Thursday, December 02, 2010

A Conservative Case For QE2?

David Beckworth argues that "conservatives", by which he means advocates of lower government spending should support the Fed's "quantitative easing" because he argues that the stimulative effects of it will reduce the need for fiscal stimulus, which in turn he argues will result in lower government spending.

Yet aside from making the dubious assertions that government spending and QE2 really boosts real growth (at least QE2 certainly boosts nominal growth, but that could mean higher inflation), he seems to be missing that deficit spending is encouraged if the cost of borrowing is lower. And as QE2 lowers real interest rates, it will reduce pressure on the politicians to reduce spending.

The big spending cuts we are seeing in for example Ireland and Greece as their cost of borrowing increased dramatically is a good example of how politicians respond to the cost of borrowing for the government.