how it goes, when the market is usually sure something will happen it
doesnâ€™t.There are a host of reasons for
this.One reason is that we always tend
to make inferences or draw conclusions on what we seeâ€”which is
opposed to thinking about the stuff going on we donâ€™t see.
an act, a habit, an institution, a law produces not only one effect, but
series of effects.
Of these effects, the first alone is immediate; it appears
its cause; it is seen.The other effects emerge only
are not seen; we are fortunate if we foresee them.
is only one
difference between a bad economist and a good one: the
bad economist confines
himself to the visible effect; the good economist takes into
both the effect that can be seen and those effects that must be foreseen.
this difference is tremendous; for it
almost always happens that when the immediate consequence is favorable,
later consequences are disastrous, and vice versa. Whence it follows
the bad economist pursues a small present good that will be followed by a
evil to come, while the good economist pursues a great good to come, at
risk of a small present evil.
same thing, of course, is true of health and morals. Often, the sweeter
first fruit of a habit, the more bitter are its later fruits: for
debauchery, sloth, prodigality. When a man is impressed by the effect that
seen and has not yet learned to discern the effects that are not
seen, he indulges in deplorable habits, not only through natural
inclination, but deliberately.
necessarily painful evolution. Ignorance surrounds him at his cradle;
therefore, he regulates his acts according to their first consequences,
only ones that, in his infancy, he can see. It is
only after a long time that he learns to take
account of the others.**2 Two
very different masters teach
him this lesson: experience and foresight. Experience teaches
brutally. It instructs us in all the effects of an act by making us feel
and we cannot fail to learn eventually, from having been burned
fire burns. I should prefer, in so
far as possible, to replace this rude teacher with one more gentle:
For that reason I shall investigate the consequences of several economic
phenomena, contrasting those that are seen with those that are
ongoing criticisms of Fed Chairman Ben Bernanke, it is clear he is a
man and knows a bit about economicsâ€”more than most of us, to say the
least.And surely Ben is familiar with
Mr. Bastiat.And just maybe Ben has more
foresight than we have given him credit.
â€śâ€¦for it almost always
when the immediate consequence is favorable, the later consequences are
disastrous, and vice versa.â€ť
called QE1 a disaster.Many have said it
didnâ€™t matter.Some have said it saved
the system.So there is some
debate.But most now have said (we plead
guilty) that QE2 will not matter at best, and be a disaster at worst
(hyperinflation, Japan style stagnation, currency wars, emerging market
bubbles, etc.).With this type of crystallized
consensus, we have decided it is time to be open to the idea that indeed
will work much better than now expected in tweaking US growth.
until we read a blurb by Alan Abelson in Barronâ€™s
this weekend did we realize that economist extraordinaire Paul
Kasriel, who toils away at
laid out some sensible reasons why QE2 will indeed work.He did this over a month ago; here is the
summary if you too missed it:
But I do not
think the level of U.S Treasury
security interest rates or the level of the U.S. dollar foreign-exchange
are the correct way to think about the prospective effectiveness of QE2.
Rather, to judge whether QE2 is likely to stimulate the aggregate demand
U.S. goods and services, I will be observing the changes in another
the sum of Federal Reserve Bank credit and commercial bank credit. All
the same, when the commercial banking system increases its holdings of
and securities, the recipients of this commercial bank credit are able
increase their current spending without any other entity in the economy
to cut back on its current spending. Similarly, an increase in
Reserve Bank credit enables the recipients of this credit to increase
current spending without any other entity in the economy having to cut
its current spending.
to Kasriel, the reason QE1 was seen as a failure is because commercial
credit decreased by a greater amount than the increase in Federal
credit. See first chart below [grey area represents QE1]:
thereâ€™s increased Fed credit offset by falling commercial bank credit.
second chart below:
banks were sucking up this credit to repair their own balance sheets
expected.So it wouldnâ€™t be a stretch to
believe bank balance sheets are in much better shape than before.And if you notice the blue line in the chart
above, commercial bank credit IS turning up.
is that maybe QE2 Fed credit will be funneled through the system
recipients of this commercial bank credit are able to increase their
spending without any other entity in the economy having to cut back on
current spending,â€ť as the theory goes.
the effects of this will not be immediate, and market players will
on â€śthe first consequencesâ€ť of dollar debasement for a while, which in
itself seems a crystallized rationale.If Kasriel is right, the whole dollar expectations game changes
in a big
way, we think. And hereâ€™s why:
Fed has left open the door to
reducing the amount of QE2 should growth materialize, i.e. $600 billion
a done deal.
the US starts to grow, it will
likely grow much faster than the eurozone, UK, and Japan.
not sound like much, but juxtaposed against dollar debasing as far as
can see (which seems to be a big part of the gold story) it is a
in expectations, we think.
Gold (black) vs. EURUSD
says he will be watching Fed and Commercial bank credit very closely
weekâ€”so will we.
dollar debasing is ruling the day.And
as long as it appears a steady decline, Ben and Co. are likely not
about that.But sooner or later that
rationale will become stale.And maybe
we will know the reason whyâ€”Ben was right.Stay tuned.
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