The Federal Reserve is buying $600 million in government bonds in hopes of juicing up the economy. And it said Nov. 3 it will “invest” as much as $300 billion more from proceeds of its portfolio in Treasury securities. The plan is to have a touch of inflation to get Americans to spend instead of save. But the Fed is taking a risk that could well lead to racing inflation.
This game of high finance is called quantitative easing, This is QE2. It was tried before—QE1—and it didn’t work then. Many economists believe the Fed is out of control in announcing another quantitative easing. They maintain that the Fed is putting the future of the U.S.dollar at risk, and maybe even the stability of the global financial system.
Fed Chief Ben Bernanke is a bit like the miller’s daughter in the tale Rumpelstiltskin, who was trying to spin gold out of straw.
Bernanke’s game also obscures the fact that money is being printed out of thin air, then used to buy government debt. The Fed is monetizing U.S. Treasury debt through its commitment to buy Treasuries and doing so by a slight-of-hand maneuver, some financial wizards say.
A rush into commodities occurs when the public believes our dollar’s worth is shrinking. The Fed’s latest quantitative easing is already triggering a flood of liquidity into riskier assets, particularly commodities. The AP reported Nov. 4 that gold set a new record high and “other commodities chalked up broad gains as investors sought protection against inflation.”
Fed Chairman Bernanke seems enchanted by the faulty Keynesian philosophy described in John Maynard Keynes 1930s book, “The General Theory.” In sum, Keynes said his antidote for slow economic growth and high unemployment was massive doses of government spending. The Fed’s monetary policy has the same effect as the Obama Administration’s failed fiscal policy of spend, spend, spend.
Increasing the money supply on the scale as if it were dropping money from a helicopter earned Ben Bernanke the nickname “Helicopter” Bernanke.
The Fed announced Nov. 3 that it would purchase the billions in government bonds in a daring scheme it hopes to prompt people to spend more money and to stimulate hiring and rev up economic growth, the Associated Press and other media reported. The Fed’s plan is to buy at the rate of about $75 billion a month.
Although the Fed announcement helped push U.S. stocks to their highest close of the year—and election results probably helped—not all financial experts were smiling. Some worried that the amount was not big enough. Others fretted that it signaled inflation ahead.
The Fed and most policymakers expect employment to improve gradually “progress towards its objectives has been disappointingly slow,” the Fed said in a statement after its two-day meeting, ending Nov. 3.
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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