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9 Reasons Why Quantitative Easing Is Bad For The U.S. Economy - The Economic Collapse | The Federal Reserve has crossed the Rubicon.
The Fed No Longer Cares About Hiding The Fact It Is Killing The Dollar - Steve Watson | Analysts, economists, even Fed employees warn against disastrous QE2.
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9 Reasons Why Quantitative Easing Is Bad For The U.S. Economy
The Economic Collapse
Buckle up and hold on – a new round of quantitative easing is here and things could start getting very ugly in the financial world over the coming months. The truth is that many economists fear that an out of control Federal Reserve is “crossing the Rubicon” by announcing another wave of quantitative easing. Have we now reached a point where the Federal Reserve is simply going to fire up the printing presses and shower massive wads of cash into the financial system whenever the U.S. economy is not growing fast enough? If so, what does the mean for inflation, the stability of the world financial system and the future of the U.S. dollar? The Fed says that the plan is to purchase $600 billion of U.S. Treasury securities by the middle of 2011. In addition, the Federal Reserve has announced that it will be “reinvesting” an additional $250 billion to $300 billion from the proceeds of its mortgage portfolio in U.S. Treasury securities over the same time period. So that is a total injection of about $900 billion. Perhaps the Fed thought that number would sound a little less ominous than $1 trillion. In any event, the Federal Reserve seems convinced that quantitative easing is going to work this time. So should we believe the Federal Reserve?
The truth is that the Federal Reserve has tried this before. In November 2008, the Federal Reserve announced a $600 billion quantitative easing program. Four months later the Fed felt that even more cash was necessary, so they upped the total to $1.8 trillion.
So did quantitative easing work then?
No, not really. It may have helped stabilize the economy in the short-term, but unemployment is still staggeringly high. Monthly U.S. home sales continue to come in at close to record low levels. Businesses are borrowing less money. Individuals are borrowing less money. Stores are closing left and right.
The Fed is desperate to crank the debt spiral that our economic system is now based upon back up again. The Fed thinks that somehow if it can just pump enough nearly free liquidity into the banking system, the banks will turn around and lend it out at a markup and that this will get the debt spiral cranking again.
The sad truth is that the Federal Reserve is not trying to build an economic recovery on solid financial principles. Rather, what the Federal Reserve envisions is an “economic recovery” based on new debt creation.
So will $900 billion be enough to get the debt spiral cranked up again?
If 1.8 trillion dollars didn’t work before, why does the Federal Reserve think that 900 billion dollars is going to work now? This new round of quantitative easing will create more inflation and will cause speculative asset bubbles, but it is not going to fix what is wrong with the economy. The damage is just too vast as Charles Hugh Smith recently explained….
In fact, economists over at Goldman Sachs estimate that it would take a staggering $4 trillion in quantitative easing to get the economy rolling again.
Of course that may eventually be what happens. The Fed may be starting at $900 billion just to get the door open. With these kinds of bureaucrats, once you give them an inch they usually end up taking a mile.
So why should we be concerned about quantitative easing? The following are 9 reasons why quantitative easing is bad for the U.S. economy….
#1 Quantitative Easing Will Damage The Value Of The U.S. Dollar
Each time you add a new dollar to the system, it decreases the value of each existing dollar by just a little bit. Now the Federal Reserve is pumping 900 billion dollars into the system and that is going to have a significant impact. Bill Gross, the manager of the largest mutual fund in the entire world, said on Monday that he believes that more quantitative easing could result in a decline of the U.S. dollar of up to 20 percent….
#2 Inflation Is Going To Hit Already Struggling U.S. Consumers Really Hard
Already, investors have been fleeing from the U.S. dollar and other paper currencies and have been flocking to commodities, precious metals and oil. That means that the price of food is going to go up. The price of gasoline is also going to go up. American families are going to find their budgets stretched even more in the months ahead.
#3 Once An Inflationary Spiral Gets Going It Is Really Hard To Stop
The Federal Reserve is playing a very dangerous game by flirting with inflation. Once an inflationary spiral gets going, it is really difficult to stop. Just ask anyone who lived through the Weimar Republic or anyone who lives in Zimbabwe today. If the Federal Reserve is now going to be dumping hundreds of billions of fresh dollars into the system whenever the economy gets into trouble it is inevitable that we will see rampant inflation at some point.
#4 Inflation Is A Hidden Tax On Every American
Tens of millions of Americans have worked incredibly hard to save up a little bit of money. These Americans are counting on that money to pay for a home, or to pay for retirement or to pay for the education of their children. Well, inflation is like a hidden tax on all of those savings. In fact, inflation is a hidden tax on every single dollar that all of us own. We have been taxed more than enough – we certainly don’t need the Federal Reserve imposing another hidden tax on all of us.
#5 The Solution To The Housing Bubble Is Not Another Housing Bubble
Today, approximately a third of all U.S. real estate is estimated to have negative equity. The Federal Reserve apparently believes that by flooding the system with gigantic sacks of cash banks will start making home loans like crazy again and home prices will rise substantially once again – thus wiping out most of that negative equity.
But the solution to the housing bubble is not another housing bubble. The kinds of crazy home loans that were made back in the middle of the decade should never be made again. Market forces should be allowed to bring the housing market to a new equilibrium where ordinary Americans can actually afford to purchase homes. But that is not how our system works anymore. Today, everything has to be manipulated.
#6 More Quantitative Easing Threatens To Destabilize The Global Financial System
We have already entered a time of increasing global financial instability, and the Federal Reserve is not going to help things by introducing hundreds of billions of new dollars into the game. Over the past two decades, bubble after bubble has caused tremendous economic problems, and now all of this new money could give rise to new bubbles. Already, we see financial institutions and investors pumping up carry trade bubbles, engaging in currency speculation and driving up commodity prices to ridiculous levels.
#7 Quantitative Easing Is An Aggressive Move In A World Already On The Verge Of A Currency War
Quantitative easing will likely help U.S. exporters by causing the value of the U.S. dollar to sink. However, this gain by U.S. exporters will come at the expense of foreigners. It is essentially a “zero sum” game. So all of those exporting countries that are already upset with us will become even more furious as the U.S. dollar declines. Could we witness the first all-out “global currency war” in 2011?
#8 Quantitative Easing Threatens The Status Of The Dollar As The World Reserve Currency
As the Federal Reserve continues to play games with the U.S. dollar, quite a few nations around the globe will start evaluating whether or not they want to continue to trade with the U.S. dollar and use it as a reserve currency.
In fact, a recent article on The Market Oracle website explained how this is already happening….
#9 It Is Going To Become More Expensive For The U.S. Government To Borrow Money
Right now, the U.S. government has been able to borrow money at ridiculously low interest rates. But as the Federal Reserve keeps buying up hundreds of billions in U.S. Treasuries, the rest of the world is going to start refusing to participate in the ongoing Ponzi scheme.
Peter Schiff, the CEO of Euro Pacific Capital, says that one of the big reasons for more quantitative easing is because the U.S. government is already starting to have difficulty finding enough people to borrow from….
But the truth is that foreigners are not stupid. They can see the shell game that is being played. As Bill Gross noted on Monday, U.S. government debt will soon become a lot less attractive to foreign investors….
As foreigners begin to balk at all of this nonsense, the U.S. government will either have to start paying higher interest rates on government debt in order to attract enough investors, or the Federal Reserve will just have to drop all pretense and permanently start buying up most of the debt. Either way, once faith has been lost in U.S. Treasuries the financial world will never, ever be the same.
Most Americans have absolutely no idea how fragile the world financial system is right now. Once the rest of the world loses faith in the U.S. dollar and in U.S. Treasuries this entire thing could completely unravel very quickly.
The Federal Reserve is playing a very dangerous game. They are openly threatening the delicate balance of the world financial system.
Once the toothpaste is out of the tube, it is really hard to put it back in again. Cross your fingers and hold on tight, because things are going to get really bumpy ahead.
The Fed No Longer Cares About Hiding The Fact It Is Killing The Dollar
A number of prominent figures within the financial world are warning that a second round of quantitative easing, expected to be announced today by the Federal Reserve, will have disastrous consequences for the US dollar and the global economy.
The Fed will release a statement this afternoon, most likely confirming that it is to buy at least $500 billion of long-term securities, in the form of printing money out of thin air.
The justification is to offset deflationary fears and stimulate spending, however, critics have refuted this outlook.
Peter Schiff, CEO of Euro Pacific Capital notes:
“I think that this will quite possibly be the worst mistake by the Fed in a generation,” adds Stephen Stanley of Pierpont Securities.
Bill Gross, the manager of the world’s largest mutual fund, told Reuters on Monday that he fears that the measures will result in a catastrophic decline in the value of the dollar:
“I think a 20 percent decline in the dollar is possible,” Gross said.
“When a central bank prints trillions of dollars of checks, which is not necessarily what (a second round of quantitative easing) will do in terms of the amount, but if it gets into that territory—that is a debasement of the dollar in terms of the supply of dollars on a global basis,” Gross told Reuters in an interview at his PIMCO headquarters.
“QEII not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices,” Gross added.
The Fed seems unconcerned that the public impression it is creating is that it is clearly acting to debase the US dollar.
“It’s a desperate act,” says Jeremy Grantham, co-founder of the investment firm GMO. Grantham says it’s a clear message from the Fed to the rest of the world: “The U.S. doesn’t care if the dollar weakens.”
James D. Hamilton, a University of California, San Diego economist notes that Bernanke may risk increasing expectations for higher inflation by too much, causing a shake- up in currency and bond markets.
“That perception alone would bring about a series of immediate challenges, such as a rapid flight from the dollar, commodity speculation and possible under-subscription to Treasury auctions,” said Hamilton, a former visiting scholar at the Fed board and the New York and Atlanta district banks.
“The real ugly question is, will this ultimately end up being inflationary?” said Scott Minerd, the Santa Monica, California-based chief investment officer at Guggenheim Partners LLC, who helps oversee $76 billion. “In the long run, five to 10 years from now or in the next decade, this is going to be a massive problem.”
The London Telegraph’s International Business Editor, Ambrose Evans-Pritchard, agrees with this outlook, noting that QE2 risks currency wars and the end of dollar hegemony:
“The Fed’s “QE2″ risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal “bancor” along lines proposed by John Maynard Keynes in the 1940s.” Evans-Pritchard writes, referring to the stated intention to institute a new global currency out of the ashes of the crippled world economy.
The most noted critics of the plan, however, have been Fed members themselves who fear the plan is dangerous, unnecessary “bargain with the devil” that will fuel long-term inflation.
As reported by Bloomberg:
In addition, Minneapolis Fed President Narayana Kocherlakota has questioned whether QE2 will work. Richmond Fed President Jeffrey Lacker has also seemed to doubt whether it is necessary.
Instead they say that the markets should be allowed to correct themselves.