Quantitative Easing

Paul Krugman wrote a blog post claiming people protested too much about inflation.

And for those who insist that we need to look at inflation in stuff like gasoline, bread, and milk: well, the BLS has convenient average price data, so let’s compare some of those prices to what they were, say, three years ago, when Bush was in the White House and all was well with the world. Over those three years, the price of gasoline has soared by … well, actually gasoline is a bit cheaper now than three years ago. OK, but milk … actually, milk prices are down substantially since three years ago. But it’s true: bread has gone up in price.

Krugman writes that people weren't complaining about deflation lowering the cost of gasoline. That is because consumers were complaining about gas being high and they were right. I'm sure many small businesses were feeling the pinch of deflation. A mom and pop convenience store can see the prices of milk, food and other products decrease. This same mom and pop store owner still haas to pay the same cost for his lease, workers and utility bills.

Tas noted today that another unintended side effect of the Federal Reserve $600 billion is that it could raise the cost of living faster than pay increases. Right now it is an employer's market and there is less worries from companies that they have to give pay raises in order to retain employees.

Krugman is supporting a policy called quantitative easing. The Federal Reserve will buy more buying government bonds, private bank bonds and printing more money. The Federal Reserve needs a bigger cash revenue stream. In economic terms quantitative easing is a "hail Mary" pass. The practice is used after near zero interest rates have not received the intended results. The Federal Reserve have kept interest rates at historic lows and banks aren't lending.

Tas tweeted me that Obama is hoping that a cheaper dollars will increase exports from the United States. China has been so good at increasing their export business by devaluing the yen. If Obama is expecting exporting to take off and banks to start giving out loans before the 2012 general election then he is in for a big surprise. My attitude is much like Tas's. If quantitative easing works then great. Let's just not kid ourselves about the possible side effects.