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  1. #1
    Uniqueorn William K's Avatar
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    Default Quantitative Easing : Good or Bad idea?

    http://www.slate.com/id/2271828/

    So the Fed is turning to a policy known as "quantitative easing." Essentially, the Fed is using its license to print money. (Technically, it doesn't have a license, but it knows someone who does.) On Nov. 3, the markets expect the Fed to announce that it has decided to create somewhere between $500 billion and $1.2 trillion that it will then spend to help goose economic growth. Rather than buying space in office parks or forklifts, though, the Fed—which purchases only government-backed assets, like bonds—will probably pick up long-term Treasury debt. The strategy has been termed "QE2" because it is the second time the Fed has used this arcane monetary policy tool. The Fed makes money ex nihilo, pulling it out of thin air rather than taking it from its coffers. Then, it pushes the money into the economy by buying up assets from banks.
    Basically printing more money and possibly devaluing the dollar. I'm no economist, so does anyone think this is a good idea? And how will this affect the global economy?
    4w5, Fi>Ne>Ti>Si>Ni>Fe>Te>Se, sp > so > sx

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  2. #2
    Senior Member captain curmudgeon's Avatar
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    Default

    my econ prof was talking about the strength of the dollar vs other currency. long story short, i think he said that strengthening the dollar would not be a good idea, but i can't remember for sure.

  3. #3
    nee andante bechimo's Avatar
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    Shell game. It dilutes purchasing power of the USD that everyone holds, while using it to buy up diluted debt.

    Banks already have excess capital so injecting more into them, won't necessarily cause them to loosen the purse strings. They've been stung pretty badly through bad press about their loose credit policies. Why they would want to run the risk of loaning out more without stringent policies in place, seems to be an unrealistic expectation of the Feds. Also, no one is convinced that the double dip recession won't happen, particularly considering how the Banks have started a wave of foreclosures. Or maybe that's it, the Feds attempting to appease the Banks so they don't foreclose.

    Not sure if the insignificant amount of $1/2 - $1.2 trillion will directly impact on the global economy. What it might do is to lower the confidence level of foreign investors in the USD.

  4. #4
    null Jonny's Avatar
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    It is what is called an implicit tax, primarily hurting those who have significant savings. Any devaluation of the dollar would function as a boost to US exports and potentially US jobs at the expense of domestic demand and buying power. There has been speculation recently that the Chinese have been purposefully devaluing their currency for years in an attempt to generate jobs, exports, and to acquire foreign debt, and some economists suggest that a similar strategy might help the United States out of the recession. The thought is that a devaluation of the currency would boost overall productivity by increasing net exports at the expense of domestic buying power, and once production has increased and overall joblessness has decreased, a readjustment of the currency could switch buying power back to the US. In short, a not entirely ethical (with respect to foreign nations) but potentially beneficial move with regard to the US economy.
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    pathwise dependent FDG's Avatar
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    y'all forget that the dollar is the world's currencies numeraire. everyone wants to keep dollars as reserves, thus QE rules don't work as well as if the US was a closed economy and/or the dollar a normal currency. the amount of generated inflation is usually much lower than what would be predicted by standard models. of course china is the main buyer of dollars, since they're artificially keeping low the value of the renmibi. sooner or later they'll have to "give up" (either directly, or by means of internal inflation, which will mean higher selling price even for export goods), but that doesn't necessarily mean that the dollar will significantly depreciate.
    ENTj 7-3-8 sx/sp

  6. #6
    Oberon
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    There is a fine line that the US doesn't want to cross, and that is the point at which some other currency (the euro, for example) becomes more attractive as a reserve currency than the dollar. The change in our economy leading up to that point might be incremental, but the change in our economy following that point will be rapid and likely irreversible. It would be what the Chinese would call "interesting times."

  7. #7
    Uniqueorn William K's Avatar
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    Thanks for the replies. Just can't wrap my head around the fact that half a trillion is an insignificant amount of money
    What I do worry about is that if the US can use it, then every other central bank in the world can do this too. At the moment there seems to be coordination between the US, UK and Japan, but the wild-card here is obviously China.
    4w5, Fi>Ne>Ti>Si>Ni>Fe>Te>Se, sp > so > sx

    appreciates being appreciated, conflicted over conflicts, afraid of being afraid, bad at being bad, predictably unpredictable, consistently inconsistent, remarkably unremarkable...

    I may not agree with what you are feeling, but I will defend to death your right to have a good cry over it

    The whole problem with the world is that fools & fanatics are always so certain of themselves, and wiser people so full of doubts. ~ Bertrand Russell

  8. #8
    pathwise dependent FDG's Avatar
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    Quote Originally Posted by William K View Post
    What I do worry about is that if the US can use it, then every other central bank in the world can do this too.
    No, no. If any central bank were to use it, it would generate high levels of inflations, since other currencies are not numeraires.
    ENTj 7-3-8 sx/sp

  9. #9
    Uniqueorn William K's Avatar
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    Oops. I meant, every other central bank can 'retaliate' or 'throw the rule book away'. Not necessarily using QE.
    4w5, Fi>Ne>Ti>Si>Ni>Fe>Te>Se, sp > so > sx

    appreciates being appreciated, conflicted over conflicts, afraid of being afraid, bad at being bad, predictably unpredictable, consistently inconsistent, remarkably unremarkable...

    I may not agree with what you are feeling, but I will defend to death your right to have a good cry over it

    The whole problem with the world is that fools & fanatics are always so certain of themselves, and wiser people so full of doubts. ~ Bertrand Russell

  10. #10
    Senior Member Kephalos's Avatar
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    I am almost certainly wrong, but I thought that quantitative easing was a response to a sudden increase in the demand for money: the demand for money increases, that raises the value of money (prices fall) so in order to maintain a stable price level the central bank expands the supply of money.

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