It has been a very long break while I write the first part of a new book. When you are spending all day working on writing, the idea of writing a blog as well becomes rather less attractive. Nonetheless, with all the fun things going on in the world, I am going to see if I can get back into it after the summer break.
Joe Stiglitz (you will need a subscription) has come out swinging with an attack on what has been dubbed ‘QE2’ or a second round of quantitative easing of the US money supply. What is best about his analysis is that it points out the fallacy that monetary interventions are costless (whereas fiscal interventions raise public debt, as we all know). Stiglitz points out that QE1, which involved the purchase of around US$1 trillion of US government bonds and mortgage securities will have a cost down the line as US bond prices fall (or, put another way, as interest rates rise to more normal historic levels). With QE2 set to be of the order of as much as US$2 trillion, the quantitative easing expected to be confirmed in November will involve long term public costs of an even greater magnitude.
Stiglitz points out that fiscal interventions (can) have clear benefits. Of course there is the money you throw down in welfare benefits to those who lose their jobs. But over and above this, you build schools, railways, new energy infrastructure, etc, etc, which has a long term benefit to society. Things may not be the same with the long-run public cost of unconventional monetary policy.
What Stiglitz doesn’t do is to say where the gain from quantitative easing investment is likely to end up. The answer, surely, is that much of it will end up in the hands of the rich. The expectation of QE2 is already driving a big rally in the US stock market. Where QE1 probably prevented rigor mortis in the banking system during the initial shock, QE2 is mainly telling the financial system that stock prices are likely to rise, if only for ‘liquidity’ reasons. From a bullish stock market, the rich benefit disproportionately. The poor see little or no benefit, consistent with a 40-year trend in the US to make the rich richer relative to the poor.
The real gainers from QE2, I think, are going to be the decidedly rich and the super-rich. This is because, unlike the loose monetary policy after 2001 which fed housing bubbles, this time the liquidity is going to drive asset bubbles and stock market bubbles in developing country markets in which ordinary people do not much play. A flood of cheap dollars, passing through the hands of hedge funds which serve the rich, is headed for the stock markets of Thailand and Indonesia, condo purchases in Hong Kong and Singapore, Latin American local currency government bonds, and so on. The financial managers of the already-rich know how to trade these markets, ordinary Europeans and Americans do not.
There was an Asian stock market bubble in 1991-4 during the last great Euro-US recession. But that was largely based on ‘discovery of Asia‘ overexcitement. The emerging markets bubble we should expect next year will be based much more on domestic US monetary policy (remember that interest rates were high in the early 90s). It may serve, indirectly, to force some warranted currency realignments by pushing up the value of currencies that have been artificially held down by government interventions in east Asia. But above all, within the US, the experience is likely to see a large transfer of wealth from the taxpayer to the already opulent.