Archive for November, 2010

QE II – WILL THIS SHIP STAY AFLOAT?

Friday, November 12th, 2010

Let’s see if I, as a small business man, understand this further monetary easing. Our government is going to add $600 bil to the monetary supply by buying federal debt instruments from banks. This on top of $300 bil quantitative easing last spring. The stated goal is to put cash into the banking system so banks can lend it to small businesses.

Fallacies? I’ll list a few:

1. What will prevent the banks from simply buying back more federal debt, vs. making loans? Oh, that’s right, some bureaucrat has thought of that and we shouldn’t worry about it.
2. Will the continuing explosion of federal debt cause buyers of those instruments to demand a higher coupon rate, which would also have the effect of making it even more advantageous for banks to reinvest in them? That is, while deflation is the present concern, when will we “snap over” from worrying about deflation to dreading inflation?
3. Will this QE money, the potential inflation it brings, and potential higher interest rates per 2 above, cause businesses to be even more cautious in committing to hire people and make investments to expand their businesses? Note I did not say that it will cause inflation. Just that it increases the risk.
4. Just what is the nature of the risk small businesses perceive now, the risk that is causing them to be very conservative? My answer: they do not know what the rules are.
5. What will encourage small businesses to go in to the bank and try to borrow? I mean, those small businesses that a bank might think has a reasonable chance of repaying their loans. Of course: put a definition on the unknown risks they fear.

So great idea, government. Don’t do what has always worked – making the business environment more certain and more attractive. Go with the stuff that has not worked last year, the year before, or a number of times in the past. Go with an agenda for redistribution, not for growth and job creation.

Jim