A Few Basic QEII Questions

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Mr. Fri's picture
Mr. Fri
Status: Silver Member (Offline)
Joined: Feb 21 2009
Posts: 220
A Few Basic QEII Questions

I know QEII is the buzz and everyone is saying it’s bad and will lead to inflation.  However, I have a couple of basic questions:

1) If “everyone knows” it’s bad, leads to inflation and will destroy the dollar, then why is the Fed doing it?  I’m not sure but I think the answers are:
      - They want to make the trade deficit more favorable for the US.  I’m not sure why they would want this short-term fix.  Surly they know all the other countries will inflate their currencies to follow the US.  Maybe the relative head start will keep us ahead.
      - It’s an attempt to give the economy more money as a short term stimulus so that it will get businesses and jobs going again.
      -  The Fed doesn’t have a choice so they do it even though they know it’s bad.  (Not sure why they wouldn’t have a choice, maybe if they didn’t the dollar would crash too fast.)

2) I don’t understand why QEII will bring so much inflation to the dollar.  Because of defaults on debts (homes, etc.), shouldn’t we have a loss in the amount of dollars in the system?  I would think that $600 billion from QEII would be small compared to the amount of money that’s been destroyed due to defaulted debt.

I realize the economy is complex and there are no easy answers but PLEASE keep your answers simple and not technical.  (I’m good in science but not economics.) AND, I don’t want to start an inflation/deflation debate.  In my second question I’m looking at the amount on both sides and wonder why the smaller side (putting more dollars into the system) is more of a concern than taking dollars out of the system.

Woodman's picture
Woodman
Status: Diamond Member (Offline)
Joined: Sep 26 2008
Posts: 1028
Re: A Few Basic QEII Questions

I'm not technical in economics either, but my take is

1.  While the official announcement is the Fed is targeting a certain level of inflation, the Fed may be positioning itself to monetize deficit spending now or in the future, to avoid a failed treasury auction or rising interest rates.

2.  Inflation could be significant if driven by a loss of faith in the currency, irrespective of money supply. 

 

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