Wrong, Too Early, Does It Matter?
By: Roger Nusbaum, AdvisorShares ETF Strategist
New York Magazine torched Amity Shlaes and the other economist who all signed a letter in 2010 warning of the inflation and currency debasement to come from quantitative easing (QE). Shlaes then dug in further in the National Review defending the position, a position that the New York Magazine called totally wrong.
Headline inflation certainly has not been problematic, if anything it is arguably too low and the US dollar has gotten stronger as QE has gone on. Actually it is better to think of the currency action being more about the other currencies being weaker because their governments/central banks need them to be weaker.
While we’re at it some were worried about sky-high interest rates and that has not happened other than the brief scare back in June of 2013.
All the points made by Shlaes and anyone else warning about QE are pretty basic economic concepts about how it is supposed to work; a central bank buying up debt resulting in balance sheet expansion should have some pretty serious consequences. Clearly there have been no dire consequences, some economic data has looked pretty good and of course the stock market has done well.
The more interesting question is why have there been no dire consequences? Often when someone is challenged on being wrong about this sort of thing they will reply about being early. How likely is it that the worriers are simply early?
A few years ago someone (sorry, don’t remember who) strung together a theory that the financial crisis stemmed from going off the gold standard in 1971. Short version; that led to the huge run up in gold, albeit slightly delayed, in the 1970s which contributed to the huge run up in interest rates which then led to the multi decade bull market in bonds which then caused all the distortions that triggered the financial crisis.
If that registers at all on your plausibility meter then no painful consequences from QE after a few years isn’t shocking. There have been other economic events that have had long theoretical shadows so don’t be surprised if this one does too.
That last sentence is the whole point of this post. The typical advisor or do it yourself investor does not need to have the ideological stake here that Shlaes (or even Rick Santelli) has, I certainly don’t. The potential utility in understanding the potential here is reduced likelihood of emotion or confusion if it turns out that bad things do ensue in the future.