Sunday, January 9, 2011

Guido Hülsmann on QEII

Here is a great interview Lew Rockwell did with Guido Hülsmann who is a Professor in the Faculty of Law and Economics at the University of Angers as well a Senior Fellow at the Mises Institute. He does a great job of explaining the real effects of QEII, its unintended consequences, hidden agendas and finally tackles the hyperinflation question. All in a maddeningly simple and elegant manner which is a hallmark of the Austrian School.

Here are some notable highlights from the interview:

(In response to the idea that lower US Dollar FX rates will boost exports and, by extension, the economy)
The foreign customers who buy more American goods, where do they get their dollars from? 

1- import more into the US, which is difficult in a period of falling exchange rates
2-they have to take credit out of the US, import capital from the US
3- withdraw their own capital from the US

The additional revenue that is gained for exporters in the US comes at a price reduced capital loanable funds for the rest of the US economy. So it's not an overall benefit.

Another issue that is certainly a "welcome" side effect and i suspect it's the real objective, it's to finance the federal government. The Fed says our policy objective is to get the US economy closer to its output potential. I don't believe this is the real policy objective. If this is the case why buy Treasury bonds? There are many other ways to increase money supply. The true goal is to finance the Obama administration at historically low interest rates.

The same question will pop up again next year. Next year, QEII will have been a story of the past and we will be working in an environment of rising prices which will entail higher interest rates. Higher interest rates also for treasury bonds. So what do we do from there? Do we permit that interest rates rise? If interest rates increase then of course we have even more budgetary problems on the federal, state, municipal level as well as problems for firms to refinance themselves. We risk a dip in the economy. The only way to avoid this is to pump again money into the economy. Which would accelerate the effect. We get into a spiraling inflationary tendencies...which could ultimately lead to hyperinflation.

For four or five years in Wiemar Germany the government financed more than 50% of its annual expenditure through money creation before hyperinflation arrived.

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