On Thursday, the Federal Reserve announced a new round of bond purchases to ‘stimulate’ the economy. What does this mean?
It’s not good, as I will explain. But first, some background.
The Federal Reserve is the U.S. central bank. It manages the supply of dollars available in the economy. When the Fed wants to, it creates money ex nihilo: it simply declares new dollars into existence. The process is electronic, but is metaphorically called ‘money printing’ because the Fed may as well have just printed a pile of cash. The Fed sends the dollars into the economy by buying financial assets; most often, it buys U.S. Treasury bonds. The recipients of the money – usually banks or the government – then spend and/or loan the new money, and eventually it circulates to the rest of us.
It’s important to understand that the new dollars, when printed in large quantity, dilute the existing supply of dollars – just like a company dilutes its stock, if it issues a lot of new shares. The new shares tend to push down the value of existing shares. It’s not an absolute; but normally (or other things being equal) each share will be worth less. Likewise, when the Fed creates a lot of new dollars, the buying power of a dollar is given a kick down. For example, instead of a dollar buying 1/20 a barrel of oil (like it did ten years ago, when oil was roughly near $20/barrel), in time, a dollar might only buy 1/90 a barrel of oil (like today, when oil is roughly near $90/barrel).
The Fed has printed a LOT of new dollars in the last couple of decades; and especially since the financial crisis of 2008. They have a euphemism for it, “Quantitative Easing” or QE. The euphemism is meant to suggest that, because the Fed boldly printed money in quantity, we’ll have easier financial and economic conditions. What the Fed announced Thursday, is that they are going to print a lot more money.
Naturally, Pravda (the left-leaning, pro-government New York Times) makes it sound like bold government officials bring us help and hope:
WASHINGTON — The Federal Reserve opened a new chapter Thursday in its efforts to stimulate the economy, saying that it intends to buy large quantities of mortgage bonds, and potentially other assets, until the job market improves substantially.
This is the first time that the Fed has tied the duration of an aid program to its economic objectives…[showing] a determination to respond more forcefully [to unemployment]…
Note how NYT tries to bias discussion, by calling it an “aid program.” Who could be mean enough to oppose an aid program for the unemployed? Especially one from bankers with beards. How could the aid program’s motives be anything less than pure?
“The weak job market should concern every American,” the Fed’s chairman, Ben S. Bernanke, said at a news conference. The goal of the new policies, he added, “is to quicken the recovery, to help the economy begin to grow quickly enough to generate new jobs.”
Got it? You should be concerned! Uncle Ben is here to help YOUR concerns! The problem is, it isn’t going to help. The Fed’s money-printing is part of the problem.
Again, when the Fed prints masses of new dollars, it dilutes each dollar’s power to buy real goods, such as food or oil. That is why the prices of food and oil tend to go up, when the Fed does these large money-printing campaigns. Meanwhile, your wages didn’t go up. Your savings account didn’t go up. So you can’t really buy any more. The Fed says you can. The Fed says that it just “stimulated” your home’s price, and that makes you feel richer and now you buy more things. But YOU know the truth, that you’re poorer. Because your monthly bills for gas, groceries, heat, etc. are just shocking.
Also, your company’s profit margins and balance sheet didn’t get any better. So your company’s business suffers. Your company fears for the future, and feels like it must hoard cash – rather than hire people. That is the story of the last 3-4 years. The Fed’s money-printing is one reason (combined with Obama’s harmful actions) why the economic “recovery” has been so weak. Because of the Fed’s various QE programs, prices have largely remained at elevated “2008” levels, or higher. Now the Fed is about to boost them even more.
The Fed’s thinking is twisted. And whenever one is faced with a firm and widespread belief in vicious nonsense, one must ask the question: Who benefits? Who has an interest in promoting this nonsense and seeing it accepted as unquestioned truth? And the answer, here, is: Big Government and Big Banking.
When the Fed prints money, it takes people awhile to realize that their precious currency is being debauched (more), and that they should charge higher prices accordingly. (Modern economists call that “well-anchored inflation expectations”; earlier, more sensible economists called it money illusion.) So the people who get the new money first are the ones who enjoy its full power to buy stuff. They win. The people who lose are the ones who receive the new money last; in other words, the rest of us, who are faced with pay higher prices for food, energy, and other real goods, BEFORE we figure out how to grow our own prices, salaries, or savings to match. This effect is called the Cantillon effect.
Now, who gets the Fed’s new money first? As stated earlier, when the Fed creates the money, it buys bonds with it, usually U.S. Treasury bonds. Who does it buy them from? The biggest banks who serve as the primary bond dealers, and who buy them in turn from the U.S. Treasury. In other words: the government gets the new money first, with the middlemen – the biggest banks – earning commissions. The Fed’s money printing benefits Big Government and Big Banking.
I’ve tried to explain the basics here. I could go on to talk about a lot more: how Uncle Ben is targeting the new program toward mortgage bonds with insane hopes of re-inflating America’s busted housing bubble; how Obama-Bernanke policies encourage people to live in debt and guarantee that the middle class will be forever enslaved in debt; how the Fed’s actions guarantee us a financial and economic crisis worse than 2008; how to protect oneself from Uncle Ben (hint: keeping a chunk of one’s savings in gold); how the U.S. eliminating its vestige of the gold standard in 1971 has contributed to the decline of the middle class over the last four decades; and more.
But this post is already too long. I shall close with a thought about the big picture. After years of debauching the U.S. dollar, the Fed announced, on Thursday and in effect, that it is going to debauch the dollar even more – debauch it again and again – continually looting the pocketbooks of the prudent and the productive, to benefit Big Government and Big Banking – until finally, somehow, magically, prudent and productive people are moved to satisfy the Fed’s demand that they hire a lot more employees. Hmm… What famous saying does that remind me of?