The Fed’s Dangerous Game

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Mark Zandi, chief economist at Moody’s Analytics, who is often quoted in economic matters, said, “Bottom line: The plan provides a boost to the economy’s growth, but it is not going to solve our problems. Even with the Fed’s action, we’re going to feel uncomfortable about the economy in the next six to 12 months.”

The latest purchase of bonds is smaller than the $1.7 trillion worth of Treasuries and mortgage-backed securities the Fed bought in its attempt in 2008—QE1– to battle the financial crisis. The action lowered the yield on those securities, pushing down interest rates for consumer and business borrowing, as The Wall Street Journal observed.

Although the Fed has been holding short-term interest rates close to zero since December 2008, the economy continues at a near standstill. “The Fed is falling short on its two primary mandates: unemployment, at 9.6 percent, is well above ‘maximum sustainable employment’ and inflation is running below what the Fed considers to be ‘price stability,’ an informal target of 1.75 percent to 2 percent,” The Journal article of Nov. 2 said.

In using quantitative easing to stimulate the economy, the Fed bought assets, such as bank loans, mortgage-backed securities, and U.S. Treasury notes. The Fed issued credit through its Trading Desk at the New York Fed. This has the same effect as printing money. It enlarges the money supply. When a central bank prints money in excess of revenue coming in, it is monetizing the debt.

Many economists believe that the election results will make it difficult for Obama to push through any major spending initiative he thinks could stimulate the economy, thus placing more pressure on the Fed to try to get the economy going. One member of the Fed’s Open Market Committee, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said the new Fed move was too risky. But Fed Chairman Bernanke wants to jack up inflation from its current bottom. He claims that a little inflation can help the economy by encouraging people to spend their money rather than save it.

The potential risks are that any inflation will suck more strength from the dollar—already weak—stirring trade disputes with other nations. Probably most dangerous is flooding the economy with billions of dollars that the fed has to print will dilute the value of our existing money. And there is no guarantee that any lower interest rates will make people spend more money or that business will hire more people.

Rep. Ron Paul (R-TX), who will chair the subcommittee overseeing the Fed, told Reuters Nov. 4 the Fed is totally out of control. “Eventually we’re going to have monetary reform.”

The manager of the world’s largest mutual fund, Bill Gross, said on CNBC Nov. 3 that he thinks the Fed’s quantitative easing will cause the dollar to collapse by another 20 percent over the next few years.

By flirting with inflation, to just get a little bit, you run the risk of an inflationary spiral that’s hard to stop. Ask anyone who lives in Zimbabwe, where about $200,000 in Zimbabwean dollars is worth about .10 U.S. cents.

As Peter Schiff, president of Euro Pacific Capital, has said: “The sad truth is that the productive capacity of the American economy is largely in tatters…Introducing freer flowing credit and more printed money into such a system will do nothing except spark inflation.”

Our government has so far been able to borrow money from other counties at low interest rates. But as the Fed keeps buying up hundreds of billions in U.S. Treasuries, the rest of the world may soon refuse to take part in what some see as a Ponzi scheme.

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  • Bear from Russia

    The real problem is not in dollar, the real problem for US is that it outsourced a major part of real economic to other countries . Because of this you have such great unemployment rate. Current crysis was not surprizing for those economists who are able to see far then their noses. For example it was predicted by Michail Hazin in 1998, ten years before it happened. Hazin's book "The dusk of the dollar empire and the end of Pax Americana" was published in 2003, 5 years before crysis and now things are going as it was written in this book.

  • Jim Johnson

    The people who suffer the most from inflation are the ones who get the money last.
    Those who get it first will be the first to dump it and buy solids.

    Who do you think will get it first?

    Who do you think will get it last?

    • FredDawes1776

      Thank you Jim you are so right and the boys who are about to rape this Nation need to be removed in the old way the chinese Army will back the big boys in the end game who are in fact foreign Rats who have come here over the last 40 years and can go home after the mass murder of this nation.

  • Edward

    Ross Perot was so correct, but no one listen to him when he explained the results of NAFTA; With the "giant sucking sound" was his colorful phrase for what he believed would be the negative effects of the North American Free Trade Agreement (NAFTA).
    When Ross explained how the "giant sucking sound" would be the sound being made as US jobs are being sucked out of America. And that would end up being the only result of NAFTA.

    And NAFTA was just the start!

    • FredDawes1776

      about 80 million Americans said no but this government raped us, Edward thank you.

    • Larry

      Ask yourself – why is labor cheaper in Mexico and China? Mexicans and Chinese have to buy food, shelter, health care etc. And yet there is a vast difference. Thailand and India have good enough medical care that Americans go there to get operated on (its called "Medical Tourism").
      It can't be just that people in these places are starving and willing to be exploited. It must be that we have artificial causes of inflated prices that they do not. Rather than claim NAFTA is the cause of our troubles (rather than a government played a big part in the current meltdown) lets take a look at what we can improve rather than put tariffs on the products of other countries that trade with us.

  • tanstaafl

    It was said that in the latter stages of the Weimar Republic, citizens used to carry their inflated currency around in wheelbarrows.

    Perhaps it's time to buy a wheelbarrow.

    • Gamaliel Isaac

      Soon you'll need a wheelbarrow full of dollars to buy a wheelbarrow

  • Spider

    Note to the author – article should read 600 Billion not 600 Million, There is a big difference

  • ObamaYoMoma

    Bernanke needs to be tarred and feathered and run out of town. Someone needs to intervene before he explodes the economy. Moreover, the timing of this travesty was carefully timed to coincide with the Republican landslide in order to blame the inevitable consequences on the Republicans. It’s obvious.

    Moreover, the reason that nobody is investing in this economy, hiring, and economic growth is so stagnant is because of all the uncertainty with respect to the prospect of higher taxes and future healthcare cost. Monetizing the debt won’t force people to invest in the economy and to begin hiring. Instead it will devalue our currency at the same time that it creates galloping inflation.

  • Patrick Henry

    There are several phenomena involved that are gaining momentum and interacting that will produce what might be called the Perfect Storm. The steady loss of America's manufacturing base, the Panic-turned recession following another Fed-induced bubble, the exploding debt from bail-outs as well as the inability of our "best and brightest" to address the structural deficit, the creeping socialism in the form of regulations and expanding entitlements, and the Baby Boom's demographic time bomb.

    I will spare you the long answer and get to the point: either we reverse, dismantle or privatize the progressive economic policies, from the Federal Reserve and Social Security to Medicare and ObamaCare, or we will slide into the ranks of once-great empires, like Rome and Britain. Tinkering at the margins only adds insult to injury. I only hope that supporters of liberty rather than tyranny are the ones who pick up the pieces after our corrupt, morbidly obese, mixed economy succumbs to reality.

  • FredDawes1776

    The new movie Red Dawn was stopped about a year ago and maybe its way to real.

    So if you can stop a movie you got to stop any games that show American fighting back against our enemies after all that can be dangerous to fight back against Red's from China and obama and bill Ayers.
    didn't bill say in 1974 he wanted 20 million American dead and 25 million more on the way to death camps within 2 years ( see FBI REPORT)

  • Gamaliel Isaac

    What good is spending when you are spending hyperinflated dollars that aren't worth anything?
    Why anyone quotes Mark Zandi, chief economist at Moody’s Analytics, is beyond me. Has everyone forgotten how Moody gave mortgage backed securities such great ratings! If it wasn't for the geniuses or crooks at Moody's the world economy might be in much better shape.

  • Wesley69

    The FED's move is driving people into commodities such as gold, silver because they see wicked inflation in the pipeline. The countries of the world are warning the US about doing this with good reason – the dollar will be worthless and will the debt they hold.

    The real problem will be this hyper inflation will destroy people's savings, condemn people on fixed incomes to poverty. Prices of everything food items will skyrocket. The next step is that people will turn to the government to solve the problem. AND THAT IS WHAT THEY WANT. A CRISIS INTO MORE POWER

    Obama talked about a transformation. Economic disaster can bring that about. The Republicans may not have the time to even try their market solutions before the Event.

    Reading the previous post by FredDawes 1776, it is pointed out that Bill Ayers wanted 20 million Americans killed and 25 million Americans who refused to accept the New Order to be sent to reeducation camps. There can be little doubt about Ayers being a Communist. From a pamphlet entitled PRAIRIE FIRE – We need a revolutionary communist party in order to lead the struggle, give coherence and direction to the fight, seize power and build a new society.

    Is this to be the new society, the transformation that is ahead for us, that Obama, Ayers, the puppet master, King George Soros has planned for us? Time will answer that question. But something is ahead. The FED is out of control and it may bring about the collapse of the dollar, but also the Republic.

    All tyranny needs to gain a foothold is for people of good conscience to remain silent.
    Thomas Jefferson

  • Guest

    All communist regimes start by eliminating the middle class – the bourgeoisie. It happened in the former USSR, the PRC, Cambodia and elsewhere. They used outright murder but the same objective can be reached via economic genocide. No smelly corpses to bury.

  • rtk_51

    Obama dislikes America and is working to see that we are no longer powerful or free, this is just another attack on us.

  • WilliamJamesWard

    Road to inflation, no the road to hell is more like it.
    It would be nice to see some justice here…………….William

    • WilliamJamesWard

      Oh! and by the way I have sent a check to the Federal Government to
      cover all of it's debt, after all my paper is just as good as theirs with
      the exception my paper was worked for…………………….William