Not that I’m obsessing about the QE2, but yes,
J.D. Foster explains Why Bernanke’s QE Justifications Don’t Wash
In a recent article, Bernanke argued that inflation was very low, perhaps too low, and that “very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation.” He also argued that “there is considerable spare capacity” in the economy, which normally puts downward pressure on prices. Both statements are clearly true.
In an earlier speech, Bernanke said that growth in 2011 was unlikely to be “much above its longer-term trend,” which means that the “unemployment rate will decline only slowly.” True again.
The conflict in these two statements may not be immediately obvious, but consider: If the economy is growing near its trend rate in 2011, as Bernanke suggests, then there is little to no risk of deflation. Strong growth is a powerful antidote to deflation worries. Either the deflation risk is vastly overstated and QE is therefore unjustifiable, or Bernanke believes growth in 2011 will continue to be anemic at best.
The economy has averaged less than 1 percent annualized growth in recent quarters, once transitory inventory and federal spending surges are weeded out. What Bernanke is silently worried about is the possibility that Congress will allow all the 2001 and 2003 tax relief to expire at the end of the year, or that Congress will allow those provisions most important to the economy to expire — e.g., the lower tax rates on small businesses and the lower rates on capital gains and dividends. Slamming a sputtering economy with a major tax hike threatens to induce another recession, and with inflation already near zero, the possibility of deflation becomes very real. But Bernanke can’t or won’t say so.
Bernanke’s QE justifications don’t wash. If the economy is expected to muddle through, let alone accelerate, then there is no reason to embark on a highly risky, highly controversial new round of quantitative easing.
Why won’t Bernanke be transparent in this? Because he also worries about the Fed’s independence.
Foster is not alone in his skepticism: A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.
The proposed QE2 already is having the effect of raising commodity prices. As the CareBears were asking, “so what is deflating right now?”