[Bond]

Originally Posted by Professor S

Huh? How so? From what I've always gathered, Friedman's life work was against such measures since "printing money" basically devalues it and amount to a inflationary tax on everyone. Pumping money into an economy to save it is Keynesian, not based on Hayek, who Friedman often echoed.

If you know otherwise, please share. It would shock the shit out of me.

Hokay, I can certainly agree that Friedman would not favor increasing inflation (as you're right, it is an indirect tax on everyone); however, inflationary concerns need to be balanced with concerns for the general economy, and more largely the ability to stimulate economic growth. Inflation is not a current economic concern. It is, perhaps, a long term concern, but certainly not a short term concern. It is true that inflation is currently especially noticeable in gas and food, but the rise in gas prices can be generally tied to turmoil in the Middle East, and food prices are historically quite volatile. Among most economists, there is still a general worry of deflation, not inflation.

Furthermore, when the systemic issues of our economy are examined, such as high unemployment and the debt issue, the only way out of these issues is to increase economic growth. This needs to take precedent over inflationary concerns.

I would also draw a careful distinction between fiscal stimulus, such as Obama's stimulus package, and monetary stimulus, such as QEII. A monetary stimulus can be executed by the Fed very quickly, and can in turn be stopped very quickly in the event of looming inflation. In comparison, fiscal stimulus is a much slower and clunkier instrument, and it additionally increases the national deficit, whereas monetary stimulus does not.

So, while monetary stimulus is better than fiscal stimulus, I would still agree it is not an ideal tool. A better tool that the Fed can use to boost economic growth is to lower interest rates, but as you know, interest rates are currently 0 percent. Monetary stimulus was the best option among a handful of worse options.

Brief excerpt from a WSJ editorial to further my point:

He would look at growth in income. "He considered stable nominal [unadjusted for inflation] income growth desirable because sudden swings in it (and thus in spending) cause huge macroeconomic disturbances when wages and prices fail to adjust quickly," says economist David Beckworth of Texas State University. Income is growing well below historical norms. POINT: For QE.

He would look at bond-market inflation expectations. In his 1992 "Money Mischief," Mr. Friedman said Treasury bonds with an interest rate tied to inflation would produce "a market measure of expected inflation" that would give the Fed "information to guide its course that it now lacks" and a way to "hold it accountable." It could even lead Congress to legislate an inflation target, he said with approval.

Today, we have inflation-tied bonds and what amounts to a Fed inflation target. Markets anticipated low and falling inflation—until Mr. Bernanke began talking about QE2 in late August, a sign that markets believe Fed's bond-buying will boost inflation, as the Fed desires. POINT: For QE.

Milton Friedman held unswervingly to his principles, but was more pragmatic than some of his modern-day followers. He was supremely self-confident, but, as Mr. Lucas puts it: "One of the many lessons I learned in Friedman's class was to work out my own views on questions, using economic logic as well as I can, and not to trust authority—even his."

The Friedman logic, though, makes the case for QE2.

Source: WSJ

Anyway, a lot of hate for the Fed and QEII stems from Ron Paul and Co. While I generally like Ron Paul and his Libertarian views, I'm afraid he isn't quite right on monetary policy. This isn't even to address the debt issue and the insane idea that he would entertain allowing us to default on the national debt.

Right now, working in the housing market, I can tell you that artificially keeping interest rates down is hurting business. Money hasn't been made available and underwriting is as tight as ever. Meanwhile, buyers feel zero pressure to buy as prices remain depressed and there is no fear that interest rates are going to rise. I recently helped put together a market statistics video for the Greater Philadephia area and the numbers are scary considering we're supposed to be in a recovery.

I don't disagree, however I would say this has more to do with general uncertainty concerning the economy than any of the Fed's doings.