A bunch of big name economists have sent the following to the Federal Reserve:
We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.
Oh dear! Robert Murphy has posted an excellent post on the scary concerns about debasement.
But that’s just one side of the story. A lot of other big deal economists agree with the plan to print money. Alan Blinder wrote this:
Here’s the first Economics 101 question: When central banks seek to stimulate their economies, how do they normally do it? If you answered, “by lowering short-term interest rates,” you get half credit. For full credit, you must explain how: They create new bank reserves to purchase short-term government securities (in the U.S., that’s mostly Treasury bills). Yes, they print money.
But short-term rates are practically zero in the U.S. now, so the Fed wants to push down medium- and long-term interest rates instead. How? You guessed it: by creating new bank reserves to purchase medium- and long-term government securities.
That sounds pretty similar to garden-variety monetary policy. Yet critics are branding QE2 a radical departure from past practices and a dangerous experiment.
So, what are we to think? A lot depends upon what you think of central banking, monetary theory, and the nature of money. In other words, most of us don’t have opinion.
Here’s what we know: if a central bank prints too much money, you get inflation and currency debasement, all other things being equal. But all other things aren’t equal – ever – so the real world is always a multi-factorial problem with many factors being unknown and unknowable.
Conclusion? I still have some work ahead to think this thing through.