"Very low interest rates drive investors into equities in search of higher yields. This supposedly produces a “wealth effect” whereby the 10 percent of Americans who own about 80 percent of stocks will feel flush enough to spend and invest, causing prosperity to trickle down to the other 90 percent. The fact that the recovery, now in its fifth year, is still limping in spite of quantitative easing is, of course, considered proof of the need for more such medicine."
Oops - changes at Fred since this was posted have broken this graph. |
In the 1970's, inflation fluctuated between 6% and 14%. Equities showed no gains between1973 and 1982, even though inflation was excessive. These are nominal equity values, so in real terms, equities were seeing huge losses. It was only after the Fed Funds rate was held at very high real levels and inflation dropped below 5% that equities entered the long term bull market of the 1980's and 1990's.
The reason that Fed accommodation has recently coincided with bullish economic experience and very low inflation is because it's the right policy to have, and because the economy is desperate for loose policy. If equities rise due to loose money, then why didn't they skyrocket in the 1970's?
Further, there is nothing "trickle down" about this. The rise in the stock market, as I have shown above, has nothing to do with decreasing yields pushing money into Wall Street. And, since when are tight credit markets good for the middle class?
"Easing serves two Obama goals."
"It enables the growth of government by deferring its costs with cheap borrowing."It would be pretty hard for easing to enable government to defer its costs with cheap borrowing, since Treasury rates have shot up with each round of QE.
"And it redistributes wealth: By punishing savers, it effectively transfers wealth from them to borrowers."Do you know what's another word for "savers"? "Wall Street". It's amazing how a synonym can change your feelings about something. So, within 2 paragraphs, Will has averred that monetary easing both creates a "wealth effect" for asset owners and also punishes savers. The mechanism he claims QE works through is lower rates, which, if true, would actually help existing savers who own fixed rate bonds. He is worried about creating inflation, which would help debtors and homeowners. And, in any case, the QE's have neither produced lower rates nor excessive inflation. This is like towing a trailer backwards, down the wrong lane of a freeway, in reverse. There are so many things wrong here, it is hard to know which way is which. But, the crazy thing is, Will is the one with the conventional take on this issue. The whole country seems like they are towing their trailers backwards down the wrong side of the freeway in reverse.
He then proceeds to compare Janet Yellen's coming relationship with the Senate Banking Committee to Arthur Burn's relationship with Richard Nixon. I suppose Nixon serves as a reminder that apathy is hardly the worst trait we could ask for in a president. As suboptimal as it is, apathy about monetary policy might be the best policy we could hope for from President Obama. When he briefly decided to care about it, he was pushing for Larry Summers, who was ready to slay all George Will's phantom monetary demons.
PS. This is an interesting question about markets, too. When markets insist on performing in opposition to continued consensus expectations to the contrary, is it because Wall Street is full of fund managers secretly investing against the op-eds of the nation's newspapers? Or, are markets finding the right prices even though the conscious consensus of the traders themselves is wrong? I suspect Hayek's "Use of Knowledge in Society" is in high gear. And, I suppose there is always the possibility that I am wrong.
George Will understands monetary policy every bit as well as Barack Obama understands insurance. And they're both equally confident in their ability.
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