"...there’s ample evidence that QE2 is the wrong medicine for the what ails the economy – that the real problem is in part a lack of good ideas, as well as an obtuse and dogmatic unwillingness to see that the private sector can’t solve all the economies problems.
...For most countries, printing too much money can be devastating. An extreme example of this is Zimbabwe, where strongman Robert Mugabe’s government attempted in the mid-2000s to pay off foreign debts by printing trillions of Zimbabwe dollars. Inflation ran as high as a billion percent — meaning that a product that cost $1 might cost a billion the next year. By 2008, US$1 bought some 10 billion Zimbabwe dollars. Zimbabwe’s currency became so worthless that the government printed 100 billion dollar notes before finally abandoning it in favor of foreign currencies.
...the U.S. is different from the rest of the world’s economies in one very important way: the greenback is the currency of global trade. Any country that wants to buy oil, steel or food on the international market is almost certainly going to make those transactions in dollars. That means the dollar is essential (for now, at least). The world’s two hundred-odd countries are constantly converting their own currencies into U.S. dollars to pay bills overseas.
...The fact that the U.S. doesn’t need to convert its currency purchase goods in the world market gives us one very powerful privilege: we can print dollars...to pay back our debts — within limits, that is.
The risk is that the world’s biggest economy could catch a small case of what ailed Zimbabwe. The dollar could get overly feeble, making it prohibitively expensive for Americans to travel abroad and pay salaries overseas. And foreign products could get prohibitively expensive. Most importantly, an overly aggressive policy of printing money to repay debt could make dollars a bad investment for foreign governments (especially China, which holds trillions), by making their dollar holdings less valuable. Eventually, this could possibly jeopardize the greenback’s status as the currency of choice for commerce — which would be very destabilizing for the global economy.
...what will happen to all the extra money flowing into the economy from QE2?
...easy money has a troubled track record. Over the past decade, the Fed kept a loose money policy for far longer than many economists were comfortable with. The result: investors threw cheap money at bad deals.
In the late 1990s, this led to the dot-com bubble — when any half-baked business idea that slapped a “dot-com” at the end of its name was suddenly worth a fortune, regardless of its prospects for earning money. In lay terms, easy money chased bad investments. We deluded ourselves into thinking that any bogusbusiness.com could generate truckloads of cash. Accolytes of the digital revolution preached a frictionless economy, disparaged bricks and mortar, and predicted a 20-year boom.
This ended, of course, in the 2000 dot-com crash, when worthless companies with soaring stock prices suddenly couldn’t pay their bills, causing mass bankruptcies and wiping out trillions of dollars in paper wealth.
After the crash, as an economic pick-me-up, the Fed once again made dollars easier to obtain. Suddenly, bricks and mortars were in vogue. Investors poured the cheap money into real estate. This made everyone feel rich again for a while, and changed the American landscape. In Florida, California, and Nevada and across the nation, new housing developments sprung up like mushrooms on a rainy day.
Meanwhile, as all that easy money was flowing to real estate, prices rose quickly. Suddenly sitting on houses whose values had skyrocketed, American homeowners used their mortgages as ATM machines, refinancing loans to cash in on paper profits. And bankers — hungry for fees — gave loans to anyone who could sign their name, and some who couldn’t.
We now know that we built too much. Money was too easy, and the real estate investment ideas simply weren’t good enough to create the growth that would sustain the economy. The bubble inflated, and then it burst. This time around, instead of dot-coms, the most immediate victims were the Wall Street firms that had borrowed far too much – Bear Sterns, Lehman Brothers — forcing the government to rescue others, to ward off a complete collapse. Main Street, where all those new homes were built, suffered as well.
...emerging nations — currently in vogue with investors who see better potential returns there than in the developed world — are concerned that they’ll be the target. If the past is a predictor, their equities markets could soar, then crash, starting the whole process over again, and leaving the wrecks of QE2 — and all the pain the we’ve been suffereing lately — on their shores."
David Case
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