Easing Into Darkness

The Arab spring has turned to a brutal fall, the president can’t quite decide if the Egyptian government that he helped bring into power is a friend or foe, and there seems to be a similar question in the president’s mind about Israel as it readies for a war with Iran. The folks down at the stock market are happy, though, because the economy’s so lousy that the Federal Reserve has decided to hand it a whole lot of newly-printed money.

Citing all the familiar economic doom and gloom, a statement from the Fed on Thursday announced that it will buy $40 billion of mortgage-backed securities every month for an indefinite period of time as part of a third round of “quantitative easing” that will wind up increasing the money supply by more than $3 trillion. Given that the Fed also signaled its intention to keep interest rates at their current historical lows for the foreseeable future, making bonds and other fixed-income investments a mug’s game, much of that money will quickly make its way to Wall Street.

This made for a big rally on the big boards, naturally enough, but it’s hard to see how it will do much for a real economic recovery on less fashionable roads. The first two rounds of quantitative easing clearly didn’t work, or there wouldn’t be any need for a third one, and there is no convincing theory to explain why this effort will be any more successful. There’s an old adage that the third time’s a charm, but we can find no scientific basis for this notion, and our thrice-married friends assure us that it’s bunk.

What’s troubling the economy is not a lack of pieces of paper printed with green pictures of federal buildings and former officials, as these are already in greater abundance than ever, but rather a lack of incentives for people to start moving them around. Until the tax codes, regulations, and prevailing political climate all signal that Americans can expect to keep most of what they earn, the Fed can roll out the dollars at a Weimar-era rate and the smart money will still be seeking a safe haven far offshore.

The Fed’s actions entail considerable risks, too. One of the reasons that people are sitting on their money is a reasonable expectation that the government’s about to go broke, and although Fed Chairman Ben Bernanke said in a Thursday news conference that his plan won’t affect the budget it is unlikely that it will induce any non-Tea Party politicians to cut back on their spending. Should the plan actually stimulate the economy, whatever goods and services are created will be chasing so much money that a ‘70s-style inflation rate might prove a best-case scenario. More dollars mean a weaker dollar, as well, and could even threaten the reserve currency status.

None of the negative effects will be immediately apparent, however, unless you’re a retiree who was suckered into bonds and other traditional retiree-age investments, and by the time the worst of it hits the election will be long past. Any short-term benefits that might occur will be more immediate, on the other hand, but surely it would be paranoid to think that politics had anything to do with it.

— Bud Norman