I Hate Being Right

No, seriously. Because it’s always about bad things.

Me, back in early December:

Hence “QE2,” shorthand for the second round of quantitative easing. By buying long-term bonds, Bernanke hopes to push down long-term interest rates. Low rates encourage borrowing, which increases spending — and prices.

The problem with QE2 isn’t that we’re printing too much money. It’s where that money will go. It should go to workers, who will spend it and stimulate the economy. But it won’t.

The New York Times, today, summarizing the economic consensus:

The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.
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But most Americans are not feeling the difference…  

Me, in December, again:

$600 billion is probably too small, relative to the whole bond market, to have much effect…

The NYT, today, again:

While that sounds like a lot of money, the purchases have not even kept pace with the government’s issuance of new debt…

And, to remind you of the underlying logic, one last time from me:

In theory, inflation is a good thing. When prices rise, firms make more money, with which they can pay higher wages. When wages rise, those monthly mortgage payments become easier to meet.

Unfortunately, economic theory just ran smack into reality.

As with most theories, the Inflation Solution depends on a critical assumption. Will firms, in fact, use that money to pay higher wages? In the world of neoclassical economics, they have to. If they don’t, their workers will leave them for a company that does.

But we don’t live in the world of neoclassical economics. We live in a world where corporations have been growing more powerful for over three decades at the expense of workers. Labor union membership has plummeted, the minimum wage has failed to keep up with the cost of living, the tax code has become more regressive, millions of jobs have traveled overseas, and executive compensation has spiraled to unprecedented heights.

Real wages have stayed flat because workers can’t earn a better living elsewhere. They’re stuck.

The New York Times, to wit:

Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.

But growth remains slow, jobs remain scarce…

“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?”

Just once, I’d like to be wrong when I predict failure.
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