Sunday, November 7, 2010

More on Quantitative Easing

The Economist has a nice write up here.

Like every policy there are costs and benefits. The costs are clear, injecting large amounts of reserves into the financial system can create high inflation. In the last month inflationary expectations have started to increase (remember TIPS had negative yields, because inflation is factored in as a coupon payment). This is good. One way to get businesses investing is to raise the future price of capital goods. Businesses can take advantage of low interest rates today (both low nominal and real interest rates) and high output prices in the future. It is a win, win. Of course they are not taking advantage of the low interest rates, why?

My thoughts, the economy still sticks. There is a lot of uncertainty surrounding future government policy and consumer spending. Will the tax cuts be extended? Will consumer continue to ratchet back spending? These factors play a key role in the profitability of any investment.

1 comment:

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