Tuesday, January 04, 2011

Massive Fed Bond Buying Stimulates Weak Recovery

When you spend this much money, you ought to expect some big results.  Minutes of the Fed's discussion of QE2 show concern that further huge monetization of U.S. sovereign debt is needed to keep the economy growing.  It's worth asking exactly how much growth this is purchasing.

Factory orders rose in November in a precise reversal of October's drop.  Fine.  That's nice.  One discouraging caveat is that much of it resulted from an expectation that continued tax cuts will support consumer spending.  Good luck pulling more demand from the future if the bond market runs away from U.S. debt.  Everything buoyant news item about this "recovery" is derived from forced monetary inflation and fiscal irresponsibility.  Those things can't continue forever. 

Further bond purchases will likely hit a wall of rapidly diminishing returns very soon.  That makes the whole project futile.