Konichiwa!
Yesterday, while Congress and the media were obsessed with the $165 million AIG bonus outrage, the Fed decided to create another $1.2 trillion of U.S currency. Numbers like this can seem absurd. How much bigger is $1.2 trillion than $165 million? Think about what gaining or losing $1,000 would mean to you. $1.2 trillion is to $165 million as $7 million is to $1,000. That’s how much more important the Fed’s action was.
Financiers have a fancy name for what the Fed did – “quantitative easing”. When you hear some kind of gee-whiz phrase in the finance industry that sounds kind of like something you understand, but somehow isn’t really clear, then it’s a lead pipe cinch that that you’re being had. Quantitative easing means that the Fed creates new currency out of thin air, and then uses it to buy assets. The moment after this happens nothing has changed about the real economy except that there is more currency. What do you think happens then? More dollars + the same assets = more dollars per asset = inflation.
If you’re in a deflationary period, the idea is that this is good because you head off some of the deflation. The hope is that this makes banks more likely to lend, “gets the economy moving again”, etc. Does this sound at all familiar to you?
Welcome to Japan.
Thanks for the reminder to get my refi done. Here’s to 30 year fixed mortgages — paid back with worthless dollars! (Now what should I buy with my soon-to-be-worthless rainy day fund?)
— Tony Comstock · Mar 19, 08:47 PM · #
I guess I don’t see why all the people taking the contrarian position of defending the AIG bonuses don’t see the elementary truth that when you reward incompetence, you ensure incompetence in the future. That’s the sort of thing most economic conservatives rail against, unless we’re in a situation like this, when those being rewarded are the captains of industry. So rewarding incompetence, when it’s the result of a union contract, is some terrible threat to the union, but rewarding incompetence when it’s million-dollar bonuses to AIG’s executives is just a sad reality we all have to deal with. I find that an inescapable facet of economic conservatism, that the importance of eliminating bad economic incentives is in inverse proportion to the power and wealth of the person receiving that incentive.
— Freddie · Mar 19, 09:00 PM · #
That’s not really fair, Freddie. There are plenty of conservative commentators and politicians who are taking the populist position on the AIG bonuses.
Plus Jim’s point in this particular post is not to defend the bonuses (though he has done so elsewhere), but to observe that the outrage and attention they are receiving is disproportionate to their actual effect compared to other economic-policy shenanigans like the inevitably inflation-stoking activities of the Fed.
— Blar · Mar 19, 11:09 PM · #
Jim,
What if the new dollars aren’t employed chasing those same assets, but instead just sit in the bank as some kind of security blanket for shell-shocked consumers, would we still get inflation?
Is it possible that all this new money will simply go toward simply moving the US savings rate to somewhere north of zero and neither increase agg. demand thus avoiding inflation?
— Jeremy R. Shown · Mar 19, 11:38 PM · #
One death is a tragedy…
— Tony Comstock · Mar 20, 12:08 AM · #
“Welcome to Japan.”
If America in 19 years is as peaceful and pleasant as Japan is today, I’ll be very happy.
— Steve Sailer · Mar 20, 12:26 AM · #
Steve,
I take it you have never lived in Japan, and worked for a Japanese company (a state department job and Saturdays at the American Club don’t count). The only way you’ll be very happy is if you grew up Japanese in Japan, and long to return to that culture which is the world’s polar opposite of America’s culture.
— Douglas · Mar 20, 12:48 PM · #
xkcd posted another way to compare large numbers today:
http://xkcd.com/558/
“Dear news organizations: Stop giving large numbers without context or proper comparison. The difference between a million and a billion is the difference between a sip of wine and 30 seconds with your daughter, and a bottle of gin and a night with her.”
— william randolph · Mar 20, 07:15 PM · #