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« ETF Update: The Lure of Brazil | Main | The Quest for Yield »

October 10, 2010



Mike C. -- The point of my article was a familiar theme for me: Most people have a strong opinion without really understanding the issue.

Does quoting someone at length provide more insight on this argument? I don't know.

Meanwhile, if you are going to quote the opinions of those on the Fed, I am curious about why you are going for the dissenters?

As you know, I like to predict what the Fed will do. It is the profitable way to go. Do you think you have an edge by going with the minority?

Just curious...


Mike C

Regarding quantitative easing, I'm going to modify/supplement my answer, but I am still going to cheat and copy the smart kid's homework:

Thomas Hoenig, the president of the Federal Reserve Bank of Kansas, on Tuesday launched his most strident attack yet against QE, arguing it would not help drive an economic recovery.

“There is simply no evidence the additional liquidity would be particularly effective in spurring new investment, accelerating consumption, or cushioning or accelerating the deleveraging that is hopefully winding down,” Mr. Hoenig told an audience in Denver.

Mike C

In three sentences, please explain what quantitative easing is, how it is implemented, and what it is intended to accomplish. (n.b., slogans like "printing money" do not constitute an acceptable answer.)

I'm going to cheat :) :

Richard W. Fisher

When the Federal Reserve buys Treasuries to drive down yields, it adds money to the financial system. In sharp contrast to the depths of the Panic of 2008, when liquidity had evaporated and we stepped into the breach to revive it, today there is abundant liquidity in our economy. The excess reserves of private banks parked at the 12 Federal Reserve Banks exceed $1 trillion. Nonfinancial corporations have an aggregate liquid asset ratio running at a seven-year high; cash flow from current production is running above total investment expenditure; cash as a percentage of market cap is extraordinarily high. Credit availability remains a challenge for small businesses, but only 4 percent of small businesses surveyed by the National Federation of Independent Business reported financing as their top business problem.[4] And reports of lagging receivables or the stretching out of payment terms that were so prominent only one year ago in the corporate supply chain have become as scarce as hens’ teeth.

The vexing question is: Why isn’t this liquidity being utilized to hire new workers and reduce unemployment? Why is it that, as pointed out in Alan Greenspan’s op-ed in this morning’s Financial Times, the share of liquid cash flow allocated to long-term fixed asset investment has fallen to its lowest level in the 58 years for which data are available?[5] If current dramatically high levels of liquidity and low interest rates are not being harnessed to add to payrolls or expand capital expenditures, would driving interest rates further down and adding further liquidity to the system through Fed purchases of Treasury securities induce U.S. businesses and consumers to get on with spending it?

So, it is indeed true that some economic theories would lead one to believe we can shake job creation from the trees if we were to further expand our balance sheet. Yet, to paraphrase the early 20th century progressive, Clarence Day―the once ubiquitous contributor to my favorite magazine, The New Yorker, and author of one of my all-time favorite films, Life with Father―“Too many (theorists) begin with a dislike of reality.”[6] The reality of fiscal and regulatory policy inhibiting the transmission mechanism of monetary policy is most definitely present and is vexing to monetary policy makers. It is indisputably a significant factor holding back the economic recovery.

n performing a cost/benefit analysis of a possible QE2, we will need to bear in mind that one cost that has already been incurred in the process of running an easy money policy has been to drive down the returns earned by savers, especially those who do not have the means or sophistication or the demographic profile to place their money at risk further out in the yield curve or who are wary of the inherent risk of stocks. A great many baby boomers or older cohorts who played by the rules, saved their money and have migrated over time, as prudent investment counselors advise, to short- to intermediate-dated, fixed-income instruments, are earning extremely low nominal and real returns on their savings.

I continue to hold a sizable profitable position in gold.


Verge -- Good point. I should have said "down slightly" since the numeric values are accurate.

Thanks for catching this.



Al - I understand your viewpoint on dealing with wasteful spending, but I didn't really miss this point. I just don't like to take up political arguments. I am trying to evaluate the level of economic growth by looking at employment. For that purpose, a government job counts.

I hope you understand my approach.



This does not sound right : " 87% of our 55 ETF's have a positive rating, up from 95% two weeks ago." Or am I missing something?

Al Brockman

You state:Government services are an important part of the US economy. We all use and consume the work of teachers, firefighters, police, military, social security administrators, government health professionals, and many others.

You miss the point.Yes, the services are necessary but not at the present cost. Many government workers' unions have priced their members' services at outrageous levels. Take a look at teachers - their working hours; their pensions; their benefits. There are many ways to provide the same services at lower costs. I administered public sector contracts for 30 years and know whereof I speak. There are so many ways to reduce the cost of public education, i don't even know where to start. Just a simple example - increase class size from 20 to 22 and you immediately reduce teacher salary and benefit costs by about 10 percent! And the impact on children is between minimal and zero.
The same thing goes for public works, police and fire and all the other "necessary" public services.

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