Saturday, August 20, 2011

Why Does John Mauldin Still Hate QE2?

John Mauldin has a sixth sense: he sees stagflation. Everywhere. Hence, his vociferous opposition to QE2. Never mind that the Fed was undershooting its tacit 2% inflation target back in August 2010 with implied ten-year inflation at 1.5% -- John Mauldin just knows that further monetary easing means the 1970s are right around the corner. And has apparently never heard of interest on excess reserves.

Mauldin recently reiterated his antipathy to QE2 with a substantive defense of Rick Perry calling Ben Bernanke "treasonous", while, of course, disavowing the Texas governor's belligerent tone. This is neither unexpected nor interesting. What is interesting is the chart Mauldin produces in the same note that purports to signal when the economy is entering recession. Compiling Fed surveys, along with a host of national economic indicators, Mauldin shows that recession warning signs are currently flashing bright red -- and that QE1 and QE2 not only turned things around before, but that their conclusion marked the beginning of economic weakening.

Simultaneously believing in this chart's predictive value and that QE2 was an unwise policy would seem to require a Herculean display of cognitive dissonance. Unless Mauldin simply subscribes to Mellon-esque liquidationism.

Still, it would be edifying if Mauldin would acknowledge the apparent tradeoff between 2-4% inflation and complete economic collapse, rather than ranting about the imminent return of problems that do not plague us. If we are to get past this muddle, we must cast aside Don Quixote economics.

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