Friday, October 8, 2010

Quantitative Easing?!.... don't call it inflation!!

This morning I woke up to NPR morning edition talking about quantitative easing. So, what is quantitative easing? Long definition short, printing money.

As NPR pointed out, this has not really been tried much before and no one knows if it works, but this is the only option the government has left to try. Stimulus was very lack luster, the interest rates are already at zero percent, and that's not working. So the only thing left to do is print money! Monetize the debt! Buy treasuries from banks and pay for them with money printed out of thin air (...and, of course, a little paper and linen... and a lot of pixie dust). To NPR's credit, they laid out two options, they either try quantitative easing, or do nothing (praying..."please do nothing, please do nothing!!) This is the only thing government can do (actually the Fed) without consulting the congress or the public. We or our representatives have absolutely no say in this! (That's not shady at all!)

Does this result in a back door bailout for banks? Yes!! The banks get a ton of debt taken off of their records.

Does this result in lower national debt? No, the debt is just transferred to the fed!

Does this increase the money supply? Absolutely!! It is a fancy term for INFLATION!!! This is the one term I was waiting for in NPR's reporting, but they never said it. This is the dirty word of the day that the Feds do not want you to say! Inflation, inflation, inflation!!!

There is no proof that increasing the money supply increases wealth, what it does is devalue the currency! The only thing this helps is debt burden. Sure, your cost of living will go up. Inflationary policy rewards those with massive debt burdens lighten the burden of their debt, but punishes savings by devaluing each dollar saved. In short, if you are financially responsible you are screwed.. this rewards the irresponsible big spenders. The biggest and most irresponsible being our government (and financial sector).

Our government is under serious pressure to decrease our debt burden. The world market is threatening to abandon the dollar as the world currency due to our irresponsible national debt. What would happen if they abandon the dollar? Well, basic supply-demand tells us that it would result in inflation! It would result in a plummet of demand, dollars flooding the market as everyone unloads their currency, and a glut in supply. The value of the dollar plummets and inflation in prices soar.... (this might be a good time to trade in your US currency for some Canadian dollars. Later you can cash them in after the storm.)

So how do we ward off the world abandoning the dollar and inflation at home? Cut spending, cut spending, cut spending!!! There is some truth that this would result in further pain, but it is short term pain for long term gain. This would result in deflation. This is true. But deflation would be healthy at this point, and there are thing you can do to shorten the pain of deflation and kick start the economy. Our government is telling us they are out of options, but the real solutions lie in the options they are not willing to try!

To lessen the effects of deflation (which is the direction the markets want to go and is why government intervention is not working, they are fighting against the market) you can cut regulation, release the chains, cut government spending, and cut taxes when and where we can... but tax cuts may not be possible, as we have a large debt hole to dig ourselves out of. These methods are all very popular among the public right now, but getting government to listen is a whole other story. Government, just as individual citizens, do not like to give up money or power once they have had a taste of it, and this would put more money and power back into the hands of the citizens!!


QE Won’t Work; Markets Won’t Care

“The bank sector remains weak,” he goes on, “and unable to increase lending to companies. There are dangers that further QE could lead to major new problems rather than leading to economic recovery.”

Then there are the curmudgeons at Capital Economics. They’re resolutely refusing to touch the QE Kool-Aid too.

“Quantitative easing provides commercial banks with an opportunity to lend more money. But it does not guarantee that they will. Banks may lack capital or be worried about the financial health of prospective borrowers. Or nobody may want to borrow money, even when interest rates are close to zero.”

Private vs. Federal Government Saving

Nearly 30 years ago, Federal Reserve chairman Paul Volker had to raise U.S. interest rates to 20% to combat inflation of 13.5%, following the stagflation of the 1970s.

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