Michael Snyder
The American Dream
Saturday, September 15, 2012
The American Dream
Saturday, September 15, 2012
Ready or not, QE3 is here, and the long-term effects of this reckless money printing by the Federal Reserve are going to be absolutely nightmarish. The Federal Reserve is hoping that buying $40 billion worth of mortgage-backed securities per month will spur more lending and more economic activity. But that didn’t happen with either QE1 or QE2. Both times the banks just sat on most of the extra money. As I pointed out the other day, U.S. banks are already sitting on $1.6 trillion in excess reserves. So will pumping them up with more cash suddenly make them decide to start lending? Of course not. In addition, QE3 is not likely to produce many additional jobs. As I showed in a previous article, the employment level did not jump up as a result of either QE1 or QE2. So why will this time be different? But what did happen under both QE1 and QE2 is that a lot of the money ended up pumping up the financial markets. So once again we should see stock prices go up (at least in the short-term) and commodities such as gold, silver, food and oil should also rise. But that also means that average American families will be paying more for the basic necessities that they buy on a regular basis. The most dangerous aspect of QE3, however, is what it is going to do to the U.S. dollar. Most of the rest of the world uses the U.S. dollar to conduct international trade, and by choosing to recklessly print money Ben Bernanke is severely damaging international confidence in our currency. If at some point the rest of the world rejects the dollar and no longer wants to use it as a reserve currency we are going to be facing a crisis unlike anything we have ever seen before. The real debate about QE3 should not be about whether or not it will help the economy a little bit in the short-term. Rather, everyone should be talking about the long-term implications and about how QE3 is going to accelerate the destruction of the dollar.
The following are 10 shocking quotes about what QE3 is going to do to America….
#1 Ron Paul
“It means we are weakening the dollar. We are trying to liquidate our debt through inflation. The consequence of what the Fed is doing is a lot more than just CPI. It has to do with malinvestment and people doing the wrong things at the wrong time. Believe me, there is plenty of that. The one thing that Bernanke has not achieved and it frustrates him, I can tell—is he gets no economic growth. He doesn’t do anything with the unemployment numbers. I think the country should have panicked over what the Fed is saying that we have lost control and the only thing we have left is massively creating new money out of thin air, which has not worked before, and is not going to work this time.”
“This is a disastrous monetary policy; it’s kamikaze monetary policy”
“This is the nuclear option for them. This is a never-ending weapon that is being fired at the middle class”
#4 Donald Trump
“People like me will benefit from this.”
“Quantitative easing—a fancy term for the Federal Reserve buying securities from predefined financial institutions, such as their investments in federal debt or mortgages—is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality formed by crony capitalism. And it is hurting prospects for economic growth down the road by promoting malinvestments in the economy.”
“That’s absolutely nonsense. The Fed is just propping up the banks.”
#7 Marc Faber
“I happen to believe that eventually we will have a systemic crisis and everything will collapse. But the question is really between here and then. Will everything collapse with Dow Jones 20,000 or 50,000 or 10 million? Mr. Bernanke is a money printer and, believe me, if Mr. Romney wins the election the next Fed chairman will also be a money printer. And so it will go on. The Europeans will print money. The Chinese will print money. Everybody will print money and the purchasing power of paper money will go down.”
“I think this will end up being a trillion-dollar commitment by the Fed”
“I want to be clear — While I think we can make a meaningful and significant contribution to reducing this problem, we can’t solve it. We don’t have tools that are strong enough to solve the unemployment problem”
“[T]he FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US….”
We have reached a major turning point in the financial history of the United States.
It would be hard to overstate how much damage that QE3 could potentially do to our financial system. If the rest of the world decides at some point that they no longer have confidence in our dollars and our debt then we are finished.
Sadly, the mainstream media does not seem to understand this, and most Americans gleefully believe whatever the mainstream media tells them.
09/13/12 Pittsburgh, Pennsylvania – (This Daily Reckoning “Classique” first appeared in Whiskey & Gunpowder on December 1, 2004, recounting a Philadelphia exhibit of Titanic artifacts.)
The first item is a set of gold-rimmed eyeglasses. Further on, there is a pocket watch stopped at 11:14. Then there is a brown leather suitcase, somewhat worse for the wear. There are stacks of white dishes and racks of dark green bottles. Another display shows brass plumbing fixtures and a gray, steel wrench. And at another stop along the walk one sees a copper and glass engine thermometer. There is a jade rosary, and a man’s boulder hat, of all things, in remarkably fine condition, considering… And a pair of woman’s shoes, made of black leather. Not one shoe, but a pair, recovered from the sea floor beneath 12,000 feet of cold North Atlantic water.
Then there are the coins and paper currency. Gold coins, silver coins, copper. British, American, French. This was real money back then, from a gold standard era. And the paper notes also tell a tale. They are a collection of official British and American treasury promissory notes, and a remarkable amount of scrip from private banks, redeemable in precious metal.
Every note has an annotation at some spot or another, promising to pay to the bearer some quantity of gold or silver. “One Dollar Silver Note,” from a bank in New England, redeemable in an ounce of silver from that institution. Or a “Two Dollar Silver Certificate,” to be paid on demand by the Treasury of the United States of America in, not surprisingly, two ounces of silver. Or “Ten Gold Dollars,” half an ounce of yellow metal in 1912, promised by and intended to be paid to the bearer from the precious gold assets of the Government of the United States.
These artifact paper notes, recovered against all odds from their watery grave, still retain a certain sense of dignity. They do not declare mightily and officiously that they are “legal tender for all debts, public and private.” They do not have to… The notes represent a solemn promise by the issuer that, in return for a person lending a sum of honest money to the bank or government, the issuer of the note will repay an equal sum of precious metal at a time and place of mutual convenience. There is, it seems, a sense of financial humility, respect and national or corporate duty to these documents.
The Titanic exhibit explains that within about two years of the ship sinking, the British and American governments changed the methods by which they permitted currency to be issued. The exhibit does not go into detail, which is understandable. This is a display of artifacts from a sunken ship, not an exposition on monetary history. But it is interesting that the curators would mention it at all.
In late 1913 the US government enacted the Federal Reserve Act, which removed the power to issue monetary notes from private banks and the US Treasury, and gave that power to the newly established Federal Reserve, or the American central bank. And in 1914, Great Britain’s central bank, the Bank of England, went off the gold standard shortly after Britain entered into what became the Great War, now known as World War I.
For the 100 years before this time, the respective values of the British and US currency had held more-or-less steady, excepting a period of inflation during the American Civil War. But after 1914 the value of the respective currencies was set by… well, by a monetary system, for lack of a better term, run by each nation’s respective central bankers.
The idea was to have an “elastic currency,” meaning a currency base that could expand to meet the needs of a dynamic and growing economy, or in the case of Britain, to fight a war that the nation could not afford.
In the ninety or so years since those monetary milestones of 1913 and 1914, both the British pound and the US dollar have lost about 98% of their value due to inflation of the national monetary supplies. That sure makes for one heck of an “elastic currency”, eh?
But because this monetary debasement has happened so slowly — year by year, decade by decade, generation by generation — this decline of the value of national currency has seemed almost a natural phenomenon, an immutable law of nature. This is the way that monetary theory is taught in all of the best schools, and is how all modern monetary systems work, right?
Typically the politicians have demanded, and people have grown to accept, “a little bit” of inflation fostered by the central bank as the price of progress. Except that “a little bit” of inflation over a long time is actually “a lot” of inflation.
Over the long term, the nominal savings of one generation are reduced, in the aggregate, to a pittance. This matters quite a bit when one goes to retire a generation or so after going to work. And in an inflationary environment, valuations of capital become meaningless over the long term, absent using statistical guesses to determine deflation factors.
Keep in mind that savings create capital, and inflation destroys savings, hence destroys capital.
From the standpoint of ethics, it would seem that the people who run the Federal Reserve and the Bank of England have a responsibility to their respective citizens to maintain a stable value to their currencies, and not to destroy that value over time. It would seem that the managers of a nation’s currency have a duty to maintain monetary standards, and not to wreck savings and impoverish one generation to benefit another. It would seem so, but apparently this is not how the monetary system works.
By way of comparison, this ethical duty to maintain standards is much the same as the duty of the principals of the White Star Line to design and build a fine ship, appropriate to the hazards of oceanic crossings. And this is much as Captain E.J. Smith had a duty to train his crew and sail his vessel along a track that would bring her safely into the port of destination. But on the night that the Titanic sank, there was a failure of duty by the Captain to sail a safe course, even after an ice warning was received over the radio. And the iceberg, scraping the rivet heads off the steel plating of the Titanic and permitting the sea to flood the ship through hundreds of small penetrations, revealed a flaw in construction. And the sinking revealed the failure of White Star Line fundamentally to design a proper ship, with lifeboats sufficient to the need of passengers and crew in a time of peril.
As fate would have it, J. Bruce Ismay, one of the directors of the White Star Line, survived the Titanic’s sinking by leaping into one of the last lifeboats that dropped from the doomed vessel into the freezing ocean. Later on, Director Ismay was greatly criticized from almost every quarter, because he survived the sinking when over 1,500 others did not. One of the most trenchant critiques of Ismay came from Admiral Alfred Thayer Mahan, the great historian, strategist and sea power visionary of the US Navy, who reviewed Ismay’s retreat to the lifeboats and his abandonment of hundreds to death by freezing and drowning, and wrote:
“We should be careful not to pervert standards. Witness the talk that the result is due to ‘the system.’ What is a system, except that which individuals have made it and keep it? Whatever weakens the sense of individual responsibility is harmful, and so likewise is all condonation of failure of the individual to meet his responsibility.”
What will the central bankers say in their own defense when the dollar, or the pound, vanishes like the Titanic beneath the sea? Will they simply shrug their shoulders and blame “the monetary system”? What will they say to those doomed souls who are the victims of their failure, and whose lives, communities, nations and cultures are shattered? What will they say as the wreckage of their monetary system slips away and rains down, like the artifacts from the Titanic landing on the dark abyssal plain far below?
Read more: A Titanic Disaster http://dailyreckoning.com/a-titanic-disaster/#ixzz26ZP1oQK2
Trying again what’s failed before: Fed chief Ben Bernanke yesterday, announcing “QE 3” — after QE 1 and 2 failed to rev up the economy.
Bernanke, of course, is far too judicious to say anything like this publicly.
The official Fed statement on yesterday’s action went like this: “If the outlook for the labor market does not improve substantially, [the Federal Reserve] will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”
Meanwhile, Bernanke’s own statements often seem to suggest the gridlock between Obama and Congress is a problem. Yet he’s well aware that, before we had gridlock, Obama and the Democrats had free rein — and gave us nearly $1 trillion in stimulus spending that failed to stimulate, a business-draining new health-care mandate and a lame energy policy that has led to higher domestic fuel prices.
And the president is promising more of the same if he wins a second term.
The result: Economic growth below 2 percent, record numbers of people dropping out of the workforce and falling wages. Middle-class incomes have fallen to 1995 levels. In other words: signs that a double-dip recession of a significant magnitude is in the cards unless something is done.
But the only card Bernanke has left is printing money — that’s what “quantitative easing” means. The Fed does it by buying bonds from the big banks (in this case, $40 billion a month of mortgage bonds). That drives down interest rates, and the banks, flush with cash, are supposed to lend out the money to businesses so the economy grows.
But this is QE 3 — and the stunt didn’t do much the first two times. Maybe it kept things from getting worse, but nothing much has happened in terms of significant, sustained growth.
The problem: Many of the businesses that have the good credit to borrow more aren’t, because they’re afraid of what to expect from a president who almost brags about plans to raise their taxes, no matter how lousy the economy. And banks aren’t so quick to lend no matter how much the Fed pumps in for the same reason: They’re scared about what the future of Obamanomics has in store for them.
Yes, the stock market loves the move — the Dow Jones Industrial Average rose 200 points yesterday. But that’s only because Bernanke also signaled yesterday that he’ll continue to keep short-term interest at just about 0 percent — which keeps bond returns so low that investors are almost forced to buy stocks.
Bernanke is well aware of the consequences of printing money: commodity price inflation (higher oil and food prices) and a further debasing of our currency.
And he knows that at some point he’ll have to do just the opposite, and start contracting the money supply and raising short-term rates before full-fledged inflation kicks in. When he does, the “wealth effect” of a rising stock market will evaporate, and so will the rest of the economy.
But at least in the short term, he thinks it’s all worth the risk, considering the alternative: a nation falling back into severe recession because of a president with no clue about growing the economy, who thinks the best way to create jobs is to crush those who do the job-creating.
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