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QuantItative Easing: Elixir or Poison?

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bernankeAhead of the November 11 - 12 G-20 meeting in Seoul, South Korea, the Fed announced QE II, another $600 billion between now and end of June 2011, a flexible figure to be raised or lowered freely, the Fed saying it will:

"....regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."

An additional $300 billion received from maturing securities will also be used. Easing, in fact, began around mid-year. Wall Street insiders knew it to take advantage, but not the public, QE being used to debauch the currency, harm the economy, and destroy, not create, jobs.

Market Ticker's Karl Denninger calls QE "the largest tax ever imposed on the American people in the history of the nation. It is more than fourteen times the Bush tax cuts....Goldman Sachs believes that Bernanke will impose a total tax through (QE) of more than four trillion dollars over the next two years, or more than fifty-seven times the Bush tax cuts."

How so? Because credit created is going into asset markets (stocks, bonds, commodities, etc.), not the economy. QE I's tax, in fact, diluted stimulus funds, an offsetting tax "directly into the bankers' pockets" for speculation, big salaries and bonuses.

Add to that inflation. According to James Grant of Grant's Interest Rate Observer, QE will create unsustainable asset bubbles and debase the dollar, making products and services more expensive, ending "everyday low prices." Bernanke wants inflation, a hidden tax. Devaluation is being used to get it, no matter the serious consequences.

Economist John Maynard Keynes in his 1920 book, "The Economic Consequences of the Peace," warned us, saying:

"Lenin....was certainly right. There is no subtler, no surer means of overturn the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not on man in a million is able to diagnose."

Denninger is just as blunt, saying unless public outrage stops this, "you're all going to be effectively dead economically.

Your assets will be stripped.

All of them.

Your homes.

Your businesses.

Your savings....And, when the inevitable margin collapse comes in the corporate sector, your stock portfolio will detonate again and your pension funds, Medicare, Medicaid and Social Security will be" toast.

There's no middle ground, no place to hide. Either "stop this madness or we all get destroyed. Those are the only choices," or as Tom Lehrer's memorable 1950s lyrics put it, referring then to potential nuclear annihilation, "we'll all go together when we go." All today except bankers, of course.

On November 4, on Bloomberg TV, David Stockman, Reagan's Office of Management and Budget Director, explained it this way:

Fed QE "is injecting high grade monetary heroin into the financial system of the world, and one of these days it is going to kill the patient," meaning economies and people.

In early 2009, economist Michael Hudson said:

"The (US) economy has reached its debt limit and is entering its insolvency phase. We are not in a cycle but (at) the end of an era. The old world of debt pyramiding to a fraudulent degree cannot be restored," only delayed  to postpone a painful day of reckoning.

Piling new debt on old exacerbates a bad situation. Hudson explained more in his latest article titled, "US 'Quantitative Easing' is Fracturing the Global Economy."

Quantitative Easing (QE) Defined

In simple terms, it's monetary policy to increase the money supply - literally creating it out of thin air. Wikipedia calls it central bank policy "to increase the supply of money by increasing excess reserves of the banking system. This policy is usually invoked when the normal methods to control the money supply have failed." Or have been exhausted in cases where interest rates are near zero, today's situation in America, Japan and elsewhere.

Central banks do it electronically, thereby increasing their own accounts to use any way they wish, but not risk free. Though not evident so far, too much money chasing too few goods causes inflation. Currency debasing, including the dollar, is another issue, very relevant today, given that it's part of the Fed's plan. Gold prices reflect it, rising from under $300 in 2002 to nearly $1,400 currently, experts believing it's heading much higher. Bond rates so far are low, reflecting economic weakness, but once inflation is sensed, they'll rise proportionately to the risk.

Project Censored's top 2009-10 story is the plan to replace the dollar, perhaps by debasing it to worthlessness. However, other nations have reacted, Michael Hudson saying by "creat(ing) an international monetary system in which central bank savings do not fund (America's massive debt). Russia, China, India and Brazil have taken the lead."

Others will likely follow. "Finance has become the new mode of warfare." Currency wars are in play for economic competitiveness, nations jockeying with each other during a period of economic weakness, a game putting them all at risk.

QE "is based on the wrong-headed idea that if the Fed provides liquidity, banks will....lend out credit at a markup, 'earning their way out of debt' - inflating the economy in the process."

Not the economy most people think of, however. The Fed's targeting "asset markets - above all real estate, as 80% of (US) bank loans" are for mortgages.

Importantly, Fed gamesmanship puts international finance at risk. "This is what US economic policy and even its foreign policy is now all about, including de-criminalizing financial fraud." In the 1980s, greed was called good, plenty of fraud, of course, with it. Today though, it's massive theft in amounts never before imagined in unknown multi-trillions, lots more to come unless stopped.

Instead of healing ailing economies, they're being wrecked. Hoped for new borrowing isn't happening. Instead, "banks have been tightening their loan standards rather than lending more to US homeowners, consumers and businesses since 2007."

Rather than lend domestically, dollars are flooding world currency markets, hoping insolvent banks can earn their way out of debt, and make America more competitive by debasing the dollar, perhaps replacing it.

Domestically, the market is "loaned up." Borrowing is shrinking, not expanding, a sure way to prevent economic growth. QE I failed, the $1.7 trillion created from March 2009 to March 2010. More worrisome is that QE II entails:

"consequences that Federal Reserve policy makers have not acknowledged. For one thing, the banks have used (bailout and liquidity funds) to increase their profits and to continue paying high salaries and bonuses. What their lending is inflating are asset prices," not output and employment. "And asset price inflation is increasing the power of property over living labor and production, elevating the FIRE sector (finance, insurance, and real estate) further over the 'real' economy."

Moreover, QE II is a zero sum game. It can only work at the expense of other economies. That's why it's "financial aggression," destroying global currency stability. It also harms America, the greater economy sacrificed for the FIRE sector, especially Wall Street, destroying countries and human beings for profit.

Todays "global economy is being turned into a tributary system, achieving what military conquest sought in times past." It's "implicit in QE II." However, other countries are reacting, "taking defensive measures against this speculation (and) 'free credit' takeovers" with cheap dollars, using various methods to do it.

The Reserve Bank of India just raised rates for the sixth time to 6.25%. The Reserve Bank of Australia increased theirs for the seventh time to 4.75%. In mid-October, China raised its rates. Brazil raised its tax on foreign investment in government bonds. South Korea may reinstate a withholding tax on foreign investors' holdings in some securities. Watch for other nations to impose similar measures, mindful of Fed policy.

Today, says Hudson, the "major international economic question....is how national economies can achieve greater stability by insulating themselves from predatory (Fed) financial movements," a zero sum game they'll lose if they can't.

Effectiveness of Quantitative Easing Questioned

QE I failed. Will QE II do better? Many economists think not, including Bernanke, having argued (with former Fed vice chairman Alan Blinder) against it in 1988. Minneapolis Fed president Narayana Kocherlakota agrees. Speaking in London in early October, he explained several reasons why, a key one that banks, flush with reserves, aren't lending.

Pimco's co-CEO Mohamed El-Erian also thinks QE II will fail, headlining on November 4 in the Financial Times, "QE2 blunderbuss likely to backfire," saying:

"....liquidity injections and financial engineering are insufficient to deal with the challenges that the US faces. Without meaningful structural reforms, part of the Fed's liquidity injection will (cause) another surge of capital flows to other countries," precisely what they don't need or want.

Fed policy will force other countries to protect their currencies, perhaps by capital controls, protectionism and other measures. As a result, the dollar's reserve currency status will erode, what's now happening incrementally.

"The unfortunate conclusion is that QE II will be of limited success in sustaining high growth and job creation in the US, and will complicate life for many other countries." That seems what Fed policy intends, wrecking world economies for greater FIRE sector profits and empowerment. Will it work is at issue, or will reckless Fed meddling destroy predators with their prey.

Economics Nobel laureate Christopher Pissarides believes QE II won't produce jobs. In a brief comment, economics Nobel laureate Paul Krugman also expressed doubt it can work. Former Fed vice chairman Donald Kohn said it won't turn around the US economy. At best, it might help marginally. Economics Nobel laureate Joseph Stiglitz in the Financial Times said it's "folly to place all our trust in the Fed," adding:

"It should be obvious that monetary policy has not worked to get the economy out of its current doldrums." Having failed so far, "monetary authorities have turned to quantitative easing. Even most advocates of monetary policy agree the impact of this is uncertain. What they seldom note, though are the potential long-term costs."

Stiglitz prefers fiscal over monetary policy, targeting education, technology and infrastructure. Even though government debt will be increased, "the assets on the other side of the balance sheet are increased commensurately," and over time, their return on investment far exceeds the cost. On the other hand, planned austerity, hoping monetary policy can work is "sheer folly." Machiavellian destructiveness better describes it.

Economist David Rosenberg is also skeptical, saying in a November 4 commentary that he sees QE II having "no visible impact on the willingness to borrow, the money multiplier or velocity, which is what we would need to see to declare this radical policy experiment a success." QE I also provided none. It was a total flop, suggesting QE II won't fare better. Worse still, Rosenberg sees destructive currency wars intensifying, leading to trade wars that don't "tend to end very well."

Market analyst Bob Chapman calls QE II a futile way to keep the economy and financial system afloat. For one thing, it drives out real investment, "the kind that creates jobs and profits." Fed policies are the opposite, producing debt and speculative excess. In the process, "they also crowd out other borrowers, which ultimately leads to higher interest rates and offsets banks' ability to lend." Moreover, consumers are gravely harmed. Their purchasing power declines, the economy, as a result, pushed "deeper into depression."

Deflation now besets America, but reckless money creation eventually causes inflation, "to be followed by hyperinflation and ultimately deflationary depression."

George Bernard Shaw observed that "If governments devalue the(ir) currenc(ies) in order to betray all creditors, you politely call this procedure 'inflation.' " It doesn't just happen. It's from reckless monetary and/or fiscal policies.

Moreover, the combination of government-created debt for wars and corporate handouts as well as QE II will "bury the economy." It will do nothing to increase demand, reverse the housing crisis, create jobs, or stimulate growth, what sick economies need to get well.

Financial expert and investor safety advocate Martin Weiss worries that the Fed is "unleash(ing) a whole new round of monetary stimulus, potentially driving more liquidity into gold, commodities, foreign currencies, and emerging markets, noting also "one of the greatest disconnects of all time between:

  • a sinking economy on the one side, and
  • the real possibility of roaring bull markets in certain asset classes on the other side."

On November 3, Bloomberg's Joshua Zumbrun suggested that Republican electoral strength may restrain Fed policy. Don't bet on it. The die is cast. QE II will be unchecked, the announced $600 billion an amount to be raised or lowered freely.

At the same time, bipartisan support for austerity will gravely harm millions of Americans. They're on their own with no help from Washington, newly elected bums even worse than repudiated ones. To their chagrin, voters will realize it once the 112th Congress convenes, what they already should know about a president who betrayed them.

A Final Comment

QE can work if used constructively, not destructively, as planned. Colonial America proved it, Massachusetts first in 1691 with its own paper money, backed by the full faith and credit of the government. Other colonies followed using scrip, freeing them from British banks, letting them grow their economies prosperously, inflation-free, with no taxation for 25 years. The secret was not issuing too much, recycling created money back into local economies for productive growth.

In other words, everything was kept proportionally in balance. Moreover, local governments paid no interest on their own money, created for growth, not banker enrichment at the expense of commerce, industry, and the public.

Lincoln did the same thing, again with government created money. His accomplishments and what followed turned America into the world's greatest industrial giant by launching the steel industry, a continental railroad system, and a new era of farm machinery and cheap tools. Free education was also established. The Homestead Act gave settlers ownership rights and encouraged land development. Government supported all branches of science. Mass productions methods were standardized. Labor productivity rose up to 75%, and still more was achieved during the post-war years, America's greatest period of growth before the Fed's 1913 creation.

By abolishing or nationalizing it, America could again be sustainably prosperous under a publicly-run banking system, everyone benefitting from inflation-free growth. Predatory lenders would be eliminated. Government would control its own money, creating it as needed interest-free. Federal taxes could be reduced or eliminated. Moreover, if states and local communities had their own banks, like North Dakota, it would work as well for them.

Under today's privately-run Fed and predatory banking system, Wall Street runs America, wrecking it for profit, QE its latest scheme. What could be used productively is a weapon of mass destruction. As a result, harder than ever hard times are coming, what only civil action can prevent, including demanding that government control its own money, what the Constitution's Article 1, Section 8 mandates.


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