Bloomberg's recently (and quite rightly) christened "Forbes 30 Under 30" superstar Josh Barro is inside my head. Or at least that's what the title of his recent post for The Ticker implies. But since he kindly didn't dig deeper in exploring the depths of our depraved "Hard-Money Advocate" Brains, let me clear up a few things.
There is an implicit assumption that more QE will lower unemployment, and that QE has some direct relationship to the decline in the official unemployment rates. I am not as far inside the heads of the easy money advocates as Josh is into mine, so perhaps he can explain the causation again, but there does not seem to be much evidence for cheap money demand in the economy right now, meaning more easy money is not going to do much to fix the economy. So any supposed benefits of QE that might be worth while trade offs to problems we see just don't exist in our minds.
On the flip side there are concerns about asset bubbles forming as a result of QE distorting resources that are quite front and center in my brain. Josh uncovers that we sound money advocates (as we like to call ourselves) are not fully aware of the opposite effects of QE: the terrible impact of austerity in Europe. That assumes we care. This is the part where avoiding the label of cold-hearted libertarian is really hard because I do think there is long-term gain from the creative destruction of austerity that is worth the short-term pain. Even if easing can be successfully deployed to create short-term stimulus, that misses the point of what austerity is trying to accomplish. And I think there is a long-term harm from resources flooding assets they otherwise would not because of cheap money. Not only do savers not get the trade off of a sound economy from QE, but they are forced to put their money into alternative financial vehicles which inherently makes QE an asset bubble inflator.
Sure, it is easy to point at economic turmoil in Europe in blame it on austerity, but that is like blaming heroin withdraw on a lack of heroin. The austerity pain is sort of what we are going for. Josh is correct, we do endorse the results. It's al that creative destruction and resources needing to be reallocated stuff in our sound money heads that makes the pain feel worth it for the end.
Now, where the fears of asset bubble creation as a result of QE distortion of resources are probably understated, the fear of inflation is admittedly overstated. It is true that Reason did a whole issue devoted to inflation mongering back in 2009. And yes, I carry some concern that all of the cheap money from QE sitting on bank balance sheets in the form of alternative investments to MBS and Treasuries could spill out rapidly into the economy and the Fed would fail to mop it up by responding fast enough. It makes perfect sense to question the technical prowess of the Fed and is more than generous to just give them the benefit of the doubt. But while I do think that is a possibility, I don't really see it happening in the immediate future—because there is no where in the economy for the banks to put that money, and those opportunities will only slowly appear.
That said I do fear we are currently experiencing higher inflation than the bond-markets reflect or that CPI reports. Housing costs make up a large component of the inflation numbers, but with falling housing prices and rising commodities prices, you can have the cost of staples at the check out counter masked in the headline figures by an off setting housing price decline. I don't think CPI measures this challenge accurately and so my inflation fears are more nuanced than in-my-head-Josh lets on. (Of course housing prices stopped falling rapidly and commodities prices are all over the place so even this fear is tempered at the moment.)
Finally, Josh hopes Japanese Prime Minister-elect Shinzo Abe will easy Japan to recovery, but this fantasy must dwell in the ominous clang of the history of the Japanese Lost Decade—which was marked by several failed rounds of quantitative easing.
(And yes, this is way easier for me to say from my comfortable Astoria apartment and MacBook Air while sipping a whisky and cider, than it would if I had half my salary, limited job prospects, and only an IMB Thinkpad to write from. But if the argument for easing is that it is inhumane to let unemployment get that high in exchange for long-term gain, just be clear about that argument and then we can discuss the morality of easing instead of whether or not it "works" in the abstract.)