As I posted in September 2008, this was the path that the Fed knew it was going to take even back then. Ben Bernanke has used every tool in his shed to fight deflation. The only thing more he can do is MORE of whatever he has done.
Be clear that the purpose of the QE1 and QE2 has been to stimulate asset prices, more specifically, to stimulate the stock market. One should ask whether the Federal Reserve's job is to stimulate stock prices. Here is the relevant quote from Bernanke yesterday:
Federal Reserve Chairman Ben S. Bernanke said resuming large-scale asset purchases should boost economic growth through lower borrowing costs and higher stock prices and that concerns about the strategy are “overstated.”
That statement should concern everyone. Gaming stock prices is something that is far outside of the Federal Reserve's mandate.
Before I go too far off on a tangent, I want to bring this back to school budgeting. QE2 is supposed to have the effect of lowering interest rates to the point that businesses will want to go out and get a loan and expand business and hire employees.
School districts, and most other government entities, only invest their money in very safe government bonds. This means that our budget will take a hit on the revenue side since our revenues generated from our investments will go down (as it did last year).
However, if QE2 has the added effect of goosing stock prices, this could have a beneficial effect on PSERS. PSERS is counting on 8% returns in its portfolio. Any gains over 8% could have the effect of lowering future PSERS contribution rates.
It is important to note that there are a number of economists out there that are suggesting QE1 and QE2 simply are an attempt by the FED to blow another asset bubble. In this case, the bubble appears to be in commodity prices (not good for HS construction costs) and stocks (good for PSERS). The FED again is forcing people to choose between no return on safe assets or mild yield on risky assets. This necessarily punishes savers, retired folks on fixed income, and the middle-class. And when the asset-bubble bursts (think NASDAQ 2001, home prices 2007-2008) the consequences far outweigh the short-sighted, short-term benefits. As Ludvig Von Mises said:
Inflation and credit expansion, the preferred methods of present day government openhandedness, do not add anything to the amount of resources available. They make some people more prosperous, but only to the extent that they make others poorer.
My educated guess is that QE2 will have no impact on unemployment or business activity. Money is already quite cheap. Businesses that wanted a loan, already got a loan.
Impacts on school district budgets will be difficult to judge in the near term. There will be some short term benefits (if stock prices remain elevated and that translates to lower PSERS contribution rates) but there will also be near term input price increases on raw materials (hurting us on the HS project).
The bigger problem here is the stubbornly high unemployment rate. The Federal Reserve has shot all its bullets and has not been able to make a dent in it. Until we can get people back to work, this economy will struggle through a quagmire for some time.
Thanks for reading.
James
