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.

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