There's been a lot of press for NGDP targeting level lately, which I see as contingent continuous Quantitative Easing. Contingent because as long as NGDP is not up to target level, there'll be QE galore until it does. Continuous because anytime it ever falls below trend, up until the time policymakers say enough with targeting trend level, the monetary nuclear option a la Chuck Norris will be turned to. I've posted on why I think it would be difficult to target NGDP level. Essentially, I think monetary policy would be ineffective now because people are already indebted, many are already unemployed, and rates are already at zero. Putting rates at negative doesn't make the indebted go into more debt, or the unemployed to engage in more spending. The few who who may have most of the money can probably go around the confines of the fed's jurisdiction. A good metaphor for the Fed doing NGP targeting would probably be Charlie Chaplin, who, unable to to control and drive his runaway car, will try to move the road instead to where the car is going so it seems the car is going in the right direction. So is there an alternative target for doing QE?
How about targeting a desired fiscal spending level? If you look at QE as essentially a monetization of sovereign debt, you could look at it as enabling more fiscal policy action. Although excess reserves created by QE may not fund more bank loans, any excess could be put by banks into more liquid marketable securities. If these natural buyers of government bonds suddenly have more cash, and lesser of the bonds, will they be more susceptible to buy bonds in the next auction? Yes. But is QE2 necessary to ensure that funds are available for the next government bond auctions? No. Government deficits, or government spending, by their nature, create private sector income. It is this private sector income which can then be used for consumption in more private sector goods, and eventually result in private sector savings, which go into commercial banks as deposits, which causes bank reserves to increase, which makes banks buy more government securities.
How about targeting currency value? Will it achieve one of the lesser talked about objectives of trade policy – realigning and revaluing of global currency values, to make them more reflective of actual growth rates in various economies? What quantitative easing would do, more than causing the hoped for but largely improbable reflation in the US economy, is to cause this inflation elsewhere, mainly due to shifts in hot money flows and the carry trade, particularly to the countries that peg themselves to the US dollar. A fast-rising inflation will crush these economies. Inflation will end up killing their people’s real income, and hence, their purchasing power, and lead to over-all depression in their economy. They would rather have capital controls, and likely, would rather give up the peg than allow hyperinflation to kill their economies. But will it result in currency war instead, and a race to the bottom? Maybe a good metaphor for QE is releasing the kraken.
Unless QE is actually in the form of a monetary helicopter drop to actual job-creating ventures, both government or private sector-led, let's just stop thinking about QE.