Quantitative Easing: Blaming China For the Failures of US Monetary Policy

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 This article comes courtesy of  Global Research

Quantitative Easing: Blaming China For the Failures of US Monetary Policy 

Krugman’s China-bashing defense of the Fed’s QE2 policy

Here’s the quandary that the U.S. economy is in: The Fed’s quantitative easing policy– creating more liquidity so that banks can lend more – aims at helping the economy “borrow its way out of debt.” But banks are not lending more, for the simple reason that a third of U.S. real estate already is in negative equity, while small and medium-sized businesses (which have created most of the new jobs in America for the past few decades) have seen their preferred collateral (real estate and sales orders) shrink. How can banks be expected to lend more to re-inflate the economy’s asset prices while wages and consumer prices continue to drift down? The “real” economy as a whole therefore must shrink.
           
What has made the argument over Fed policy so important in recent weeks is a series of exchanges between Republicans and Democrats. The deteriorating situation prompted a group of Republican economists and political strategists to publish an open letter to Federal Reserve Chairman Ben Bernanke criticizing the Fed’s policy of Quantitative Easing (QE2), flooding the economy with liquidity spilling over into foreign exchange markets to push the dollar’s exchange rate down.[1] True enough, as far as this criticism goes. But it only scratches the surface.
         
Enter Paul Krugman, one of the most progressive defenders of Democratic Party policy. His New York Times op-eds usually rebut Republican advocacy for Wall Street and corporate interests. But he also indulges in China bashing. To “blame the foreigner” rather than the system is normally a right-wing response, yet he blames China simply for trying to save itself from being victimized by the Wall Street policies he normally criticizes when labor is the prey. By blaming China, he not only lets the Federal Reserve Board and its Wall Street constituency off the hook, he blames virtually the entire world that confronted Mr. Obama’s financial nationalism with a united front in Seoul two weeks ago when he and his entourage received an almost unanimous slap in the face at the Group of 20 meetings.
           
Sadly, Prof. Krugman’s “Axis of Depression” column on Friday, November 19, showed the extent to which his preferred solutions do not to beyond merely marginalist tinkering. His op-ed endorsed the Fed’s attempt at quantitative easing (QE2) to re-inflate the real estate bubble by flooding the markets with enough credit to lower interest rates. He credits the Fed with seeking to “create jobs,” not mainly to bail out banks that hold mortgages on properties in negative equity. 
           
The reality is that re-inflating real estate prices will not make it easier for wage earners and homebuyers to make ends meet. Lowering interest rates will re-inflate real estate prices (“wealth creation” Alan-Greenspan style), raising the degree to which new homebuyers must go into debt to obtain housing. We. And the more debt service that is paid, the less is available to spend on goods and services (the “real” economy). Employment will shrink in a financial spiral of economic austerity.
           
Unfortunately, most economists are brainwashed with the trivializing formula MV=PT. The idea is that more money (M) increases “prices” (P) – presumably consumer prices and wages. (One can ignore velocity, “V,” which is merely a tautological residual.) “T” is “transactions,” for GDP, sometimes called “O” for Output. 
           
Some 99.9% of money and credit is not spent on consumer goods (the “T” in MV = PT). Every day more than an entire year’s GDP passes through the New York Clearing House and the Chicago Mercantile Exchange for bank loans, stocks and bonds, packaged mortgages, derivatives and other financial assets and bets. So the effect of the Fed’s Quantitative Easing (monetary inflation) is to inflate asset prices, not consumer prices and other commodity prices. 
           
This is the key dynamic of today’s finance capitalism. It loads down economies with debt – and when debt service exceeds the surplus out of which to pay it, the central bank tries to “inflate its way out of debt” by creating enough new credit (“money”) to make real estate, stocks and bonds worth more –enough more for debtors to borrow the interest due. This is the deus ex machina, the external influx of credit enabling financialized economies to operate as Ponzi schemes. The dynamic is encouraged by taxing speculative (“capital”) gains at a lower rate than wages and profits. So why should investors finance tangible capital investment when they can ride the wave of asset-price inflation. The Bubble Economy turns into speculative “wealth creation.”
           
Can it work? How long will gullible investors bet on a pyramid scheme growing at an impossibly exponential rate, enjoying fictitious “wealth creation” as bankers load the economy down with debt? How long will people think that the economy is really growing when banks lend to an economy overseen by regulatory agencies staffed by ideological deregulators? 
           
The bankers’ ideal is for the entire surplus over and above bare subsistence to be paid in the form of interest and fees – all disposable personal income, corporate cash flow and real estate rent. So when the Fed’s QE lowers mortgage interest rates, will this enable homeowners to pay less – or will it simply increase the capitalization rate of existing rental value?
           
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