It hurts my heart when I see people misleading amateur investors. So I'm going to write take-downs of bad columnists.
"[QE2] cost $600 billion of your money."
Actually QE2 didn't "cost" money. The Fed traded $600 billion of one financial asset for $600 billion of another financial asset. This could cost something if the transactions were still conducted on paper, since in that case you'd have to buy the paper. Fortunately they're on computers.
One day someone takes $100,000 out of a CD and buys $100,000 in savings bonds. Does he need to cut expenses, since the savings bonds "cost" $100,000? No, because now he has $100,000 in savings bonds. Savings are unchanged.
Later in the column he gives a shout-out to Austrians who advocate a gold standard. But even in a gold standard the monetary authorities have to purchase gold half the time to keep its value from falling. To my knowledge, no advocates of a gold standard would say this half of their policy "costs" anything.
"According to the U.S. Labor Department, since last August the number of full-time workers has gone up by just 700,000, from 111.8 million to 112.5 million.At a cost of $600 billion, that’s $850,000 a job."
Last August is when I moved into my new apartment in Shadyside. That's 700,000 jobs per apartment that I rent. Of course, you might say you can't draw one-to-one effects between any two things that happen simultaneously.
Imagine that instead of buying the assets over a number of months, the Fed bought assets over the course of 50 years and called it QE2. Over the next 50 years, the number of jobs will definitely increase by tens of millions. Obviously, by spacing out its purchases over 50 years, the Fed would make QE2 impotent. According to Brett Arends, though, it would make more jobs attributable to QE2, since more jobs would be created during the time QE2 was going on.
"Meanwhile QE2 has created an entirely artificial bubble in all dollar-based assets."
This is a fine claim to make. But Arends follows his claims with reasons the "bubble" is not, in fact, artificial.
"What’s really happened is a decline in the value of the dollars that the shares [of the stocks on the S&P 500] are measured in."
If the dollar is actually devalued, that is evidence against a bubble. If dollars are worse less--or are going to be worse less--then higher share prices are rational. Just like it was rational that, after Argentina devalued its currency against the dollar, tradable products in Argentina started to cost more pesos.
A bubble is when an asset price will predictably fall. So to say shares are in a bubble is to say that the dollar is down temporarily but it's right about to gain lots of value.
But I don't think Arends believes the dollar is about to gain lots of value. He just hasn't thought about his assertions. He's just saying "bubble" and "devalued" dollar together because they're both negative things you could say about QE2.
"Measured in hard currencies, the stock market boom has been much less impressive. In Swiss francs, the S&P has risen by just 8.4% since Aug. 27. In currencies like the Swedish krone and Australian dollars it’s even less. Measured in gold, the S&P 500 is up just 4.5%."
First, gold is not a currency. Show me a menu with prices in gold.
Second, there are many currencies in the world, and they go up and down every day. At any time, you can measure a price against one of the currencies that has risen and claim the rise is actually, deep down, invisibly unjustified. Have you ever heard someone say "That house seems expensive, but what's it worth in Swedish krones?" If so, then you have been to Sweden.
Third, is devaluation a result of QE2 or the continuation of a trend driven by real factors? Here is the USD vs. the Australian dollar over a ten year period.
Australia is a country with tons of natural resources and few people. In a world with growing population and a growing number of machines that require natural resources, demand for things in Australia will rise. The Australian central bank will either let prices rise in Australia, or it will let the Australian dollar rise.
"Meanwhile the illusion of a boom is causing all sorts of investors to take crazy risks. Witness LinkedIn’s IPO."
If LinkedIn's share price is so certifiably inflated that it can be used as a piece of evidence in another argument, then Arends should write a column telling everyone to sell LinkedIn. You can make a fortune if you know for a fact that a share price will fall. Look at John Paulson.
More importantly, there is no logical link between investor's appetite for particular stocks and the Fed's policies. QE2 should raise share prices on average, because it will raise expectations of future nominal spending and hence corporate profits. But Arends denies share prices are really up on average. And more importantly, the potential "bubble" aspect of LinkedIn's share prices exists in investors' perception of its future profits relative to the profit growth of all other companies.
Why QE2 would suddenly make investors turn "crazy" is unclear. If there is a reliable, provable link between fed policy and the ability of professional investors to pick stocks, then Arends could win the Nobel Memorial Prize in Economics for making the link indisputable.
You get the picture. Arends is wrong/illogical.
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