Quantitative Easing – What Good Will It Do?

Previously in Brucenomics I’ve written about Robert Kiyosaki’s book series Rich Dad Poor Dad. In it, Robert distinguishes between “assets” (things that bring money into your pocket) and “liabilities” (things that take money out of your pocket.)

Fittingly enough, in the early part of this century when he began his series, Kiyosaki used houses as an example. Is Your House an Asset? Here’s what he said. A house you buy for yourself is a liability. A house you buy to rent to others at a profit is an asset.

It’s the same thing–a house. It’s the way a thing is used is that creates different outcomes for its owner. And as it turned out, houses as liabilities set off the financial crisis for their owners, then for the owners of mortgage-backed securities (MBSs), then for investors in collateralized debt obligations (CDO) derivatives based on those MBSs, and then for all the rest of us.

All too often when times get tough, the first impulse is to hang onto your money (or for many people their credit cards) and not spend. Robert Kiyosaki’s message is basically that this is not the right thing to do. What you need to do is look at what assets you possess (including that house or credit card) and see how they can bring money into your pocket.

Of course, you have to look at your liabilities too. Yes, those expensive coffee drinks or cigarettes or other “luxuries” might have to go. But skimping and saving alone is not enough. You also have to figure out how to use what you have left to make more. This is the meaning of the word, “entrepreneur”.

Those young boys selling delivery of mixed drinks with little paper umbrellas in Mexico to tourists on the beach or offering pirated bestselling books in India to commuters driving to work are entrepreneurs. We Americans have forgotten that that kind of entrepreneurship is what built America.

Fear and ignorance make people want to hoard money in a declining situation. On the other hand, the spirit of entrepreneurship (i.e., hope, or in some case just plain desperation) says instead, “Think Bigger.”

The people who have forgotten the meaning of entrepreneurship the most are the very people who say they believe in “business” and the “market.” These are the people who are now screaming for government spending and taxation to be halted. They want the government to stop using “fiscal policy” to stimulate the economy.

No matter if government spending and taxing is focused on national assets like education, infrastructure, health, and technology and it will return far more to us than it costs! They don’t want it. But those assets that fiscal policy focused on are assets which would make America grow and become richer.

The alternative offered to “fiscal policy” is “monetary policy” i.e., pumping money into the economy. But this is simply another form of government spending!

Using quantitative easing to fight financial doldrums

Unfortunately the government is being forced by those who oppose fiscal investment in America’s future to turn to even more printing of money. Next month the Fed is likely to do that with another round of “quantitative easing.”

Quantitative easing (QE) happens when a central bank of a country buys back its own government bonds from banks and other large investors. This is equivalent to printing money. It puts more money into circulation by paying those who hold long-term government bonds when they sell their bonds back to the government.

These bonds, are overvalued right now and are bound to decline in price. That will leave future taxpayers on the hook for bonds’ future loss of value. These will be the very kind of losses that those opposed to the “wasteful stimulus spending” think we’ll be escaping through use of quantitative easing.

In other words, quantitative easing means our government will now be spending to buy future liabilities rather than buying assets for the future.

What will we get for the taxes we spend on QE2?

There is no way of knowing if those large investors (banks and corporations) who get the money for selling their bonds back to the government will use that money – or simply sit on it.

Francesco Guerrera estimates that big businesses are hoarding more than $600 billion of cash in the U.S., along with $400 billion more abroad. If larger companies aren’t using the trillion dollars they have now to create goods, services, and jobs, why should we imagine they’ll make use of even more money? Guerrera asks this very question in his article, “Better tax treatment would help release trapped cash” (Financial Times, Oct 19th, 2010 p. 16).

Guerrera remarks that, “Much of the cash imported in the 2004 [tax] amnesty [for American corporate cash abroad] went to investors through dividends and share buy-backs, rather than on capital expenditure and research and development. What’s even more questionable is why $400bn or so in extra cash [now] would prompt companies to open the spending faucets.”

This is exactly what we might ask about the anticipated effects of quantitative easing. No wonder nobody but the Fed thinks the idea of “easing” restrictions on the quantity of cash in our economy will help much of anything right now!

For more on fiscal vs. monetary policy, see Joseph Stiglitz “It is folly to place all our trust in the Fed” Financial Times, October 19, 2010 p21.

Copyright © 2010 Nancy K. Humphreys