Is QE really bad?

[ER_Hopeful]

I have some general understanding of how the FED works and the concept behind fiat money leads to inflation etc. There're a lot of media out there that criticize the FED for creating money out of thin air in general as well as using the same approach to solve financial crisis(past and present).

The question I have is Is doing nothing and letting it free fall better? is there a better alternative to QE? The media seems almost silent on this other than going back to the gold standard (but don't really want to turn this thread into another gold standard debate)

 

[Spock]

It either goes boom now, or it goes bigger boom later due to an even bigger pile of debt.
Extend and pretend can either buy time to prepare or, if it lasts long enough, until I'm dead and don't care.

 

[Lakewood90712]

Not if you now have acess to massive amounts of near zero rate money. Or , if the mid size to large company you work for uses a lot of credit.

 

[DrRoy]

It either goes boom now, or it goes bigger boom later due to an even bigger pile of debt.

My understanding is that with QE or electronic creation of money, it is not held debt in the usual sense. The fear has always been that this will cause inflation, but we have not seen that from the QE during the Great Recession period. That experience has led the Fed to do more, faster, this time around. I was not sure at all back then, but this time I do believe that doing nothing would be worse.

 

[atmsmshr]

Not a history scholar, but an overgeneralization of parallels in modern US history.

1929 - 1932. Pretty weak banking system in USA. A lot of 'moral hazard' theorists who preferred to let weak economic entities die - survival of the fittest. Trade barriers. Partly as a result, stock market collapse, economic depression, deflation.

Post WWII. Incredible sovereign debt world wide. In the US, the Fed kept interest rates low for decades, in part to allow the economy to grow in relation to the war bonds and still be able to service the debt. Inflation eventually takes off when Nixon is in office. Inflation is finally throttled by the Fed in early 80's - that was painful.

Financial Crisis - Europe takes the route of austerity and scolds southern economies. Fed eventually takes the QE approach and buys up US Government bonds by the trillions - expanding money supply. US economic recovery leads Europe. Very little inflation - in fact inflation consistently undershoots the Fed target. Perhaps some of that is because Congress keeps issuing debt (Treasuries) at a record clip and soaking up the excess liquidity. Also because exporters like China accept dollars for goods sold, effectively importing USA inflation. Certainly some of the excess got stuffed into the stock market.

Pandemic - The Fed proves to be the only agency in the world to act quickly enough to keep markets from freezing up. They 'put money in the window' of the bank to keep confidence and liquidity. Necessary? Well yes - the whole house was on fire. Let's worry about the water bill next month. World wide, the dollar remains a stable value for countries. The Euro is starting to show cracks. The Yen hangs in there. And what elected world leader is going to trust the communist Chinese government anytime soon?

Stay tuned for how it turns out. My money is on the Fed almost getting things right as they balance inflation and job; but a long recovery until people come back out into normal habits again.

 

[Spock]

My understanding is that with QE or electronic creation of money, it is not held debt in the usual sense. The fear has always been that this will cause inflation, but we have not seen that from the QE during the Great Recession period. That experience has led the Fed to do more, faster, this time around. I was not sure at all back then, but this time I do believe that doing nothing would be worse.

I assert we had massive inflation during the Great Recession... but not in consumer prices. The inflation was in stocks and bonds.
Follow the money. The GR QE $ went into cheap loans to those closest to the spigot and trivial bond rates. Instead of using the funds for capex and growth, companies used most of the $ for stock buy backs. The $ never reached Joe SixPack to drive up consumer prices.