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Thursday, December 2, 2010

Dangers of quantitative easing

Quantitative easing is an inefficient way to prop up the economy. In short, the process moves hot money into the economy directly, hoping it will generate jobs and have a multiplier effect. Jobs creating jobs.

The age-old example by Keynes is this: take all the gold bullion in the Treasury, get 50 trucks to transport them across the country, then use diggers to dig up 100 feet deep and bury the gold inside. Then seal it. Then get another group of contractors to use train or trucks to dig out the gold, and move them back into the Treasury vault.

The whole process is supposed to create jobs for the truckers. Jobs for managers. Jobs for insurance company to insure the cargo of gold. Jobs for coffee makers. Jobs for tyre. Jobs for petrol station. Jobs for burger flippers.

So fast forward to Quantitative Easing 2, in the year 2010. How will it be performed and why is it inefficient? This cartoon below will dispel the clouds. You will learn why QE2 is not that great for the US economy. Why the Fed is not being respected. Why Goldman Sachs seems to be untouchable as a financial institution in a very wrong sense.

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