24 April 2011

Quantitative Dis-easing

Filed under: Culture — ktismatics @ 11:45 am

I’m reluctant to write about politics or economics because I don’t know that much about them. But I don’t know much about ontology or education or the origins of human language either, so what the hell…

According to this article in the NY Times, Federal Reserve Chairman Ben Bernanke acknowledges that the Fed’s “quantitative easing” interventions haven’t had much effect on the average American’s economic situation. The idea as I understand it was for the Fed, comprised of a bunch of privately-owned banks, to buy a lot of debt issued by the Federal Government. This sudden increased willingness to lend would reduce long-term interest rates in financial markets, which in turn would stimulate the private sector to borrow more cheap money to expand production capacity. This expansion would include hiring more US workers, thus reducing unemployment. In addition, the banks’ purchase of Federal debt would pump hundreds of billions of additional dollars into circulation. More total dollars reduces the value of any particular dollar; i.e., the currency is devalued relative to other world currencies. The weaker dollar would effectively reduce wages paid to US workers, and reduce the prices of US-made goods on the world market.

However, even before the quantitative easing was enacted it seemed evident that industry was in no mood to borrow. The bank bailout, pushed through Congress in the aftermath of the housing crash, was justified as a credit easing move, inasmuch as the “toxic assets” held by the mortgage lenders wouldn’t collateralize any new lending. But even before the bailout the long-term interest rates were low, and still the corporations weren’t borrowing. In the two-plus years since then American businesses have amassed huge profits, which presumably means that they have enough cash to finance expansion without borrowing heavily. And yet the US unemployment rate hovers near 9 percent.

The implication seems clear: profits have gone up largely because US unemployment has gone up. American workers are expensive relative to third-world workers. More profits can be generated by laying off American workers and rehiring elsewhere in the world — which is what has happened. Meanwhile, the only big borrower has been the Federal government: the national debt has doubled in less than ten years. This is the new money that’s been used to keep American demand — and prices — growing.

During the current Republican resurgency, panic is mounting about government debt being out of control, about how 42 cents of every dollar spent by the Federal government is used to pay interest on the debt and so on. Now Bernanke is setting the stage for discontinuing the quantitative easing, which means that interest rates on government borrowing are about to increase, which will increase the panic level. Surely the bipartisan political solution won’t be to raise taxes or (God forbid) for the government to default on its loans, but to cut government spending. More hundreds of thousands of people who hold government jobs or contracts will be cut loose, flooding the job market, increasing the unemployment rate, reducing the wage rate. At some point the private sector’s rehiring of American workers will generate as much marginal return on investment as further expanding third-world production capacity. Maybe that recovery will happen in two years, as the experts contend. I wonder if it will always be two years away.



  1. From today’s news:

    Sales of homes worth over $1 million, which account for about 1.5 percent of total U.S. sales, have risen in most states so far in 2011. Realtors, brokers and others in the housing industry report the first bidding wars for expensive homes since the crash. “There is a surge of confidence among high-end buyers and we’re unfortunately short on inventory,” said Pamela Liebman, chief executive of New York property firm The Corcoran Group. Her firm saw a doubling in the sale of luxury co-ops, worth more than $10 million, in the first three months of 2011.

    At the bottom end, homes are also on the move as investors pay cash for foreclosed properties to rent them out.

    It’s a different story in the middle of the market. Properties worth between $100,000 and $500,000 make up more than 60 percent of U.S. housing. Sales in that category in March were down across every region of America from the same month a year earlier, when tax breaks were propping up demand.


    Comment by ktismatics — 25 April 2011 @ 7:33 am

  2. That’s a good way to end the article. American economic theory has always been to build a structure that makes a small percentage of people rich, and then their wealth will trickle down. I mean, in certain historical periods this has been less the case, but it still seems to be the primary approach in our short history as a nation.

    CEOs are already pulling in big bonuses; the housing market is booming for expensive homes; corporations are making money again and not paying taxes; some of the biggest corporations are in fact getting refunds (presumably on taxes paid in the past); and the rich (and, curiously, even the not-so rich) are clamoring to keep the taxes on the rich low, even give them more tax breaks if possible…..all the while unemployment stays high and people in the middle and lower classes are struggling.

    One is tempted to be astounded that the American public sits and takes it; one might also be tempted to be confounded that the rich continue to push for more wealth, even in the midst of recession and suffering. But history teaches us that the rich can get pretty disconnected from reality, and the American workers (and especially the middle class paper pushers) seem to have been trained to view poor people as guilty of sloth and to view those who are unemployed as lacking motivation. This stigma certainly has to be overcome.

    At some point, things will snap. If enough pressure builds up, then a real change of our economic system might be the result, after the aftershocks.


    Comment by Erdman — 25 April 2011 @ 7:50 pm

  3. As a side note…I’m glad you blogged about this. More people need to blog intelligently about the economy and inequality. There are some who just rant, and there are others who are intimidated by the topic. We need to have voices, though, who wisely reflect on the reality of our state of the union.


    Comment by Erdman — 25 April 2011 @ 7:54 pm

  4. Maybe your little town in Alaska is buffered from the global economy, Erdman, being more reliant on local business and the traditional fishing economy. I know that’s one of your interests: local, sustainable, off the grid. I don’t know what use there is in trying to work through the intricacies of monetary policy, but from time to time I find it intriguing. Given the sustained healthy profitability of the corporate sector it’s hard to justify the ongoing talk of double-dip recession and restoring confidence in the economy and so on.


    Comment by ktismatics — 25 April 2011 @ 10:23 pm

  5. “One is tempted to be astounded that the American public sits and takes it; one might also be tempted to be confounded that the rich continue to push for more wealth, even in the midst of recession and suffering.”

    Subscribers to the shock doctrine contend that the right is able to respond quickly to crises, and even to anticipate impending crises, shaping and timing their interventions so as to steer widespread but inchoate public discontent in a direction of the right’s choosing. I.e., recession is itself a tool that the rich wield in continuing to push for more wealth. I think there’s something to this contention.


    Comment by ktismatics — 26 April 2011 @ 9:09 am

    • I agree. I think there’s something to that. That’s a theme that would align with Howard Zinn’s take on the history of the U.S.


      Comment by Erdman — 26 April 2011 @ 7:07 pm

  6. Of course the biggest and most direct beneficiaries of quantitative easing were the banks, who borrowed hundreds of billions from the Fed for virtually nothing in order to lend to the US government at a higher interest rate. Here’s an article (hat tip to I Cite for the link).


    Comment by ktismatics — 28 April 2011 @ 11:51 am

  7. Eerdman what’s with the new avatar, I thought you were writing from the marketing relations of Paramount Pictures or somethin’, advertising the new Chronicles of Narnya!


    Comment by center of parody — 29 April 2011 @ 8:36 am

    • It’s the advertising and marketing firm that I’ve hired to manage my blogging image and identity. The guy in the picture is not me, he’s much better looking, a computer generated person, actually. What we’re going for is sexy but intellectually credible. It’s sort of some kind of merger of Johnny Depp and Michel Foucault.


      Comment by Erdman — 29 April 2011 @ 7:28 pm

  8. I like the avatar, Erdman — pretty artsy work for a photo you probably took of yourself on your computer. I agree about the Howard Zinn, which on your recommendation I’ve been reading intermittently. I now have my own copy of Zinn’s People’s History of the US, it having been bequeathed to me by a homeless guy who was moving from Boulder to Oregon and found it too heavy to tote all that way.

    I’ve been waiting for my personal notification of your new Facebook status, inasmuch as I have no presence in that venue. Inquiring minds want to know.


    Comment by ktismatics — 29 April 2011 @ 7:53 pm

  9. The guy in the picture is not me, he’s much better looking, a computer generated person, actually. What we’re going for is sexy but intellectually credible. It’s sort of some kind of merger of Johnny Depp and Michel Foucault.

    Actually I thought ‘Jesus meets Ralph Fiennes’


    Comment by Center of Parody — 30 April 2011 @ 2:26 pm

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