Categorized | Economic Crisis

QE1, QE2, QE3, QE4…….. Terminate?

The minutes of the latest Fed meeting show that their quantitative easing programs may terminate sometime in 2013.

Yeah right!

There are two ways to interpret this lofty and fanciful goal: either the Fed has no idea about how an economy works, or that the Fed understands very well the catastrophe into which it is leading the US and the world, but it simply cannot stop. The Fed is past the point of no return and they CANNOT stop their policies now, or else the whole system will alt-ctrl-delete.

Here are the key points as to why the FED will most likely not stop printing money:

1. The Fed’s objective of lowering unemployment down to 6.5%;

2. Keeping interest rates artificially low till the end of 2014;

3. The importance of inflation to help wipe out pre-existing debt and obligations;

4. Deflation is the banks’ worst nightmare;

5. Debased currency and the race to the bottom;

6. Manipulate opinion by creating fear of inflation;

7. Money printing stoppage will probably trigger a stock market collapse;

8. Push the “can” down the road again and delay the day of reckoning.

1. The Fed’s objective of lowering unemployment down to 6.5%

At the December 2012 FOMC meeting, the Fed stated that they expect to keep interest rates low until the unemployment rate falls below 6.5%, so long as inflation stays below 2.5%. The only way how interest rates will stay low is for the Fed to continue printing money so they can purchase government treasuries. If their QE programs stops prematurely, then interest rates have to go up because less people will be buying bonds! This is basic supply and demand.

The unemployment rate at the close of 2008, right at the end of Bush’s term, was 6.8%. After four years it is now at 7.8%. There were no net increase in jobs during Obama’s whole first term. Since printing money is seen as a stimulus to the markets and hence job creation, we should expect Bernanke and friends to be printing money until unemployment goes down to the desired mark; but good luck decreasing unemployment when you have higher interest rates! They couldn’t even do it when interest rates were low.

Here’s another angle: the food stamps situation in the US. When George W. Bush took office in 2001, there were 17.3 million Americans on food stamps; at the end of his term in 2008, there was 28.2 million, a 63 percent increase in eight years or (1.36 million every year). With Obama there are now, in 2013, 46.37 million Americans (or 15% of the entire US population) in need of food stamps for basic survival. This is an increase of 64%  (or 4.54 million). An increase in interest rates will push up the number of Americans on food stamps.

2. Keeping interest rates artificially low till the end of 2014

In January 2012, the Fed stated that they would pledge to hold interest rates low until late 2014, keeping it at the historic low range of 0-0.25%. As mentioned, keeping interest rates low is imperative to keeping the economy rolling, increasing jobs, and lowering unemployment.

But as with all in life, you have to strike the iron while it is still hot, and the Fed is so far past doing “the right thing” that increasing interests rate now, at this advanced stage, would not only not have any positive benefits, but it would also accelerate the implosion of the US–and consequently the world’s–economies.

Bear in mind that the current interest payments on the national debt is nearly $1 billion per day. Any increase in interest rates would increase these interest payments. To concretize this in real numbers, consider that a 1% increase would lead to an additional $164 billion in interest a year. The US government is already operating at trillion-dollar deficits; this increase would not be helping their plight.

3. The importance of inflation to help wipe out pre-existing debt and obligations

As stated in a previous post, US Debt Crisis How High Will It Go?, almost half of the spending done by the US government goes to entitlements (Medicare, Medicaid, social security). Approximately 28% of the US population are baby boomers, and 80% of investments and laws are carried out by this powerful demographic.The importance of keeping up with this demographic’s entitlements is a must for the most obvious reasons, but with increasing debt, one of the ways of rendering these obligations less burdensome to the US government is through inflation.

By debasing the currency, pre-existing debt and obligations are paid out with inflated dollars. If interest rate hikes would occur, it would probably cause deflation (assets sell off). Deflation would increase the value of the dollar and make it harder to pay out these interest payments and obligations with the already dysfunctional economy.

4. Deflation is the banks worst nightmare

Deflation by definition is a decrease in the supply of money resulting in lower asset prices and a higher dollar value. If this would occur, another round of foreclosures would enter into the market. The result could very well be banks left with more toxic assets coupled with yet another bank bailout, if not an actual bank-run as we have seen in Greece ans Spain last year.

5. Debased currency and the race to the bottom.

US foreign debt gets devalued through inflation–and this begs mentioning China’s colossal $1 trillion exposure to US debt. If the Fed’s money printing policy would stop right now, then the the opposite would occur: the debasement of the US debt would stop, and foreigners would be winners as the US debt they hold becomes more significant.

During the 2011 presidential state of the Union, Obama reiterated that boosting the amount of goods we ship overseas should be a top priority in reducing unemployment. A sure way to increase exports is by debasing the currency by money printing.

It is extremely shortsighted for a government to think that it can manipulate its own currency so that other countries will find its products cheaper through underhanded currency manipulation. These merits of these exports must be real–they need to come from innovation, such as technological advancements or more efficient ways of doing things etc.

6. Manipulate opinion by creating fear of inflation.

The US has increasingly become a service-based economy. If people are encouraged to save, then a service-based economy does not work very well. People need to be encouraged go out and spend their money if a service-based economy is to function properly. However, spending money is psychology-driven. As Jim Rickards points out in his great book Currency Wars:

“Spending, however, is driven by the psychology of lenders, borrowers and consumers, essentially a behavioral phenomenon. Therefore, to revive the economy, the Fed needs to change mass behavior, which inevitably involves the arts of deception, manipulation and propaganda.”

7. Money printing stoppage will trigger a stock market collapse

I don’t even want to go there.

8. Push the “can” down the road again and delay the day of reckoning.

This seems to be the trend.

By not continuing the quantitative easing programs the FED has already initiated, interest rates would be left to rise and wreak total havoc worldwide. Markets would surely collapse almost instantaneously, companies would go bust, there would be increased layoffs and real-estate defaults, the Ponzi schemes of banks would be exposed, and the world would be under a total economic standstill.

This is why the Fed cannot stop the quantitative easing. Sure, they can disguise it with yet a fancier name or disguise it under a thousand masks, but ultimately people are going to notice that the emperor has no clothes.  All the mess would be exposed if they were to stop printing money today. Printing money (i.e. pushing the can down the road) until it creates hyper-inflation is much more favorable politically–because no one would know then where to point the finger in the midst of such financial havoc. All the roads point to this direction as it is the PATH OF LEAST RESISTANCE.

One caveat: the Fed has all kinds of tricks up its sleeves to continue playing this unfair game, which is why it is impossible  for anyone to predict with any accuracy the exact date of a collapse. Call it quantitative easing, call it Operation Twist, the Fed has its ways to prolong its game, but it is running out of ammunition: interest rates are already at 0% and it has been purchasing US government bonds.

How long do you think the Fed can keep this going?


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