[roymurdock]

The crux of the problem is that the Fed is "pushing on a string" - playing with the supply side of money while having absolutely no effect on the demand side.

Thomas Palley [1] sums this up nicely in a 2011 critique of QE:

The underlying problem is structurally deficient demand caused by thirty years of neoliberal economic policies that have undermined the income and demand generation process (Palley, 2009). However, rather than fixing this problem, policymakers are again turning to ultra-easy monetary policy in the form of QE. Viewed from this perspective, QE can be interpreted as a form of asset market trickledown whereby supporting asset prices is supposed to jumpstart the macro economy…From a political standpoint, this is an enormous change from the world of forty years ago. The New Deal policy paradigm of wage floors and household income supports has been replaced by one of asset price floors and asset market subsidies. Viewed through a political lens QE therefore represents the triumph of plutonomics, and that makes it an obstruction to the extent it obscures the challenge of repairing the income and demand generation process.

The Fed has dug itself into a hole with QE, where it is losing the ability to control anything in the economy due to the lower 0 bound of the FFR and the economy's inability to handle an interest rate hike.

It is up to the Federal Government (which, democratically speaking, means we the people) to adopt New Deal-like investments in infrastructure, R&D, education, and tech to seed long-term prosperity in order to rebuild an economy with a strong middle class that will demand loans for things like mortgages, appliances, cars, and machinery, as well as drive invention and wealth creation rather than rent-seeking & arbitrage as we are seeing today.

[1] https://ideas.repec.org/p/uma/periwp/wp252.html

[rhino369]

>playing with the supply side of money while having absolutely no effect on the demand side.

This is a strange position to take on a website that glorifies start ups. Cheap capital can unlock demand by lowering barriers to entry.

People looking for investment opportunities fund companies like Uber. And uber turns around an creates massive demand for private adhock drivers.

That sort of incentivize won't reverse a recession like deficit spending can. But it has a real effect.

The critiques of QE never really panned out.

>The Fed has dug itself into a hole with QE, where it is losing the ability to control anything in the economy due to the lower 0 bound of the FFR and the economy's inability to handle an interest rate hike.

The fed always has the option of last resort. Actually printing money and buying debt from government directly.

[roymurdock]

HN is a strange and wonderful place full of all kinds of people with all kinds of opinions on startups.

And yes, easy money can help unlock demand, but it can't generate it in a sustainable manner.

> "Actually printing money" - and then what? Dropping it to the eager consumers out of helicopters? [1] They've given banks all the money they need, and then some. Banks act as the gate keepers of loans and investments within the economy, vetting those who are likely to pay back. That is their business.

They are not finding enough demand within the economy to push out more money, even with short-term interest rates near 0 for the past 6 years. So they sit on it, earning 0.75% on their reserves.

The Fed does not have the power to solve this problem, in my opinion.

[1] http://www.investopedia.com/terms/h/helicopter-drop.asp

[ConfuciusSay]

QE1 worked, in that it saved us from a depression. But the jury's still out on whether that was just a can kicking exercise to be reckoned with at a future date. The other QE's by any measure, have been a failures, at least when compared to QE1.

And when almost all major global economic indicators are looking negative, it's hard to talk about QE in terms of it being successful policy.

[mpweiher]

You mean: "we keep pouring money in at the top, but it just isn't trickling down" ?

[roymurdock]

Yes.

I recommend that you read the linked paper, where Palley highlights the 5 channels through which QE should have had an expansionary effect on the economy, according to Keynesian economic theory (hence the name of the paper).

Here are the 5 channels:

1. A traditional Keynesian interest rate channel whereby the Fed purchases long-term bonds in order to reduce the long-term interest rates as it is unable to further reduce short term rates (zero lower bound)

2. The Tobin’s q channel whereby some of the liquidity is directed to the stock market, increasing stock prices and investment in turn

3. A wealth effect that increases consumption brought about by higher bond and equity prices

4. Expected inflation brings forward consumption and investment spending as households and firms purchase in the present rather than in the future when money is expected to lose real purchasing power (increased velocity of money due to inflation)

5. Increased net exports whereby some of the liquidity is used to purchase foreign reserves, decreasing the exchange rate and devaluing the dollar

I'll leave it up to you to research whether or not these 5 channels have been effectively manipulated as Keynesians would have predicted through QE. But I have a feeling you already know the answer...Bonus points if you can answer this question: Why did channel #2 work so well, and why haven't we seen the supposed wealth effect (#3) predicted under a burgeoning stock market?

[igravious]

Not an economist but let me try to see if I really have as good a handle on all this macro-economic stuff as I like to think I do.

Ok. My guess is that QE goes directly to banks. Banks should start lending. QE is inflationary so the economy artificially grows and exports are helped cuz the $ gets cheaper but imports are hurt. This is not so bad for the $ because it is the world's reserve currency and a lot of commodities are traded in it.

Anyway, for some reason, the institutions don't lend the QE money into the real economy they buy portfolios of stocks because the return is greater and the risk is lower. That's my guess. I suppose for proper bonus points I need to be able to say why the stock market seems like a better bet than the real economy. And maybe #3 hasn't panned out because companies aren't paying dividends like they ought to.

crosses fingers

[Tycho]

A wealth effect might be a hard sell to a population who just came out of a catastrophic housing bubble.

[chralieboy]

Precisely.

In Silicon Valley it would be like a company that is raising record amounts of money at mind-boggling valuations but whose revenue isn't growing at the same pace.

One of the major question marks has been wage growth during the recovery. Stock markets have been skyrocketing, but wages have generally remained stagnant.

Similarly, labor participation (i.e. of the people who could work, how many are actively looking/employed) has remained worryingly low. While the US unemployment rate is very low (~5.1%), that isn't a direct inverse of those who are employed. There is a huge group of people who have simply given up trying to find work and others who are working but less than they would like (e.g. part-time, have one job but would like to work another/overtime, etc.)

We see that effect on inflation, which is no where near the 2% level that the Fed would like. Inflation crudely correlates with real growth because it encourages spending; if the money I have will be worth less in the future, I'm more likely to spend it today.

So in effect, we look at the S&P and think "Awesome! We're at all time highs!" But then we look at the economic fundamentals for people and it looks less sketchy.

[igravious]

Don't you mean "more sketchy", as in we look at the S&P and think "Yay" But we are getting dubious signals from the so-called real economy that do not correlate with the signals we are getting from the stock market. Hence, "more sketchy", no?

[curiousgeorgio]

I'd venture to say that our wage and labor problems have less to do with the economy itself and more to do with a shift in global demand and specialization. All of those manufacturing jobs are going to China (whether we like it or not, China's labor costs are probably always going to be more cost effective for business), and the US labor market is demanding more skilled labor. We have an enormous oversupply of unskilled labor that isn't meeting the shift in labor demand.

Instead of using politics and complex tax systems to try and gain back those manufacturing jobs, I wish our government would focus more on helping our workforce adapt to the things where our country can have a competitive advantage in the world: education, technology, engineering, etc.

[carsongross]

A universal citizens dividend funded via direct issuance would be the least corrupt way to stimulate the economy at this point.

In the long run, we will need a debt-jubilee if we want to continue the current monetary system.

[toomuchtodo]

That sounds very similar to a basic income (which I whole heartedly support)

[Steko]

Any mention of the Fed on HN seems to come with a generous helping of heterodox complaints about QE. I'll just point out that despite throwing everything at the wall for 6+ years they are all still batting zero.

[irln]

There are so many smart people on HN, such as yourself (and not being sarcastic!), with wide ranging expertise. I think we can crowd source some improvements right here.

[Steko]

I claim no special skill or insight into economics, I'm just tagging these posts so people don't mistakenly think that what is presented is mainstream economic theory. Based on our experience in the last decade, as a first order approximation heterdox claims about QE unsupported by evidence should be greeted skeptically.