Steve Ludlum ‘Wires’
A quick look across the Internet suggests some apprehension and uncertainty over @$ … er, QE. Maybe it’s warranted, maybe not:
Tyler Cowen is ambivalent but imports a positive report from Japan – which has indeed avoided a depression since its bubbles collapsed in the early 1990’s. Since EU has depressions as social phenomena – class warfare waged with cash – the coherent Japanese society is probably secure from these sorts of things, anyway.
Paul Krugman was – and likely is – more positive, hoping for a touch of inflation. I suppose this gears in with his (pointless) China bashing. Maybe someone out there is paying Prof. Krugman to bash! Krugman has been astute about liquidity traps (which neutralize the effects of adding money/base money to the economy.
Mark Thoma, like Prof. Krugman is recently silent on the subject having been ambivalent in the past. It makes sense that the Keynesians would favor adding money to combat deflation. This is the rationale of Bernanke and New York Fed governor, Bill Dudley. From this it would appear that QE 2.0 is a done deal.
Deutsche Bank is also ambivalent except to promote stocks. How long with the stimulus for equities last?
Zero Hedge issues a clarion call for gold as maven Tyler Durden believes QE will annihilate bond yields, putting pressure on the dollar. Maybe it will and maybe not.
Bruce Krasting doesn’t see where the rewards justify the risks that the Fed is monetizing too much outstanding public debt.
I personally think whatever the Fed and other central banks do is irrelevant. The Bank of Japan has already embarked on its own version of QE while the
Bank of England is considering it.Will adding more cash money solve the problems that have been building for decades? Not hardly. The only thing that has a hope of success is stringent energy conservation.
Instead of throwing money at problems, a large gasoline tax should be implemented – for the first year, then a second large gas tax implemented the following year. I know, I know, taxes imposed during severe recessions are counterproductive – not this time! This recession – to be a depression as the anger builds – is the consequence of resource waste. Wasting more resources makes the economy worse not better.
Just like a finance economy awash in money cannot be ‘improved’ by forcing more money on it.
More automobiles and more roads to drive them on: what will the outcome be? A suggestion can be gathered from the residential real estate industry which has been the ‘leader’ in demonstrating to economists what happens when a good does not provide a profitable return on the costs paid to put that good into service.
The above chart estimates the market value of today’s median-priced house over a 40-year period. The thick red line represents real house prices. For those unfamiliar with economic terminology, “real” prices are prices that have been adjusted for inflation. The thick blue line represents nominal house prices. The thin lines represent the pre-bubble (1970-1999) trend lines.
This graph shows the change in nominal home prices vs. the change in nominal rents since 1983. Over the long run, home prices and rents should increase at roughly the same rate.
Believe it or not, the return on petroleum put into service is practically zero! If you drive a car you don’t earn anything by driving unless you are a taxi or a truck driver. ‘Going to work’ is like ‘going to Disney World’. It is economic only from the standpoint that fuel is sold to you. Using fuel is wasting fuel. Fuel is the ‘loss leader’ that enables the sales of cars, roads, parking lots … and houses.
Real estate demonstrates that when the system- wide return on petroleum use decreases the price of petroleum itself will decline. Return generates the funds needed to bid the price. Adding more cars would seem to add demand but adversely effects return elsewhere in the economy including in other parts of the fuel use system. Drivers can indeed afford to pay for the gas, but they cannot afford to buy a house. House price collapse leads to less funds available to bid up the price of the rest of the ‘stuff’.
This is one reason the world is going broke. People spend on the wrong things which cuts into overall returns. It’s not just the USA or the developed world. China and other 3d world countries are spending on autos and the American Way as fast as they can. As returns from their ‘mis- investment’ falter, their ability to bid up prices – of fuel or anything else – will falter as well.
In the end, all will turn their fluttering hearts upward toward the Federal Reserve, and the wind will carry them away …
