Halloween is over, but that didn't stop markets worldwide from reacting in terror to the news that Greek leaders have decided to put their bailout up for a popular referendum, which is a little bit like asking a sick child to vote on whether he would like to take a bitter-tasting medicine or not.
The latest consternation arrives just in time for this week's meeting of the Federal Open Market Committee, which will announce its latest monetary policy decisions tomorrow. We hope that it will not encourage those at the Fed who want to introduce "QE3" or some other new form of monetary easing.
We believe the Fed's serial easing has already caused enough damage, and that more easing is uncalled-for.
Proponents of further easing argue that the stubbornly high unemployment rates, coupled with fears of another recession triggered by Europe's woes, necessitate pumping more money into the system in order to bolster consumer borrowing and spending, on things like homes and autos.
However, we have already explained in numerous previous posts that "the consumer" does not really drive the economy. If he did, the unprecedented amount of monetary stimulus that has been in place over the past two years might have been expected to have a lot more positive effect than it did.
On the contrary, we believe that production and producers drive economies. When producers increase their production, that prompts the hiring of more employees, which then stimulates the consumer much more effectively than artificial government stimulants can ever do. The Fed's excessive monetary easing has made life much harder for producers, by creating price instability and price uncertainty, which continues today (incidentally, this also ends up harming consumers because fewer of them get hired, and they also face higher prices for the goods and services they need to buy).
Noted Stanford economist John B. Taylor wrote an editorial in the Wall Street Journal today explaining the ways that the Fed's excessively easy policy has caused damage around the world. Some of them may surprise you because they are rarely explained by the consumer-centric media coverage that dominates the financial television shows. He explains:
Economic policies in America affect the world in ways that are often subtle. In the case of monetary policy, for example, decisions on interest rates by foreign central banks are influenced by interest-rate decisions at the Federal Reserve because of the large size of the U.S. economy. If the Fed holds its interest rate too low for too long, then central banks in other countries will have to hold rates low too, creating inflation risks. If they resist, capital flows into their countries seeking higher yields, thereby suddenly jacking up the value of their currencies and the prices of their exports.While some might mistakenly believe that tilting the playing field in order to help one's own exports or harm another country's imports could be a good idea, we have explained in previous posts that such unstable business conditions make it very hard for producers to predict the future, lowering their willingness to hire employees and having a host of other negative side effects as well.
Further, with US GDP growth coming in at 2.5% for the third quarter, the argument that we are slipping into recession simply does not hold water, even though we believe that growth could and should have been a lot stronger at this point, if it were not for the misguided government policies that have been creating obstacles to business growth.
In sum, now that Halloween is over, we hope the serial "easer" that has been stalking the halls of American monetary policy for the past two years will not strike again.