Dan Mitchell’s Comments on Quantitative Easing

CATO scholar and economist Dan Mitchell has given his assessment of why quantitative easing is a bad idea. His remarks will be ignored by the main stream media in stark contrast to anything Paul Krugman writes about that is reported as the gospel. Mr. Mitchell is cautiously right and has a solid understanding of economics and Krugman is almost always wrong and believes in the old fairy tales of an Englishman who should have written fiction novels instead of pursuing economics as a profession. One graduated Georgia and one has a Nobel Prize. If you want Krugman’s view go to the White House web site or the New York Times. In this blog we want to leave the witch doctors to the main stream media and concentrate on real economics and economist.
Mr. Mitchells reasoning is as follows:

CATO scholar Dan Mitchell should have won the 2008 Nobel Prize but he believes in free markets

“There are several reasons why this is a bad idea and one potential argument why it is a good idea.
* It is a bad idea because rising prices are the inevitable result when there is more money chasing the same amount of goods.
* It is a bad idea because it assumes that the economy is weak because of low interest rates. That is nonsense. Interest rates already are very low. Trying to drive them lower in hopes of stimulating borrowing is like pushing on a string.
* It is a bad idea because you don’t solve bad fiscal and regulatory policy with bad monetary policy. The economy is weak in considerable part because of too much spending, new health care interventions, and the threat of higher taxes. You don’t solve those problems by printing money, just like you don’t make rotting fish taste good with ketchup.
* It is a bad idea because the easy-money policy of artificially low interest rates helped create the housing bubble and financial crisis, and “hair of the dog” is not the right approach.
* It is a bad idea because no nation becomes economically strong with a weak currency.
* It is a bad idea because it may lead to “competitive devaluation,” as other nations copy the Fed’s misguided policy in hopes of keeping their exports affordable.”
To follow up I was amused at Donald Trump’s interview with Greta Van Susteren on Fox News. The Donald was complaining about the bad Chinese and their unfair trade practices. He was arguing for a 25% tariff on all Chinese goods imported into the United States. I just had to laugh at his biases in favor of his American business buddies and ignorance (?) of the plunging dollar. Even without QE2 the dollar has dropped a staggering 13.5% in the last 5 months. If the Donald wants a 25% increase in the price of Chinese goods well we are more than half way there. You really want tariffs at this time Donald? He’s an idiot when it comes to economics.

The Philips Curve is a Keynesian fairy tale from the past that our current Federal Reserve Chairman Ben Bernanke believes in and was most likely his justification for QE2

Some “experts” predict this cheapening of the dollar will lead to a 20% devaluation. That would mean the dollar index which has dropped from 88.5 five months ago to 76.5 today would plunge to 64. Ouch! Unchartered territory and certainly would fit into Obama’s “spread the wealth” anti colonialist philosophy. A weak president supporting a weak dollar policy with his appointee Ben Bernanke doing the heavy lifting.
One thing is absolutely certain is that the QE2 policy will cheapen the dollar conservatively 4%. That means 4% more for gas and all other imports. A 4% tax on every man, woman and child with no representation or impute into this arbitrary decision. Ben Bernanke and his buddies just decide to tax everyone 4% and that’s final.
Dan Mitchell states that the only justification provided by his monetarist buddy is:
“* The only legitimate argument for quantitative easing is if more money needs to be put in the system to counteract deflation. In other words, if the Fed focuses on its one appropriate responsibility – price stability, and if there is a legitimate concern of falling prices in the future, then an “easy-money” policy today could offset that future deflation.”
I think this misses the mindset of Bernanke. Bernanke is a student of the Great Depression and John Maynard Keynes. Bernanke probably does believe in the Phillips Curve which states that there is a trade off between inflation and unemployment. As Mr. Mitchell correctly points out this is ludicrous when you have massive federal spending and the misallocation of resources that accompany that spending. Combined with massive federal intrusiveness into the economy with health care and financial regulations no amount of inflation will cure the problem of a decaying economy. At best it will provide a short lived economic expansion followed by inflation and a even worse long run economic decline. To put it bluntly this QE2 stimulus could make the top ten Federal Reserve blunders of all time. This doesn’t even take into account the foreign policy implications such as the Chinese getting just a little pissed off seeing the United States willfully and purposefully cheapening its dollar.
Ben Bernanke is the wrong Federal Chairman at the wrong time in history. Washington needs more economist like Dan Mitchell who understands economics from the Austrian perspective or even monetarist closer to Dr. Freidman’s view of monetary policy. Bernanke is going to do his QE2 and it will be a disaster. Stock up on the oatmeal folks and elect a president that will replace Ben Bernanke.