and the Virtues of QE2
November 16, 2010
The primary motivation, as you mentioned earlier, is to avoid deflation. Although inflation is still very modest, we are seeing rises in commodity prices. How successful ultimately do you think it will be in inducing higher inflation? And is that really the Fed’s primary goal?
They want to stop deflation. They are aiming towards 2-3%, and they think that in real asset prices that might be even a little higher, because there’s a little leverage in those assets. That’s their goal – to nudge it up a little bit. Nothing excessive, and they definitely have the tools to ease it on the other side.
I’m a very strong supporter of this. This is absolutely the right policy to pursue at this point.
Let’s talk about the so-called tail risks, and the possibility of unlikely but not impossible events. For equity investors, what do you perceive is a greater threat: a Japan-like lost decade or a bout of very high inflation? How should investors think about protecting against those risks?
When you talk about a decade-long risk, that’s not something that’s an immediate concern. It’s going to take a decade for us to know about that. The Fed definitely wants to avoid that, and they want to avoid rapid inflation. The Fed has the tools to avoid both. Right now, pumping up asset values a bit and keeping inflation at the 2-3% mark is the right policy. At this point, I’d rather err on the side of slightly higher inflation than potential deflation.
Thank you. You’ve been more accurate than virtually anyone else to whom I’ve spoken and asked similar questions.
I’ll admit all of the mistakes I made, including not seeing this crisis coming or the effect of the leverage that the banks held, but I believe I was one of the few people who stayed positive on stocks when everyone else was so negative.
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