Don't double-down your bet on Goldman's latest assertion that QE2 is good for the economy. Last month, chief Goldman economist Jan Hatzius said it was bad. Goldman said before that the Fed would need to pump $500 billion to $1 trillion via QE. Then they said it would be at least $2 trillion, but really they would probably need $4 trillion. Now they say we don't have to worry about inflation and that QE will work:
Goldman Sachs Group Inc., which warned a month ago that the U.S. economic outlook was “fairly bad” at best, said the Federal Reserve’s decision to increase bond purchases will spur growth.
“Downside risks to the economic outlook have declined significantly,” Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients. “As we move through 2011, the lagged effects of the renewed monetary easing combined with a gradual slowdown in the pace of private deleveraging should result in a substantial pickup in GDP growth.”
The Fed’s decision will lower the risk of deflation, Hatzius wrote.
Hatzius defended Fed Chairman Ben S. Bernanke when others including E. Gerald Corrigan, former president of the New York Fed, have voiced concern that the central bank actions will lead to a surge in costs for goods and services. Bernanke on Nov. 6 dismissed the idea the central bank will increase prices to higher levels than it prefers.
“The widespread hostility to the Fed’s actions is misplaced,” Hatzius wrote in his e-mail, which he distributed yesterday in New York. “The slack in the system is so enormous that U.S. inflation is unlikely to become a problem for years.”
Hatzius’ outlook has improved from a month ago, when he said the U.S. economy faced two main scenarios, neither of them good:
“A fairly bad one in which the economy grows at a 1 1/2 percent to 2 percent rate through the middle of next year and the unemployment rate rises moderately to 10 percent, and a very bad one in which the economy returns to an outright recession,”
he wrote to clients on Oct 6.
Now he gets a couple of bits of good news (private employment up and a positive in the ISM manufacturing index) and he does a 180. The news really isn't all that good. There are other positive signs, but none of them in my opinion will act in a timely way to revive employment significantly.
Ben Bernanke believes the same thing. At a Fed conference at Jekyll Island, Georgia--the famous place where a meeting occurred in 1910 among prominent bankers which is seen as the real birthplace of the Federal Reserve Bank--he defended his QE actions:
"There is not really, in my mind, as much discontinuity as people think" in the path the Fed is currently following, the central bank chief said. "This sense out there, that quantitative easing or asset purchases, is some completely far removed, strange kind of thing and we have no idea what the hell is going to happen, and it's just an unanticipated, unpredictable policy—quite the contrary. This is just monetary policy," Mr. Bernanke said. ...
Mr. Bernanke explained "we are not in the business of trying to create inflation," and "I have rejected any notion that we are going to try to raise inflation to a super-normal level in order to have effects on the economy." But because the Fed is "equally committed to both sides of our mandate," the central bank should also avoid having prices fall below levels consistent with price stability, he said.
"If inflation is declining and continuing to decline, at a minimum we should not be satisfied," and should view current price pressure levels as "a signal more should be done." ...
"We see an economy which has a very high level of under utilization of resources and a relatively slow growth rate," Mr. Bernanke said. "The standard considerations suggest we should be using expansionary monetary policy, and that was the purpose of the action" taken last week, the chairman said.
I don't think Mr. Hatzius or Dr. Bernanke has it quite right about inflation. Inflation has nothing to do with "slack" in the system. They confuse factors of supply and demand for inflation. Inflation is, always has been, and will be an increase in money supply by the Fed. Otherwise, how does he explain the periods in the 1970s when we had high inflation, yet capacity utilization was low?
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This is a complex topic. I believe this is the Fed's Hail Mary pass. Stay tuned.
I will soon be coming out with an article explaining stagflation and why I think that's the logical result of QE.
Disclosure: No positions