A Meaningless Ratio

I’ve noticed for some time now that some financial TV guests are so eager to trash the Fed that they will say some really strange things in that service. One this morning probably should win the prize. The topic was QE2 and job creation. The guest gave an estimate of QE2 purchases to date and an estimate of the jobs created during that same period. Then he divided the latter into the former to get a cost per job. The program hosts went along with that little exercise without qualification.

Now, it’s fairly common to perform this exercise with stimulus spending to see how much each job created “cost” the government. Of course, that assumes no benefits to the spending except jobs created, but I can live with that little omission. But, “cost” of jobs in terms of Fed purchases of Treasuries? The Treasuries don’t disappear. They don’t vanish into thin air. They will either mature or be sold. The money spent on them isn’t “down the drain.” The Fed gets the Treasuries and pays for them with reserve deposits owed to banks. The banks get the reserves and pays for them with deposits owed to their customers. Maybe the operation didn’t create lots of jobs, but investing in Treasuries is not the same as throwing away money.

Yet, those who argue that QE2 didn’t do much good—didn’t create many jobs—also argue that it is debasing the currency. Has anyone bothered to look at actual M2 growth over the past year? Just under five percent.

Comments (2)

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  1. Erosen says:

    Great piece as usual. Confused about 1 thing. Doesn’t the Fed Create the reserves it uses to buy treasuries? Is this a typo? Or more likely I need more education….

    Debasement is not in M2….yet. But, it is real, intangible, incurable and psychological and QE is primarily responsible for it. Debasement is a concept, it s a form of theft, and worst of all, it will backfire eventually.

  2. Harold Black says:

    Bob, What you don’t mention is that M2 growth is irrelevant here. What is important is the growth in the monetary base. M2 will not grow unless the banks lend out excess reserves. Since we are in a recession there is little borrowing demand However, the base is the fuel for M2. It has increased sharply because of all the Fed’s actions. The question is what will the Fed do about the increase in the base?