After the first QE (quantitative Easing) round where the Fed bought $1.75 trillion of debt between early 2009 and early 2010, now the Fed will be buying more bonds: $600 billion of Treasuries between now and next June.
After a while since the last QE, there has been some results. Dollars is depreciating against other major currencies. Real yield on ten-years inflation indexed Treasuries bonds falls 0.5 %. And share prices has been up by 14 %. All of these are signs of successes with respect to what the QE is supposed to do. Several channels described above, including increase spending through greater wealth of households, increase trade balance through lowered price of the dollars, can translate this success of QE into real activities of the economy - a question that is still open to be answered.
I personally think that the government should not have put so much money into the economy. I think that a better solution would have been to lower taxes.
ReplyDeleteTax cuts might actually increase the budget deficit and consequently, decrease national savings, the supply of loanable funds and the level of investment, especially at a point where government spending on the military is substantial (c.f Reagan deficits).
ReplyDeleteMeanwhile, Bernanke is right in resorting to this last option. There are risks involved but if the interest and inflation rates are closely monitored by the Fed, it might be a success.