsing! Buy gold! Buy gold! ). So I’m just going to throw three questions out there in the expectation that wiser heads can provide some balance to all this doom and gloom. Here they are:
Is Bernanke taking a dangerous gamble and setting a terrible precedent?
What are the likely short term and long term consequences of this decision?
What ramifications would a currency collapse in the United States have for the global economy?
I’m not an expert and this is basically a WAG - I think that buying gold/commodities could be a good idea if you are expecting some inflation down the road. I think the QE will eventually lead to some inflation so it’s not a bad idea to do so.
That said, the idea that the economy is going to collapse and gold will save you is misplaced, in my opinion. If the economy collapses then I think we are all screwed and it won’t matter how much gold you’ve stockpiled unless you get out of the country (as I think there will be massive unrest and such).
Complete errant nonsense. The Fed didn’t buy the bonds from the government; they bought the bonds on the open market. The bought the bonds from people who had already purchased the bonds and would have been quite happy to continue holding them.
The Federal Reserve, like all central banks, buys and sells government bonds all the time. It’s one of their most important tools in implementing monetary policy. The only real difference is that with QE2, the Fed is buying longer-term bonds then they normally would.
QE2 is not the harbinger of hyperinflation in the United States. It will lead to some inflation, but that’s pretty well the point of QE2. What everybody screaming about inflation is completely ignoring is that currently inflation in the US is absurdly-- and bordering on dangerously – low. The Fed cannot allow itself to be paralyzed because of nebulous threats of future inflation. The Fed has had a lot of practice in dealing with inflation; when it comes, they can start removing money from the economy.
Nobel Prize laureate Paul Krugman commented on “QE2” two days ago. In summary
Is Krugman (like the Pope ) infallible? Of course not. Is his analytic talent and forecasting track record better than 99% of Dopers who respond here? I think so.
The implicit inflation target for the Fed has historically been around 2%, in the last couple of years the actual rate has been less than 1%. QE2 is an attempt to correct this underinflation. Inflation is a bad thing if it get out of control, but there is no sign of it getting out of control. There are models out there of two equilibriums one high inflation and one low inflation without the possibility of medium inflation, but that is just guesswork. Bernanke is taking a gamble but it is a good one. He is one of the premier scholars of the depression and knows the power of incorrect monetary policy.Not taking action with inflation as low as it is would be an even bigger gamble.
The ironic thing is that Barry O has finally taken some good steps to help the economy and he has waiting just long enough for the new republican congress to get credit.
If so, it will be like the hyperinflation of the 1970s, not a result of fiscal policy but of a rising real external cost to the American economy, i.e., that of imported petroleum.
You do realize that many of these talking heads are paid large sums of money by gold companies, and that their neutrality on this issue might, as such, be more than a trifle suspect?
Even without this, which makes for better radio (especially given the audience):
“There’s a chance inflation might rise to 10 or 12% if the current policy of deficit financing continues.”
“If you don’t kick these bums out, they’ll print so much money it’ll be worse than 1920’s Germany! Run to the hills, stockpile ammunition! And now for a message from our sponsor, Honest Arthurs Bullion and Krugerrand Company.”
But the inflation of the 70s wasn’t hyperinflation, it was plain old regular inflation. We only rarely got into double-digit annual inflation. That sucked hard, but it wasn’t hyperinflation. The only money that literally because useless was the penny. We still use $1 bills. Compare and contrast to, say, Italy, where the lira was worth less than a 1/10th of a penny even though it originally meant a pound of silver, like the British Pound. But even that wasn’t hyperinflation, because it lost its value over decades of inflation, not in months.
The German finance minister thinks you guys suck (‘The US Has Lived on Borrowed Money for Too Long’). As the minister of one of the very few Western economies which are doing ok – at least to some extend, I’m inclined to put my faith more with him rather than some of the dudes responsible for the decisions that got you into the shit to start with. ymmv.
Rune, I bet you money it will work! But 1st, I’ll need to talk to Mr. Lee at Golden Dragon Mercantile Bank to arrange a loan for our little wager.
My maternal Grandfather’s recollections of the night before he emigrated to America on a steamer: he was in bar in Bremen and celebrated his departure with a glass of beer worth 2,000,000 Marks. Didn’t phase this German billionaire…:dubious:
German GDP dropped further than America’s actually. They’re doing better on unemployment but that’s because they have strong unions which prevent people getting fired and socialist worksharing programmes where people work less so there are more jobs to go round or less layoffs.
They’re complaining about our trade deficit and complaining when we take action to cut it. That’s completely incoherent.
Germany and China are pissed because our actions nudge them towards taking a more active role in fueling the recovery of the world economy. They would rather sit contentedly inside their little mercantilist bubbles and export their unemployment to the rest of the world.
As to the OP, since the Fed can’t lower interest rates any further, they’re attempting to drive down long-term rates by replacing long-term debt with short-term debt. That pumps more money into the economy, makes US exports more attractive by depreciating the value of the dollar, and hopefully discourages investors from putting their money into long-term government debt (in favor of stocks and corporate bonds, which are riskier but have higher yields). We’ll see if it actually works.
) infallible? Of course not. Is his analytic talent and forecasting track record better than 99% of Dopers who respond here? I think so.