What has Ben done?

By

John Wright

 

Ben Bernanke announced that the Federal Reserve will execute Quantitative Easing III. He says the Fed will pump up to 40 billion dollars a month into buying bonds/mortgage backed securities to stimulate the economy, and that this process will continue through 2015 if necessary to "get the economy moving" and reduce the high unemployment plaguing our economic recovery from the "Great Recession." As this is September of 2012 we could have as much as 39 months times 40 billion dollars per month of additional funny money created. That amounts to just short of 1.6 trillion dollars of extra cash with nothing behind it as assets of any guaranteed value. It is a very bad joke. The real effect will be, in conjunction with QE I and QE II, to cause massive inflation at a time when our wages and salaries are badly depressed, and it wonít help the job market at all. It will destroy older people on fixed incomes. Increases in the stock market averages will reflect nothing but inflation, not economic progress.

So, whom does it help? For one thing it allows our federal government to continue increasing the national debt, kicking the can down the road. This can happen with Treasury borrowing from the Fed and by artificially enlarging the GDP through inflation, making the debt load look manageable, when in fact it is not unless we have massive income tax increases and severe control of entitlements spending. For another it keeps the financial institutions looking healthy on the surface.

No one has explained at all how this influx of funny money will create sustainable jobs that have decent wages or salaries outside of government. In other words, the private sector that will have to hire tens of millions of people to create a sufficient source of taxable income will fail in that endeavor because the necessary customers to buy the products and services do not and will not have the necessary income to be customers. Thus, availability of very low interest loans to businesses to stimulate expansion will mean nothing, as the businesses know there is no corresponding customer base with sufficient income to consume what they might produce. If anything, intelligent citizens are eliminating debt as fast as they can, and not increasing their physical purchases, but in fact decreasing them in anticipation of hard times and heavy taxes ahead.

If I think in a backhanded optimistic way I can see the likelihood of dividing our nation into two very distinct populations. The first is about half of the potentially employable people having viable jobs and actually becoming "the economy." They will have incomes that reflect inflation and they will be heavily taxed. The second group, the other half, is about permanent unemployment and subsistence living on the government dole. Exactly how this might work isnít entirely clear, but if the population of marginalized citizens is kept segregated, fed and sheltered and provided very limited local medical care then a gradual decline of their cost can occur. Fewer of them will even drive cars (it will become too expensive to own and operate a car) or be seen very often outside the ghettos. How this can be considered progress is beyond me. As to the potential population increases in the ghettos, well, that is a different subject that should not be discussed in this article. Just think about the primary objective, which is to minimize the impact of the unemployable and the elderly on the "real" economy.

These sleight of hand tricks by the Federal Reserve and our federal government to hold our economic mess together might work if we didnít have to continue borrowing money from countries that hold very large sums of USA currency due to balance of payments trade problems. But, how that process might be accomplished is not addressed publicly in any format by any political group or the Federal Reserve. The idea is that our creditors donít want to be paid in currency of badly diluted value in terms of purchasing power. They will be less inclined to carry large amounts of our currency or loan it back to us as we present high inflation as the only path to address our economy problems at home, via funny money.

We have just enough experience with and knowledge of past governments in the 20th century that experienced out of control inflation and the printing of ever more currency that became ever more useless. That issue precipitated World War II.

What all of this means to me is that we are in for a long period of economic upheaval, at least ten years, and likely war if our creditors hold our feet to the fire. Well, one good thing that may happen as a result of diluting our currency is a severe decline in our imports and the subsequent creation of new manufacturing locations within the USA to meet internal product demand.

Overall, we have two massive problems, a large and increasing population of unemployable people and a huge debt from operating our federal government via deficit spending over many years. The disparity between annual tax revenue and annual expenditures simply cannot be allowed to continue. It has reached the level of the ridiculous and something big will fall apart soon, regardless of the moves made by the Federal Reserve.

Hang onto your hats. QE III is too tiny to address our very large problems, it is money that will not be used to create necessary economic infrastructure in the USA, and it is too large to accept as additional debt that shows up as massive inflation. We either get a grip on federal government expenditures or we will implode. We are beyond any form of popular political considerations in the severity of what we have to do to survive. Now, I wonder when the Congress will grasp that reality and take the necessary painful steps to right our course?

Oh, Ben Ö What have you done? It is another pound of nails for our coffin.