Like a Thief in the Night: Part II

As I mentioned in Part I, quantitative easing (QE) is the action by the Fed of creating money out of thin air and injecting it in to the financial system. Although this subject hard to grasp for many Americans, it is essential to understand what is going on. Like a thief in the night, QE can rob you blind while you lay in a blissful sleep, stealing your wealth without your knowledge or consent!

The QE process used by the Fed is somewhat confusing. While it is not necessary to understand the intricate details, if you can get the gist of it you will be way ahead of the game. Wikipedia (see also Monetization Examples) has the simplest explanation of how the Fed plays Monopoly with your money:

A central bank implements QE by first crediting its own account with money it has created ex nihilo (“out of nothing”).[1] It then purchases financial assets, including government bonds, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations. The purchases, by way of account deposits, give banks the excess reserves required for them to create new money, and thus a hopeful stimulation of the economy, by the process of deposit multiplication from increased lending in the fractional reserve banking system.

Got it now? If not, that’s ok as long as you understand that by printing more money the Fed is devaluing every dollar you own. So what has the Fed be up to with QE lately?

The Fed has been very focused on keeping interest rates near zero to ease credit through the use of QE. So far the Fed has bought $1.7 trillion of long-term Treasury and mortgage related bonds. Seemingly, the Fed’s actions have for the most part worked. America’s financial system did not implode and plagues of locusts did not terrorize the country. However, despite the enormous amount of cash pumped into the economy, the economy was not jump started and the unemployment rate hardly changed. In fact the unemployment rate is now creeping back up to double digits. What is the Fed to do this time? More QE!

The big question for the Fed is how much more QE is necessary to fix the economy. Some Fed officials have stated their support for pumping an additional $2.35 trillion into the market in order to drive long-term interest rates even lower and stimulate the economy! Ok, well what if that doesn’t work? Why not just pump $5 trillion into the economy? What about $10 trillion? Where does this insanity end?

I am by no means an expert on the Fed or monetary policy, but it is not hard to understand that each time the Fed decides to use QE, my hard earned savings becomes worth a little less. Inflating the money supply is essentially a tax on the American people without Congress having to vote on it! Think about this, did you vote for Ben Bernanke for Federal Reserve Chairman? No, he was appointed. Did Congress vote to tax Americans more to help redistribute the wealth around to the financial industry? In the case of TARP and some other cases yes, but Congress has no voting rights or regulatory power over the Fed’s monetary policies such as QE. Therefore, Americans are basically being taxed each time QE is used by the Fed and there is little we can do about it!

It should not be surprising that after the Fed’s hint to use more QE to inflate the economy another $2.35 trillion that gold futures hit a new high, breaking $1300 per ounce. Is this another sign that we can expect hyperinflation to come in the near future? As long as banks keep hoarding money and businesses resist taking on new debt maybe not, but there is no way to predict that with certainty. What happens if the economy seems as if it is turning the corner and we quickly witness banks and businesses open up their vaults to the trillions that are on hold? With trillions of new money circulating through the economy the Fed may then be forced to hike interest rates to double digits in order to keep inflation from getting out of control.

Hyperinflation or not, the Fed is stealing your hard earned money, not for your interest but for their gain. The parties at hand have already shuffled through the green well before it ever finds its way to your bank account, then much deflated. This is a threat to your most basic God given liberties!

You ability to control the value of your dollar may have been sold to the Fed by Congress decades ago, you should not be discouraged from pressuring your representatives to support bills that will audit the Fed, limit its power and ultimately dismantle it. More importantly, there many things you can at home to prepare yourself for the inevitable economic woes ahead. Getting out of debt, keeping a minimum of six months emergency cash reserves, trimming unnecessary expenses, and refraining from taking on new unnecessary debt are just a few examples that a personal financial adviser will likely suggest to you. That way, when times get real tough, which I believe is certain, you will be much better prepared to ride the storm and come out stronger than before.

That is accurate, but their intentions are for the banks to lend the money out so it circulates through the economy. For some reason, Bernanke has been dumbfounded as to why banks are now being more responsible with their lending practices as opposed to handing money away to anyone who walks in. His solution - give them more money!

The Fed has a dual mandate - stable prices AND full employment. Those two goals are antithetical. How long is Congress going to let them focus on stable prices and start pressuring them to (try) to push the string to bet employment up?

The Fed has a dual mandate - stable prices AND full employment. Those two goals are often antithetical. How long is Congress going to let them focus on stable prices and start pressuring them to (try) to push the string to bet employment up?

“Banks don’t directly produce anything but debt...”

Well, in a well-functioning economy, they provide CAPITAL, which businesses need to expand. So the premise is that by lending to businesses, banks facilitate a “virtuous cycle” of borrowing to buy new plant or equipment, which in turn creates jobs, which in turn creates demand for the new goods etc. etc.

But the central implication of your remark is correct: had we instead put dollars directly into the hands of consumers, many would have spent it immediately, while others would have saved it (i.e., put it into banks!). The point being that goosing the economy indirectly through the banks is far less effective than goosing it directly via giving households more money. One could argue that Americans aren’t spending “enough” because they feel overtaxed. Imagine if we had a one-year payroll tax holiday. The economy would skyrocket.

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