September 23, 2012
Quantitative easing (QE) is the Federal Reserve Bank’s attempt to stimulate our economy. So far QE has boosted the stock market but not employment enough.
The strategy of running inflation higher than interest rates for an extended period, in an effort to reduce government debt loads in real terms, is policy makers’ “Plan A.” Inflation helps paper over problems in a debt-dependent economy. Inflation has proven to work for heavy borrowers like us.
Between 1945 and 1955, the U.S. was able to reduce its public debt-to-GDP ratio from 126% to 62% with the help of persistently high inflation and relatively low interest rates (GDP is the value of everything the U.S. produces in a year). We just went over 100% again for the second time in the country’s history.
So the Fed is at it again with more quantitative easing called QE3. They’re buying house mortgages so the lenders can lend the money again. Trouble is, the dollars are being created at the stroke of a computer key instead of earned. That leads to more dollars chasing the same amount of goods and services we produced before the computer games.
Inflation expectations, the yield differential between interest on private debt and inflation-protected Treasuries, just rose to its highest level since 2006. The 10-year expected inflation rate rose to 2.73% last week, approaching its all-time high of 2.78% reached in March 2005. The surge in inflation expectations has been accompanied, as usual, by a weaker dollar and higher gold prices. Higher prices will follow.