Print Barron's(12/20) Why The Fed Should Shop Till It Drops 18-Dec-2010 (From BARRON'S) By Jonathan R. Laing Few monetary policy moves by the Federal Reserve have elicited as much controversy as its decision early last month to engage in "quantitative easing" by buying some $600 billion worth of long-dated government bonds over the next eight months. Republican bigwigs have termed the move wildly inflationary, debauching the dollar by "monetizing the debt" in order to finance profligate government spending. Likewise, various foreign government officials -- led by finance types in China and Germany -- have accused the U.S. of using QE2 to beggar its trading partners and boost exports by cynically driving the value of the dollar lower. At the same time, critics have noted that rates on government bonds have gone up, not down, in the weeks since the Fed announced the plan. Yet, no less a figure than Goldman Sachs' chief U.S. economist, Jan Hatzius, says that the attacks on QE2 are ridiculous; he thinks that perhaps even more quantitative easing may be called for to ensure that the U.S. economy achieves a self-sustaining recovery: "Buying longer-maturity government securities is little different than the traditional policy of using short-term government securities transactions to tighten or loosen monetary policy," Hatzius tells Barron's. "With short rates at near zero, quantitative easing is the last lever left, so it makes sense to employ it. The Fed isn't talking about flooding the world with dollars, after all." He has neatly skewered the arguments against quantitative easing one by one, both in a number of reports since the policy was announced and in our interview. Take the most widely bruited objection -- that QE2 will unleash ruinous inflation. Hatzius asserts that such fears are simply wrong-headed. While buying bonds by the Fed does involve "printing money," all that's effectively occurring is a replacement in the banking system of bond holdings with cash, and potentially lendable reserves on a dollar-for-dollar basis. But then those reserves must in turn be lent out by the banks to trigger a surge in credit, economic demand and ultimately a rise in prices. Only then is the so-called multiplier effect set into motion. But up until now, banks have been reluctant to lend. Some $1 trillion in excess reserves were mostly generated by the Fed's first foray into quantitative easing, which ended this spring, and are already idling in the U.S. banking system. Banks, Hatzius points out, can raise funds outside the banking system to extend more credit but have chosen not to do so. This ebb in lending, he contends, is largely the result of continuing deleveraging of balance sheets in the private sector -- both debt-burdened households and timorous businesses. In other words, the private sector is seeking to save more than it borrows and spends. The resultant economic doldrums can be seen in the huge slack in the general economy, best exemplified by the U.S.'s 9.8% unemployment rate, low capacity utilization and a core inflation rate less than half the Fed's desired target of 1.7% to 2.0%. According to Hatzius, this slack militates against any resurgence in unhealthy inflation for some time to come. Or, as he put it in a recent report, "The time is measured in years, not in quarters or certainly in months, as many seem to believe." Hatzius bases this conviction on his application of Okun's Law, named after economist Arthur Okun. It holds that a relatively large percentage gain in the growth of the economy, or gross domestic product, is required to induce a decline in the unemployment rate. Thus, by Hatzius' reckoning, lowering the unemployment rate by more than four percentage points -- to an acceptable "full-employment" level of, say, 5.5% -- would require steady GDP growth of two percentage points above its norm (which he assumes is about 2.5% a year at full employment). Assuming drops in the unemployment rate only half the size of the portion of GDP growth that's above normal, it would take more than 5 1/2 years of steady real annual GDP growth of 4% to bring the unemployment rate down to 5.5%. Even if structural changes in the labor market have raised the "natural" rate of unemployment to 7% -- a contention Hatzius finds dubious -- it would still take 2 1/2 years of steady 4% GDP growth to eliminate undesired unemployment and reach the point at which economic slack disappears and inflation becomes a threat. The latter eventuality seems unlikely. Annual drops of 1% in unemployment are rare events in the U.S. economy and are unlikely to occur in the immediate future, given current economic drags like fiscal policy restraint, a still-healing financial sector and the housing overhang. Two weeks ago, Hatzius and Goldman boosted their estimate of 2011 GDP growth to 2.7% from 2.0%. And with Washington's recent tax deal, the growth could be as much as a percentage point higher. The firm's 2007 projection is for 3.6% growth. This wouldn't be nearly a big enough bump to ignite inflation. In fact, core inflation will likely come in at about 0.5% through 2012, Hatzius estimates. Hatzius concedes that quantitative easing is a somewhat blunt instrument in boosting lending and firing economic growth. He uses a rule of thumb that the U.S. gets about 0.5% of GDP growth for each $1 trillion in quantitative easing by the Fed. Thus, he'd hoped that the Fed might boost its QE2 asset purchases to as much as $2 trillion, but doubts that will happen now, given the political backlash that has occurred. As Hatzius' numbers suggest, quantitative easing can help the economy even if banks remain tight-fisted. That's because the strategy also operates through another channel, namely the asset side of the private-sector balance sheet. By virtue of buying long-dated Treasuries, theoretically the Fed should have boosted the value and correspondingly lowered the yield of longer-dated Treasuries. That hasn't happened, of course, because of the recent improvement in the economic outlook and growing confidence on the part of investors. But without the Fed action, rates would have been even higher. Not all rates have gone up along with those of Treasuries. In fact, the difference between Treasury rates and high-yield bonds has narrowed. Also, the stock market has rallied smartly. This is in part the result of the animal spirits that quantitative easing has perhaps unleashed. More quantitative easing is now necessary, Hatzius says, because deflation is a far bigger threat these days than inflation. And deflation is far harder to combat and reverse than inflation, since nations have had so little experience with the former, other than Japan in the past 70 years or so. No force is as destructive to economic growth as deflation. Consumer spending spontaneously drops as buyers hold back on their spending in the expectation of lower prices. Wages, though somewhat sticky, begin to drop along with prices. But perhaps most lethal, says Hatzius, deflation raises the real value of existing debt, making repayment all the more difficult and costly. And then asset prices collapse as a result when collateral is dumped in a mad scramble for liquidity and solvency. One can only hope that Hatzius is right -- that QE2 will only boost and not hurt the U.S. economy even if it's only at the margin. The U.S. needs all the help it can garner. --- 若海友喜欢，以后会继续贴。