Sunday, November 7, 2010

I'm not an economist, but I am sleeping at a Holiday Inn Express

The Fed announced it's QE2 program last week that calls for the central bank to purchase $600B of long term US treasuries from banks.  The Fed feels that with short term rates at rock bottom, QE2 will lower long term rates by 200 - 500 basis points.  So the Fed will pump more money into the economy hoping that businesses and consumers will borrow and banks will lend because banks borrow in the short term and lend over the long term.  Will it stimulate the economy?  Doubt it, though there's a chance exports may increase.  It will piss off other central bankers who will view it as a US ploy to further devalue the $ while devaluing their current US holdings.  It will also spark fears of inflation which will reduce the value of the dollar and reduce our debt and possibly spur consumers into spending if they think the value of their money will fall.  There is also the possibility that this extra liquidity will create a new wave of asset bubbles.  If the Fed's job is to monitor inflation and achieve full employment, then this move seems to be WAY off the beaten path at this time.  Very risky monetary policy.  Stay tuned for opinions on fiscal policy.

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