Beyond the Cusp

September 17, 2012

The Real Reason for the Latest Quantitative Easing, QE3

With the usual lack of explanation, Federal Reserve Chairman Ben Bernanke coldly announced to the Press that the Federal Reserve was going to enact another round of Quantitative Easing, QE3. What this has meant in the past is that the Federal Reserve buys up a set amount of Government Debt which places ready cash in the hands of the Federal Government. What makes this so wrong is that in order for the Federal Reserve to buy these debts is that they have the Federal Treasury print the money that is necessary to buy up the debt. As stated, in both of the previous Quantitative Easings, QE1 and QE2, the Federal Reserve set an upper limit to the amount of debt they were going to acquire, and needless to say, they did buy the maximum they had set. This time it is being done somewhat differently. This time the Federal Reserve has announced that it will be buying mortgages and has stated their willingness to buy whatever amount of these debts as it will take to reach the desired effects. Nobody has even ventured a guess on how much debt will be involved. There is no upper limit which makes this not only unprecedented, it makes this truly frightening. Just imagine what it might mean if over a short period of time an unprecedented amount of dollars are suddenly pumped into the money supply and near unlimited amounts of credit are made available at rates next to no interests. The potential for massive inflation once this newly created money gets into the economy and starts to join and pump up circulation and inflation will become our main concern. Since this new money will likely sit initially and not enter circulation quickly, the negative effects will not be felt in the immediate future. What these Quantitative Easings are setting up is massive inflation kicking in as soon as the economy returns to a fair degree of health. This inflation will in turn wipe out much of the early gains made by the economy for much of the middle class as prices will begin to jump while salaries will lag behind.

But why at this time have the Federal Reserve Board decided to implement another round of Quantitative Easing without placing a ceiling on the amount? The answer is relatively obvious, it will give a momentary surge to the economy which will likely last two or three months which puts the consequences to this bald faced move to improve the image of the President concerning the economy as the easy credit will spark purchases. This is a sacrifice of the future of the American economy for a short turn sprint to just past the election for the benefit of President Obama’s reelection bid. This along with the continued ridiculously low interest rates will give the economy a burst like adding nitrous to the family car’s intake and just like the nitrous will burn out the family car’s engine, this will also burn out the economy down the road. This is not a surprise as both parties have done many of the same maneuvers in order to better their chances for reelection. We can expect another favorite to be used even more in the stretch to November, the release of supplies of gasoline from the National Petroleum Reserve in order to keep fuel prices as low as possible, placing another claim evidencing the good stewardship by the President. Despite all of these maneuvers to give the appearance of a bright future with lower fuel prices, easy credit with low interest rates and a quick spurt in the economy right before the election, the payment will come due by the end of the next year. The only way to counter the injected money from having deleterious effects on the future economy is to implement programs or interest rates which result in removing the excess funds from the money supply. This can be done most efficiently by either raising interest rates or raising taxes in order to bleed off the revenues injected into the system by the Federal Reserve. Ben Bernanke most certainly is aware of this reality but is playing politics with our futures. His actions are as contemptible as they are disingenuous. The one item that must be restated is that this Quantitative Easing has been made open ended with no upper limit and is being used to purchase the most toxic debt possible, Freddie and Fannie mortgages which were bought from banks and lending institutions who were allowed to unload bad debt they were forced to loan by Government regulations and threats of legal actions if they had refused to make bad risk mortgage loans. This ends up placing this most toxic of debt squarely on the shoulders of the American taxpayer who will be left to cover these defaults in the end.

Beyond the Cusp

June 22, 2012

Consequences for United States Bailing Out European Union Countries

The United States has already quietly taken the initial steps to assist in easing the financial problems being experienced by some countries within the European Union. This was done by, believe it or not, exchanging dollars for equal value of Euros thus tying the two currencies to the other to some extent. Who knew that the dollar was considered to be more stable a currency than any other in this crazy world. So, in order to repair this strength in the dollar, or for whatever reason the politicians and experts are claiming, we have exchanged straight up, charging no exchange fees, of dollars for Euros in order to share the pain. As for which side is sharing whose pain might still be up for debate but it is being sold as assisting the European Union through some rough periods with members’ economies ranging from imminent default to relatively healthy considering the current world economic situations. This will in effect ally the United States with Germany, possibly France and any other country with sufficient economic strength to support and pull the countries suffering from poor economic times, some claim caused by their overly socialist policies, without having any fall into default on their debts. The amount of funding this project will require is currently uncertain, we simply know that it is going to take more and more going into the future. The outlook seems bleak to us but some have said they see the light at the end of the tunnel. Some claim that light is on the onrushing runaway train coming at us in the tunnel.

So, exactly what are the risks being taken by the United States through stepping up to join in the efforts to save the Euro and the European Union from economic disaster? The most obvious risk is that it is possible that pulling the likes of Greece, Spain, Ireland, and possibly Italy and even France through to better times may be a futile endeavor that will simply pull everybody else down with the others. This may end up being the straw that breaks the camel’s back, or the investment that tips the economy into a ruinous spiral. What makes this even more risky is that neither Germany nor the United States nor any of the others who might be called upon to finance those countries in jeopardy will simply not have sufficient treasure to succeed and thus will simply collapse along with those they were supposedly saving. This is made evident due to the facts that in order to make the necessary loans to those desperate countries, the healthy countries are taking out loans as they do not have the money on hand. The United States already has budgetary deficits such that there is insufficient cash to pay for their own bills, let alone make loans to cover other countries’ shortfalls. This leads to the big question, where can the United States turn in order to get loans in order to loan the needy European countries. Who, in their right mind, would make a loan to the United States so the United States can loan the same monies to a country to which the loaning country would not make that same loan? Simply, why would China loan Greece money via the United States when they refuse to loan money directly to Greece; or for that matter even to the United States as things stand.

The simple answer is that nobody is going to loan more to the United States simply so the United States is enabled to make the same loan to a European country in danger of default. Now we have the United States already obligating themselves to assist the European Union’s weaker nations over their current problems by extending them new loans. The United States does not have the money for the loan and nobody is offering to loan the United States the necessary funds. So, what do you think those financial wizards in Washington DC have hit upon as the solution? Believe it or not, they are suggesting that we have another round of printing money under the guise of Quantitative Easing. So, here comes QE3, and no, that is not a new Queen Elizabeth Cruise Ship. Actually, a new Queen Elizabeth Cruise Ship would be both cheaper and very likely a better investment.

So, to give a quick overview of what it means when they say Quantitative Easing as the method to ease our budgetary needs or, as in the current so-called emergency, producing funding to loan as a bailout for the European Union Euro using nations experiencing fiscal difficulties and in danger of default, the mechanisms are that the Federal Reserve instructs the Treasury Department to print money which the Federal Reserve buys and then loans out. The reality is that the money is created electronically and simply added into the currency in circulation totals. This is painless as long as the new money does not gain velocity, another way of saying actually being spent in the economy. The problem comes when all this newly created money begins to be used by the banks to make loans and such which then places the money into actual circulation. Currently, the banks are sitting on most of the invented money resulting from QE1 and QE2. The money in QE3 will not be sitting idle in any banks; it will be used to pay loan interest from one country to another country. These transactions will involve banks but also will be made available to the crediting country to use to pay their debts and fund programs or pay salaries. This will place the QE3 into circulation rather rapidly and beyond the control of our Federal Reserve bankers or the Treasury Department. The result of this will be the beginning of sharper inflation and rising prices as the dollar will be devalued by the percentage of the QE3 totals against the current currency in the economy. This will very likely spark the banks to resume loaning in a more invigorated manner thus placing the rest of the QE1 and QE2 monies into circulation which will result in even faster rising inflation. So, the result of bailing out Europe will be higher prices here at home. Sometimes it pains to be so helpful.

Beyond the Cusp

June 7, 2012

Is There a Magic Economic Formula?

Ask this question of an economist and he will begin to spell out all kinds of formulae used in either Macro or Micro economics. Believe it or not, these two sectors of economics do have numbers of formulas which apply solely to one or the other and a select few which are used in both. That about exhausts my memory of my ECON 202 and 102 courses I took longer ago than I care to admit. As for what these formulae are, I can fortunately claim not to remember a single one of them and do not feel the slightest remorse for having apparently wasted my time on required elective credits. Looking back on life and what courses were required is another of the mysteries of life, especially since they had changed by the time my children entered college. Apparently required knowledge is flexible entity dependent upon when and where you attain said knowledge. But if we were to ask if there is some magic economic formula that will spur the recovery and speed up the creations of jobs, we are not asking for anything learned in a basic economic course, we are looking for a political answer which is often completely dependent upon your political outlook. As we have seen in fairly recent history, a conservative believes the formula is to remove regulations and free up as many options as possible for what they call the entrepreneurial class while a progressive will call for government to spend stimulus money in selected areas to spur growth which will repay on the investment through increased tax collections. They didn’t exactly teach this in the economics classes I took, at least as far as I remember.

The importance of this particular question is directly related to the choices we will be making in the November elections, both for the Presidency, our Senators and our Representatives. The two parties offer two competing and opposite approaches to the economy. Oddly enough, I have an even simpler idea which would likely have a better result than either Romney or Obama will offer. We have been told that Romney has this legacy of great business sense. The truth is that Romney has been able to choose companies which with a measured infusion of capital and a set of adjustments made, most often to either management or procedural, and the company would turn around. Sometimes it was as simple as modernizing the equipment, other times the overhaul might have required changing personnel or business models. President Obama has already shown his business outlook and it has been defined as quantitative easing and stimulus plans. The stimulus plans are of the Progressive nature where government spending will result in an improved economic outlook as business spend the stimulus monies and this leads to a more active economy. Of course, this also depends on where one invests the stimulus monies. Apparently, stimulating the green industries, two of the three major car makers, Wall Street investors, failing banks, and ecology enterprises were the wrong choices. That aside, we know that President Obama will likely continue with the same model and hopefully, should he be reelected, let’s pray he chooses better in his next term.

Well, now for what may be the most preposterous plan to save the American economy and get things moving in a positive direction you will likely hear this campaign cycle. If any politicians were to make this their plan, they would get my vote, but fear not, nobody would ever recommend this. The promise is to do nothing, allow nothing, change nothing, and leave everything exactly as it is for the foreseeable future. The biggest problem we have in the economy at the moment is not sufficient stimulus monies available; Lord knows we have made more than sufficient available. Currently, the government is putting out as many as a thousand new regulations per month. This rate is without the full implementation of Obama Care which commands that the Secretary of the Department of Health and Human Services fill out the regulations necessary to enact the desired ends of the legislation. This is also before the 2,300-page Dodd-Frank finance industry regulation legislation which directs the regulation writing to the Treasury Department bureaucrats. This is the real problem facing the economy as well as many other things in our lives, endless, uncountable, confusing and unenforceable collection of regulations. If a President could declare a hiatus from new regulations and bring the regulation factory that are the alphabet soup of extra-Constitutional cabinet departments to a screeching halt, businesses and investors would have a known field of play with stable conditions for that period of time. We do not need more investment. We do not necessarily need to undo any number of regulations, though that would not hurt. We do not need to play artificially with the interest rates. We need nothing. Simply nothing. That’s my plan, have the government take a nice long holiday, we’ll even keep paying them. Paying them not to do anything could be looked at as paying them to do no more harm. Just let everybody catch up with all the garbage that has already been enacted and regulated before loading up even more crushing our incentive to be productive. Nothing, what a concept.

Beyond the Cusp

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