QE2 Analogy

Posted by Jeff Carter
on November 15th, 2010

In another post, I highlighted two letters. One in the Financial Times, which was satirical. One in the Wall Street Journal which was serious.

However, the financial literacy of many people is not technical enough to understand the full effects of QE2. When economists and traders start talking about it, the normal person’s eyes begin to glaze over. It’s not that the concepts are really hard to understand, but the “shoptalk” describing the Fed action muddles the brain. Plus, the average person feels helpless anyway.

Here is an analogy to help someone understand QE2.

It is the fourth quarter of a football game. There are ten seconds left on the clock. It’s third down and four yards to go. The ball is on the 40 yard line. The score is 32-30. It’s been a hard fought game, with a lot of trick plays. If the coach loses the game, the season is over.

The coach is left with a choice. Go for a quick first down and then try for the end zone or kick a game winning field goal from 57 yards away. The coach knows that his kicker has enough leg. He’s done it in practice.

QE2 is lining up for a game winning field goal.

Many things can go wrong. A penalty could be called on the opposing team, giving you a better chance. Your team could get a penalty, making it tougher. The wind could shift. The kick could get blocked. The snap could go bad and your kicker could miss, ending the game. You could surprise everyone and call a fake. Or, your kicker could kick the ball through the uprights and you could win the game.

As a coach that just saw a bunch of substitutes run onto the field, wouldn’t you call time out and talk about it?

That’s what QE2 is really like. A pretty big gamble. There is little penalty for Bernanke if he would have waited. With a new Republican lead house, there is a slight chance that some fiscal policies will be changed. Changing those fiscal policies will have a pretty big effect on monetary policy.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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