What is quantitative easing (QE) and how does it effect us --interview with economist Scott Sumner
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By: ITHP Newswire | October 19th 2012
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Scott Sumner is a highly respected economist, blogger and professor of 30 years at Bentley University. He's researched various topics including monetary economics, the gold standard, and the relationship between cultural values and neoliberal reforms. If there's one person to ask questions relating to the economy it's Dr. Sumner. ITHP got the chance to conduct a short interview with Dr. Sumner about the topic of quantitative easing. Please enjoy.
1.) What is Quantative Easing and what's the "official" justification for using it?
QE is a program of increasing the monetary base, an expansionary monetary policy. The term 'QE' is used because at this point it only affects the quantity of money, not the interest rate.
2.) How will QE affect the U.S dollar? What happens when the dollar declines in value and what impact does inflation have on the economy and our savings?
The dollar would slightly depreciate, which would slightly raise inflation (but not very much.) It's hard to say the impact on savings. The higher inflation would reduce the real value of some nominal assets, like Treasury bonds. On the other hand QE also boost growth, and this would raise the value of some form of savings, like stocks. Ands stronger real growth would tend to raise real interest rates.
3.) It seems like those in power want us to spend and not save. What effect does spending have on the economy in the short term and long term?
The contrast is not between spending and saving, it's between spending and money hoarding. They don't want us to hoard money. But they'd be thrilled if saving and investment rose in response to the QE program. You can "spend" on either consumer goods or capital goods. The latter is called investment.
4.) Japan and other countries have used Quantative Easing in the past. How did it work for them?
There is some debate over whether QE worked in Japan. Some claim it boosted the economy during 2002-06, but inflation stayed very low. The reason inflation didn't rise is that the QE was temporary; the BOJ pulled much of the extra money out of circulation in 2006. Temporary QE is not very effective. Permanent QE is highly effective, but Japan never tried permanent QE. So Japan's experience tells us very little about the effectiveness of QE.
5.) To some it seems like the health of the world economy should be tied to its ease of access to the natural resources it needs to survive. The western world appears to still have easy access to oil, food, water, minerals, etc. and is rapidly improving its technology. Why than do many once strong economies now all of a sudden appear to be in a state of emergency?
The Western world has been suffering from very tight money since 2008, which has reduced NGDP growth to the lowest levels since Herbert Hoover was president. That's the main reason growth has been slow, and the main cause of the debt crisis.
6.) If the Fed is buying bonds from Bank of America, Goldman Sachs, and other big banks for example how do we know this is in the best interest of the country and not the elite?
There are two issues with bond purchases. Are they sound macro policies, and are the bond dealers charging excess commissions on the bond sales to the Fed. I presume the Fed knows how to minimize the costs of bond purchases, but am not an expert in that area. It's a very minor issue compared to the macroeconomic aspects of bond purchases.
7.) Is their any alternative to Quantitative Easing (QE) and do you have a solution to the problem?
Yes, I strongly favor a program called nominal GDP targeting, level targeting, as an alternative to QE. This would involve the Fed setting a trend line for NGDP (perhaps 5% annual growth), and committing to return to the trend line after any under or overshoots. I believe that this sort of monetary policy would have greatly reduced the severity of the Great Recession.
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