QE is meant to stop deflation, not make it good or more tolerable. Deflation is bad for two reasons.
One, people and businesses would hold off on purchases as long as possible, since their cash would be growing in value. This would kill jobs.
This doesn’t describe the technology sector in general or consumer electronics in particular. Computers, smartphones, televisions–these items are all more expensive today than they will be tomorrow, yet sell they do.
More significantly, this should hold true for all kinds of investments, especially liquid ones. If people and businesses will hold off on purchases as long as possible in a deflationary environment where the cash they hold is growing in value, they should also hold off on purchases as long as possible in an inflationary environment so long as they are able to park it anywhere–including the stock and bond markets–where a real return can be realized. Why spend today what will be worth more tomorrow?
In Lowe’s framing, cash is another asset among many that is expected to yield a real positive return. In an inflationary environment, cash–forex markets notwithstanding–is off the list, but there are other assets serving a similar function. People and businesses hold off on discretionary purchases in favor of ultimately growing their cash holdings in this way now.
More simply, if cash yields a positive return, as is the case in a deflationary environment, some people and businesses will spend it on purchases while others will hold it as an investment. If cash yields a negative return, as is the case in the inflationary environment, some people and businesses will spend it on purchases while others will convert it into non-cash investments.
Two, debtors would be penalized, including especially the largest debtors, large businesses that can only operate with access to credit. This would destroy private credit and kill even more jobs.
An artificially inflationary environment crowds out private credit. If the Fed allowed the funds rate to float, you and I and tens of millions of people like us would provide credit. Because the Fed and the putatively private financial system it underwrites restricts private credit to risky borrowers–think credit card companies and payday loan operations–we’re left providing credit to commercial banks for negative real rates of return or engaging in asset speculation.
We can reframe debtors being penalized in a deflationary environment to private creditors being rewarded in such an environment. That’s how we get a healthy, resilient economy, one where equity markets move based on real shifts in productivity and innovation rather than on the arbitrary moves of a central bank. When bad employment and poor productivity numbers lift markets on anticipation of what kind of intervention the revealed weaknesses in the economy will lead to, it’s not the sign of a salubrious system. It’s the sign of a sick one.
And our economy is very, very sick. A strong economy would not be on the brink of catastrophe over a temporary partial shutdown, just as a financially stable family would not be on the brink of catastrophe if the husband found himself out of work for a couple of months.
I’ve long been mocked as an economically illiterate boob for conceptualizing an individual’s financial situation as a microcosm for that of a nation’s. The US gives China treasuries, China gives the US real things. America trades pieces of paper for medicines and iPhones and cars. It’s brilliant, as brilliant as my swiping this piece of plastic to get medicine, an iPhone, and a car. No, I can’t pay for those things and I don’t know how to make them, but as long as this card doesn’t decline, who cares?
We’re about to find out. The Fed is promising to purchase everything from junk bonds to preferred stock. Since the Fed has a blank check, this essentially amounts to private asset seizure, something the Fed is supposed to be prohibited from engaging in. Just as an organization sets up a corporation to do what the organization is prohibited from doing, though, the Fed will get around this prohibition by underwriting other government institutions to do the buying on its behalf. We’ll be told that the two are independent from one another, just as we’re told the Fed and the Treasury are independent from one another.
Included in this Fed promise to buy everything, of course, are treasuries. There couldn’t be a better time for China to unload. My hunch is that as the dollar buckled under QEternity this week, the Trump administration was made aware of how tenuous the situation is. On a dime we went from defiantly talking about “Chinavirus” to this:
Just finished a very good conversation with President Xi of China. Discussed in great detail the CoronaVirus that is ravaging large parts of our Planet. China has been through much & has developed a strong understanding of the Virus. We are working closely together. Much respect!
— Donald J. Trump (@realDonaldTrump) March 27, 2020
The counter is that there is no limit to the size and scope of monetary and fiscal stimulus. The Fed creates whatever it needs to. There will be no price inflation as a result. To the contrary, if the Fed doesn’t go balls to the wall, it risks deflation, and we can’t have that.
The only consequence will be increasing deficits, and those don’t matter. Everyone wants dollars and they always will, even those who supply us with everything we need when they are in the midst of severe economic contractions of their own. Though their production is declining and more of what they do produce will be consumed by their own people, they’ll still keep sending us stuff in return for IOUs that obviously cannot ever be paid back in anything other than more IOUs. It’s IOUs all the way down.
Since we’ve turned the audacity up to eleven, recall what we’ve been saying for years now about the coming decline and fall of the American empire:
I think following an economic collapse and currency crisis, we’ll have a gubernatorial candidate run–and win–on his state peacefully separating from the rest of the United States. It will be the beginning of the end of the US as a putatively unified single political entity.
Yet another thing the Fed will be doing is absorbing municipal bonds, propping up state pensions, plugging budget shortfalls, and in a hundred other ways underwriting a host of state and local obligations the economic collapse has rendered utterly insolvent. The blank check will lead to some states becoming even more fiscally irresponsible than they already are. Other states will start looking for the exits.