The Wall Street Journal hosted a video debate between Brad DeLong, an economics professor at University of California Berkeley, and Jim Grant of Grant's Interest Rate Observer. The subject was the prudence of another round of monetary easing, or QE3.
Jim Grant bases his recommendation on the ineffectiveness of the first two rounds of monetary easing, and the observation that interventions and manipulations are often met with unintended consequences. He notes that large cash balances have been amassed, but that these balances are not purchasing goods. He notes a fear of inflation in general and asset bubbles in particular
Professor DeLong's argument begins with a appeal to the Milton Friedman's reputation. He claims that QE3 is what Dr. Friedman would prescribe, based on Friedman's work relative to the Great Depression and the lost decade in Japan. DeLong sees no asset bubbles, and expects "NEGATIVE headline inflation" (my emphasis) before the end of the year.
My take is that QE3 would be more detrimental than helpful. We are seeing signs of bubble pricing in certain ares: gold, Treasury Notes, oil. The inflationary effects of these bubbles are being masked by the deflationary forces working in other sectors: housing, industrial capacity. There is a sea of liquidity waiting to be unleashed when the economic, regulatory, and taxation conditions are favorable. It's probably better for the country to go ahead and take its medicine, get labor and capital reallocated, and then move forward.
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