There is a rising, worldwide tide of protest against the Fed's decision to proceed with QE2. Today's WSJ has an excellent op-ed on the subject, which included an insightful quote from Sarah Palin: "We don't want temporary, artificial economic growth brought at the expense of permanently higher inflation which will erode the value of our incomes and our savings." That captures the essence of the layman's QE2 concerns.
The chart above shows that the bond market is protesting as well. 30-yr bonds—which are quite beyond the scope of the Fed's planned bond purchases, and generally immune to Fed manipulation in any event—have been marching steadily higher in yield (and lower in price) ever since late August, when the Fed began pre-announcing its intention to proceed with QE2. Quite simply, the bond market is telling us that QE2 will indeed accomplish its stated objective of increasing inflation. Gold, trading today at over $1400/oz., is also telling us that QE2 will prove inflationary. Industrial commodity prices are at all-times high as well, and the dollar is at or near all-time lows against other currencies.
The issue now becomes this: how long will the Fed ignore the growing number of market signals that its proposed QE2 is not a good idea? Dissension among the Fed governors is growing, and I note Kevin Warsh's op-ed in the WSJ the other day as being particularly well thought out. Encouragingly, he makes it clear that the only rational way to stimulate the economy is through the supply-side, not with monetary policy:
The U.S. and world economies urgently need stronger growth, and the adoption of pro-growth economic policies would strengthen incentives to invest in capital and labor over the horizon, paving the way for robust job-creation and higher living standards.
Pro-growth policies include reform of the tax code to make it simpler, more transparent and more conducive to long-term investment. These policies also include real regulatory reform so that firms—financial and otherwise—know the rules, and then succeed or fail.I think Bernanke must be a very nervous man these days. He is determined not to let deflation show up on his watch. But I doubt whether he is going to plunge ahead with QE2 in the face of mounting opposition to inflationary policies, and mounting evidence that deflation and a liquidity shortage are the least of the economy's problems at this juncture. I think that when push comes to shove we are going to see that QE2 is a conditional policy objective, not cast in stone. It can and most likely will be shut down or put on hold before too long.