Thursday, May 3, 2012

John Taylor on the Folly of QE

Excellent interview with John Taylor where he uses plain old good sense to explain how the foolishness of current monetary policies will cost us dearly later:
You don't believe purchases by the Fed have any long-lasting influence?

Let's suppose something even more misguided: For QE3, the Fed decides to buy the stock of publicly traded companies in order to lift stock prices. Equity prices would rise. But how long could that last, unless the earnings of these companies rise proportionately? Price-earnings ratios would become unsustainably high, and the market would soon correct for the Fed's aberrational influence. The same dynamics work for the bond market.

Apart from not helping, quantitative easing has also hurt?

Speaking of the stock market, notice that stock prices have become sensitive to whether or not the Fed will implement QE3. I see no reliable relationship between equity prices and quantitative easing, but the fact that many people believe in it is at least a source of concern. Another important concern is just how the Fed will manage to sell off all the mortgage-backed securities and medium-term government bonds it now holds on its balance sheet without causing disruptions in the market.

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