Donald Trump tells us -- daily, it seems -- that China is "manipulating" its currency to our detriment. But are our president and our Federal Reserve playing an equally clever (cynical?) game?
Traditionally, the Fed has managed our nation's money supply by raising or lowering its interest rate target for the inter-bank interest rate. The Fed generally achieves its target by selling government bonds to banks and other financial institutions, or by buying them back. When the Fed receives payment for these bonds, it decreases the amount of money in the economy, and when it pays for what it buys, it increases the amount of money in circulation -- while simultaneously affecting the price and yield of these government bonds.
But when the nominal interest rate is at zero or near zero, the Fed cannot lower the interest rate further. The Fed is left with its alternative of "last resort:" Quantitative Easing (QE). In that case, the Fed alters the supply of money in the economy without reference to increasing or decreasing interest rates, by buying bonds (or other assets) from the banks and other financial institutions. As it pays for its purchase, the Fed increases the money supply -- for the purposes of stimulating growth in the nation's economy.
Quantitative Easing No 1, or QE1, began on Nov. 25, 2008 when the Fed stated it would buy $600 billion in agency mortgage back securities (MSB) and debt. On March 18, 2009, the Fed advised it would expand the program and buy an additional $750 billion to purchase agency MSBs, and $300 billion to buy Treasury securities. (agencies in question are "Government-sponsored Enterprises," such as Fannie Mae and Freddie Mac).
QE2 was announced on Nov. 10, 2010 when the Fed stated it would buy $600 billion in longer-term treasury securities, at the rate of $75 billion per month.
QE3 was announced on Sept. 13, 2010 when the Fed stated it would make an "open-ended commitment" to purchase $40 billion in agency MSBs per month, until the labor market improved.
QE4 was announced on Dec. 12, 2012. This time, the Fed say it would authorize the purchase of up to $40 billion of agency MSBs per month, and would purchase $45 billion in longer-term Treasury securities per month. Through December 2012, the Fed pumped $2.9 trillion into the U.S. economy. So where did the Fed get that $2.9 trillion? From its printing press. It prints it!
So, is QE all bad? I don't think so. And if I don't, you can bet the president and the members of the Fed don't think so either.
The money that goes into the U. S. economy is spent to buy oil from Saudi Arabia, and manufactured goods from China, etc. In return, they get our money. We get oil. The Saudis get "paper." We get computers and TVs. The Chinese get "paper." Our cars run better on oil than on paper, and I would prefer to write my op-eds on a computer rather than on paper. Therefore, at first glance, what the president and Fed are doing appears to be utterly brilliant.
But there clearly is a downside at present, and in the near future there may be a disastrous downside. When we pay the Saudis and Chinese in paper, they can bring the paper into this country and buy goods, buildings and lands. And then American sellers end up holding the paper!
At present, that is not awful, but as more and more money is put in circulation by the Fed, the value of the money Americans hold in savings declines -- loses its purchasing power. For example, a short while back you could purchase an 18 oz. package of Oreo Cookies for $2.50, or less. Today, a 13 oz package of Oreos commonly runs $3.50. The beauty of that is, that the U.S. dollars that the Saudis and Chinese hold also lose their purchasing power. But it takes more dollars from savings to buy a gallon of Saudi gas.
The Fed is creating a house of cards. And unless the QEs stop, the value of all money in savings will be devalued or virtually wiped out. Of course if that happens, the president will have his "more equal" America -- his "equality of outcome." Everybody will be equally miserable -- just as they were in the old Soviet Union. There are three simple proofs that this can't work much longer.
-- The first is the USSR.
-- The second is today's European financial crisis.
-- The third is this: if the QE can go on forever, why tax Americans at all?
Why just not run the printing presses and print all the money we need to fund the military, Medicare, Social Security, Obamacare and to buy Saudi oil and Chinese manufacturers?
Posted Online: April 10, 2013, 2:43 pm - Quad-Cities Online
by John Donald O'Shea
Copyright 2013
John Donald O'Shea
No comments:
Post a Comment