Sidebar: You know how many $500 bills it would take to total $3 trillion? Yeah, six million. You'd need several days at Kinko's and a truck convoy to bring them back to the game!
Anyway, those assets would return to being held by the bank and the players would suddenly be flush with cash. The players would then have the ability (and - being flush with cash - likely the desire) to buy whatever their little hearts desire. If Monopoly were truly a 'free market' game, the plethora of cash would likely result in prices increasing substantially.
Inflation!
Would that the real world were so simple.
The reality is that no one knows if this experiment will be successful. The Fed's indicated objective is to lower borrowing costs and ignite a wealth effect by forcing investors out of low-interest-earning 'safe' assets and into more risky assets such as stocks. If successful, investors will feel more wealthy due to the rebounding value of their investments and will increase spending. The lower cost of borrowing will also (allegedly) encourage more spending and investing.
We doubt any net benefit will come of this second round of quantitative easing. Borrowing rates are already ridiculously low. Corporations continue to be reluctant to expand and hire despite massive reductions in their cost of borrowing. Consumers continue to deleverage rather than spend despite massive reductions in loan rates.
As for the so-called "wealth effect", Milton Friedman had an answer for that. In his 1957 book A Theory of the Consumption Function (no really - it's a riveting read!), Friedman advocated the "Permanent Income Hypothesis" which stated that consumers would regulate their consumption based on their long-term income expectations. (i.e. NOT current income) Having experienced a couple of nasty stock market crashes in the last decade, we would suggest stock market gains as something OTHER than "permanent" for most investors. From our perch, these expensive efforts to blow another bubble in the stock market will do little to help the economy short term and, unfortunately, set us up for the next ugly crash.
We sincerely hope we are wrong. But the reality is that if the first round of QE ($1.7 trillion) didn't jump-start the economy, why would anyone believe another $600 billion will? Moreover, consider Japan. They have been trying to restart growth through quantitative easing for years. . . to no avail. While Japanese government debt has increased exponentially over the past couple of decades, consumer debt in Japan peaked in 1995 and has been declining ever since. Appears we are on the same path. You know what happened in Japan.
The best reading we came across regarding the Fed's actions appeared in the Financial Times last Thursday and the NY Times last Friday. Links are below.
Finally, Gluskin Sheff Chief Economist and Strategist, David Rosenberg pointed out some scary facts regarding Japan's experiment with quantitative easing. In his November 5 observations he noted that
"The day the Bank of Japan launched the program on March 19, 2001, the Nikkei surged 7.5% from 12,190 to 13,103. It went on to make a fresh high on May 7 at 14,529 (just under two months after the announcement) - rallying another 11%."He goes on to point out that
"Three months later, as it became painfully obvious that the real economy was not responding well to the shock therapy, the Nikkei Index slid 16% to just over 12,000. Moreover, the day before 9/11 it had already tumbled all the way down to 10,050 (down 27% from the nearby post-announcement high and 14% lower than the day of the announcement itself!)."As Mr. Rosenberg concluded:
"Forewarned is forearmed."
Bernanke Pushes on a Very Long String
Financial Times editorial
November 4, 2010
Bernanke Fearing Fate of Japan, Not Greece
Sewell Chan
New York Times
November 5, 2010
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