9 Reasons Why Quantitative Easing Is Bad For The U.S. Economy

The Economic Collapse ^ | 11/02/2010 | Michael Snyder

[WebFocus]

9 Reasons Why Quantitative Easing Is Bad For The U.S. Economy

Buckle up and hold on - a new round of quantitative easing is here and things could start getting very ugly in the financial world over the coming months. The truth is that many economists fear that an out of control Federal Reserve is "crossing the Rubicon" by announcing another wave of quantitative easing. Have we now reached a point where the Federal Reserve is simply going to fire up the printing presses and shower massive wads of cash into the financial system whenever the U.S. economy is not growing fast enough? If so, what does the mean for inflation, the stability of the world financial system and the future of the U.S. dollar? The Fed says that the plan is to purchase $600 billion of U.S. Treasury securities by the middle of 2011. In addition, the Federal Reserve has announced that it will be "reinvesting" an additional $250 billion to $300 billion from the proceeds of its mortgage portfolio in U.S. Treasury securities over the same time period. So that is a total injection of about $900 billion. Perhaps the Fed thought that number would sound a little less ominous than $1 trillion. In any event, the Federal Reserve seems convinced that quantitative easing is going to work this time. So should we believe the Federal Reserve?

The truth is that the Federal Reserve has tried this before. In November 2008, the Federal Reserve announced a $600 billion quantitative easing program. Four months later the Fed felt that even more cash was necessary, so they upped the total to $1.8 trillion.

So did quantitative easing work then?

No, not really. It may have helped stabilize the economy in the short-term, but unemployment is still staggeringly high. Monthly U.S. home sales continue to come in at close to record low levels. Businesses are borrowing less money. Individuals are borrowing less money. Stores are closing left and right.

The Fed is desperate to crank the debt spiral that our economic system is now based upon back up again. The Fed thinks that somehow if it can just pump enough nearly free liquidity into the banking system, the banks will turn around and lend it out at a markup and that this will get the debt spiral cranking again.

The sad truth is that the Federal Reserve is not trying to build an economic recovery on solid financial principles. Rather, what the Federal Reserve envisions is an "economic recovery" based on new debt creation.

So will $900 billion be enough to get the debt spiral cranked up again?

No.

If 1.8 trillion dollars didn't work before, why does the Federal Reserve think that 900 billion dollars is going to work now? This new round of quantitative easing will create more inflation and will cause speculative asset bubbles, but it is not going to fix what is wrong with the economy. The damage is just too vast as Charles Hugh Smith recently explained....

Anyone who believes a meager one or two trillion dollars in pump-priming can overcome $15-$20 trillion in overpriced assets and $10 trillion in uncollectible debt may well be disappointed.

In fact, economists over at Goldman Sachs estimate that it would take a staggering $4 trillion in quantitative easing to get the economy rolling again.

Of course that may eventually be what happens. The Fed may be starting at $900 billion just to get the door open. With these kinds of bureaucrats, once you give them an inch they usually end up taking a mile.

So why should we be concerned about quantitative easing? The following are 9 reasons why quantitative easing is bad for the U.S. economy....

#1 Quantitative Easing Will Damage The Value Of The U.S. Dollar

Each time you add a new dollar to the system, it decreases the value of each existing dollar by just a little bit. Now the Federal Reserve is pumping 900 billion dollars into the system and that is going to have a significant impact. Bill Gross, the manager of the largest mutual fund in the entire world, said on Monday that he believes that more quantitative easing could result in a decline of the U.S. dollar of up to 20 percent....

"I think a 20 percent decline in the dollar is possible."

#2 Inflation Is Going To Hit Already Struggling U.S. Consumers Really Hard

Already, investors have been fleeing from the U.S. dollar and other paper currencies and have been flocking to commodities, precious metals and oil. That means that the price of food is going to go up. The price of gasoline is also going to go up. American families are going to find their budgets stretched even more in the months ahead.

#3 Once An Inflationary Spiral Gets Going It Is Really Hard To Stop

The Federal Reserve is playing a very dangerous game by flirting with inflation. Once an inflationary spiral gets going, it is really difficult to stop. Just ask anyone who lived through the Weimar Republic or anyone who lives in Zimbabwe today. If the Federal Reserve is now going to be dumping hundreds of billions of fresh dollars into the system whenever the economy gets into trouble it is inevitable that we will see rampant inflation at some point.

#4 Inflation Is A Hidden Tax On Every American

Tens of millions of Americans have worked incredibly hard to save up a little bit of money. These Americans are counting on that money to pay for a home, or to pay for retirement or to pay for the education of their children. Well, inflation is like a hidden tax on all of those savings. In fact, inflation is a hidden tax on every single dollar that all of us own. We have been taxed more than enough - we certainly don't need the Federal Reserve imposing another hidden tax on all of us.

#5 The Solution To The Housing Bubble Is Not Another Housing Bubble

Today, approximately a third of all U.S. real estate is estimated to have negative equity. The Federal Reserve apparently believes that by flooding the system with gigantic sacks of cash banks will start making home loans like crazy again and home prices will rise substantially once again - thus wiping out most of that negative equity.

But the solution to the housing bubble is not another housing bubble. The kinds of crazy home loans that were made back in the middle of the decade should never be made again. Market forces should be allowed to bring the housing market to a new equilibrium where ordinary Americans can actually afford to purchase homes. But that is not how our system works anymore. Today, everything has to be manipulated.

#6 More Quantitative Easing Threatens To Destabilize The Global Financial System

We have already entered a time of increasing global financial instability, and the Federal Reserve is not going to help things by introducing hundreds of billions of new dollars into the game. Over the past two decades, bubble after bubble has caused tremendous economic problems, and now all of this new money could give rise to new bubbles. Already, we see financial institutions and investors pumping up carry trade bubbles, engaging in currency speculation and driving up commodity prices to ridiculous levels.

#7 Quantitative Easing Is An Aggressive Move In A World Already On The Verge Of A Currency War

Quantitative easing will likely help U.S. exporters by causing the value of the U.S. dollar to sink. However, this gain by U.S. exporters will come at the expense of foreigners. It is essentially a "zero sum" game. So all of those exporting countries that are already upset with us will become even more furious as the U.S. dollar declines. Could we witness the first all-out "global currency war" in 2011?

#8 Quantitative Easing Threatens The Status Of The Dollar As The World Reserve Currency

As the Federal Reserve continues to play games with the U.S. dollar, quite a few nations around the globe will start evaluating whether or not they want to continue to trade with the U.S. dollar and use it as a reserve currency.

In fact, a recent article on The Market Oracle website explained how this is already happening....

In September, China supported a Russian proposal to start direct trading using the yuan and the ruble rather than pricing their trade or taking payment in U.S. dollars or other foreign currencies. China then negotiated a similar deal with Brazil. And on the eve of the IMF meetings in Washington on Friday, Premier Wen stopped off in Istanbul to reach agreement with Turkish Prime Minister Erdogan to use their own currencies in a planned tripling Turkish-Chinese trade to $50 billion over the next five years, effectively excluding the dollar.

#9 It Is Going To Become More Expensive For The U.S. Government To Borrow Money

Right now, the U.S. government has been able to borrow money at ridiculously low interest rates. But as the Federal Reserve keeps buying up hundreds of billions in U.S. Treasuries, the rest of the world is going to start refusing to participate in the ongoing Ponzi scheme.

Peter Schiff, the CEO of Euro Pacific Capital, says that one of the big reasons for more quantitative easing is because the U.S. government is already starting to have difficulty finding enough people to borrow from....

At the end of the day, all this deflation talk is a red herring. The true purpose of QE 2 is to disguise the decreasing ability of the Treasury to finance its debts. As global demand for dollar-denominated debt falls, the Fed is looking for an excuse to pick up the slack. By announcing QE 2, it can monetize government debt without the markets perceiving a funding problem.

But the truth is that foreigners are not stupid. They can see the shell game that is being played. As Bill Gross noted on Monday, U.S. government debt will soon become a lot less attractive to foreign investors....

QEII not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices.

As foreigners begin to balk at all of this nonsense, the U.S. government will either have to start paying higher interest rates on government debt in order to attract enough investors, or the Federal Reserve will just have to drop all pretense and permanently start buying up most of the debt. Either way, once faith has been lost in U.S. Treasuries the financial world will never, ever be the same.

Most Americans have absolutely no idea how fragile the world financial system is right now. Once the rest of the world loses faith in the U.S. dollar and in U.S. Treasuries this entire thing could completely unravel very quickly.

The Federal Reserve is playing a very dangerous game. They are openly threatening the delicate balance of the world financial system.

Once the toothpaste is out of the tube, it is really hard to put it back in again. Cross your fingers and hold on tight, because things are going to get really bumpy ahead.

[C210N]

They are openly threatening the delicate balance of the world financial system.

There are some things that QE-II (and if needed QE-III, QE-IV, etc) are actually "good" for. Specifically, creating a dollar crisis that can lead to a global currency solution. Any problems associated can be blamed on the new batch of Republicans.

[Lazlo in PA]

This article can be summed up in one word. DOOM!

Blaming the Repubs is a tall order since the electorate has proven to be wise to what is going on as evidenced of the election. Plus our man Reid helming the Senate and Obummer still running the country really make things appear predominately Rat.

[Hoodat]

quantitative easing - n. the act of printing up more money to finance enormous government deficits which cannot be financed by traditional means.

All this spin regarding this action by the Fed is pure unadulterated BS. The ONLY reason that the Fed is expanding the money supply in this fashion is because the Treasury cannot sell bonds quickly enough at current interest rates to finance this 'unprecedented' (Obamaword) level of deficit spending. If we had a Fed that was really looking out for Americans, Bernanke would tell Geithner to pound sand.

[zek157]

At the end of the day, all this deflation talk is a red herring. The true purpose of QE 2 is to disguise the decreasing ability of the Treasury to finance its debts. As global demand for dollar-denominated debt falls, the Fed is looking for an excuse to pick up the slack. By announcing QE 2, it can monetize government debt without the markets perceiving a funding problem.

That pretty much sums the situation. Our savings will be worthless to buy a few months of “prosperity”. I disagree that the markets will not perceive a problem.

[WebFocus]

I think of all the reasons the author cites, the last one (#9) seems to be the most convincing.

This QE 2 is, before all, some form of insurance provided to the government, in order to guarantee that the new treasury bonds (approx. 100 billion dollars a month) will find at least one buyer.

The depreciation of the dollar would be perceived as a bonus by the Fed and the government. Remember that one of Obama’s projects is to double US exports. This can’t be done without a massive depreciation of the dollar.

On top of that, one shouldn’t forget that the US is incredibly lucky, because other major currencies do not offer better perspectives than the dollar.

The Euro? Should be long dead! The Pound? Not much better than the Euro! The Yuan and the Yen? Local currencies!

Of course, there are the commodities and among these, gold and silver.

But it is obvious that these markets are manipulated by the same ones (bankers) who play with the currencies (JP Morgan and HSBC are now being investigated for manipulating the price of silver).

Given the massive quantities of gold purchases, all over the world, by central banks as well as individuals, gold price should be well over 5,000 dollars an ounce now.

But the price is held by short sellers ( see JP Morgan and HSBC as examples ).

The question is: why on earth would anyone short sell something which appears to be a sure winner in the long term?

The answer is that these short sellers, guided by the Fed, don’t want to see the fiat currency system crash in a matter of weeks, something that would happen if precious metals’ prices were left to the (free) market.

They want an orderly decline and this is exactly what they have got until now: major currencies depreciating at a pace of 10 to 20% a year, and gold/silver appreciating at a similar pace.

[EasySt]

From http://www.themoneymasters.com/

“The purpose of this financial crisis is to take down the U.S. dollar as the stable datum of planetary finance and, in the midst of the resulting confusion, put in its place a Global Monetary Authority [GMA - run directly by international bankers freed of any government control] -a planetary financial control organization”- Bruce Wiseman