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Furor over QE3 is groundless
On 13 Sep 2012 the Fed announced that it would embark on a third round of quantitative easing. This caused the “sound money” doomsayers to start pumping out articles with titles such as “QE3 Will Unleash Economic Horror On The Human Race.”
The economy could use a good dose of “aggregate demand” (new spending money in the pockets of consumers) but QE3 won’t do it. Nor will QE3 trigger hyperinflation. In fact, QE3 won’t do much at all. There are better alternatives.
The Fed calls QE an asset swap, meaning it will trade Fed-created dollars for assets on the banks’ balance sheets. Critics call this “reckless money printing.” Critics say it will produce hyperinflation. They say that too much money will be chasing too few goods, forcing prices up and the value of the dollar down. It will be the end of the world.
They are all incorrect. The money created by the Fed will go straight into bank reserve accounts, and banks can’t lend their reserves. The money will just sit there, drawing a bit of interest. The Fed’s plan is to buy mortgage-backed securities (MBS) from the banks, but according to the Washington Post, this is not expected to be of much help to homeowners.
Why QE3 Won’t Expand the Circulating Money Supply
In its third round of QE, the Fed says it will buy $40 billion in mortgage-backed securities every month for an indefinite period. To do this, the Fed will simply credit those banks’ reserve accounts. The Fed will alter numbers in the banks’ computers. The banks will get electronic “dollars” (i.e. their computers will be adjusted) and the Fed will get the mortgage-backed securities. The electronic “money” (consisting of computer digits) will remain in the banks’ reserve accounts. The banks’ balance sheets will remain the same. The amount of money in circulation will also stay the same. (And thus the depression will continue to worsen.)
No “money” changes hands. Instead, computers change digits. When the Fed engages in QE, it takes away something on the (computerized) asset side of the bank’s balance sheet (government securities or mortgage-backed securities) and replaces it with electronically-generated “dollars.”
(COMMENT: the exact same process happens with federal spending, which has nothing to do with QE. The government does not ship out dollars. Instead, the government simply credits accounts. If you receive a Social Security check, then a bank takes the check and changes the computer numbers of your account. Voila, you have “money.” Thus, there is plenty of government “money” for social programs. The government can simply credit people’s accounts. However the One Percent and their puppet politicians don’t want that. They want you to starve. They don’t care how much money they have. They only care how much MORE money they have than you. Wealth is not an absolute. Wealth is comparative. Thus, austerity has only one purpose: to make you suffer.)
As noted above, the electronic “dollars” are held in the banks’ reserve accounts at the Fed. They are “excess reserves” that cannot be spent or lent into the economy. They can only be lent to other banks that need reserves, or used to obtain other assets (new loans, bonds, etc.). As Australian economist Steve Keen explains:
Reserves are there for settlement of accounts between banks, and for the government’s interface with the private banking sector. Reserves are not for lending. Banks themselves may swap those reserve assets for other forms of assets that are income-yielding, but they are not able to lend from them.
This was also explained by Prof. Scott Fullwiler, when he argued a year ago for another form of QE—the minting of some trillion dollar coins by the Treasury (he called it “QE3 Treasury Style”). He explained why the increase in reserve balances in QE is not inflationary:
Banks can’t “do” anything with extra reserve balances. Loans create deposits, but reserve balances don’t finance lending, or add any “fuel” to the economy. Banks don’t lend reserve balances, except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its interest rate target. Widespread belief that reserve balances add “fuel” to bank lending is incorrect, as I explained here over two years ago.
Since November 2008, when QE1 was first implemented, the monetary base (money created by the Fed and the government) has indeed gone up. But the circulating money supply, M2, has not increased faster than in the previous decade, and loans have actually gone down.
(COMMENT: That is, the Fed has electronically increased the banks’ reserves, but the actual money supply in circulation has been shrinking, since the government is spending less, and banks are lending less. Because of this shrinking money supply, we have a depression.)
Quantitative easing briefly boosts the stock market, because investers falsely believe that QE increases the money supply, providing more money to invest. Because of this false belief, investors jump in and buy, which temporarily boosts stock prices. When the deception wears off, the Fed announces a new round of QE to keep the game going.
That is what happened with QE1 and QE2. The Fed claimed it was done to boost employment, which of course was a lie. What QE1 and QE2 did was temporarily boost the overall price level of stocks. The rate of price inflation has actually been lower after QE than before the program began.
So why have QE3 now? What's behind the timing?
The Fed claims it will engage in QE3 (buying mortgage-backed securities) in order to lower interest rates for homeowners and other long-term buyers. However, politics may also play a role. As noted above, QE drives up the stock market in a false anticipation of an increase in the amount of money available to invest. This is a good political move for a Wall Street that plans to re-install Obama.
Because of the deception (that QE increases the money supply) QE also causes a temporary increase in the prices of commodities (oil, food and precious metals), since “hot money” floods into them from investors.
There is also evidence that commodities are going up because some major market players are colluding to manipulate the price, just like the banks manipulate the LIBOR interest rate. These are criminal rackets, but big banks are immune from the law.
The Fed does bear some responsibility for the rise in commodity prices, since QE creates a false expectation of inflation, and the Fed has kept interest rates low (which encourages investors to buy stocks, bonds, and commodities, rather than T-bills). But the price rise has not been from flooding the economy with money. If dollars were flooding into the economy, then housing and wages (the largest components of the price level) would increae as well, and we would move out of this depression. But wages and the housing market remain flat, and overall price increases (in the real economy) have remained within the Fed’s 2% target range.
Some Possibilities That Might Be More Effective at Stimulating the Economy
Getting money into the pockets of consumers would ease the depression, but QE3 won’t do it. The Fed could give production and employment a bigger boost by using its lender-of-last-resort status in more direct ways.
The Fed could make the very-low-interest loans to banks, or to state and municipal governments, or to students, or to homeowners. The Fed could rip up the $1.7 trillion in government securities that it already holds, lowering the national debt by $1.7 trillion (as suggested a year ago by Ron Paul). Or the Fed could buy up a trillion dollars’ worth of securitized student debt and rip those securities up. These moves might require some tweaking of the Federal Reserve Act, but Congress has done it before to serve the banks.
(COMMENT: All these moves would show that hysteria over the “national debt” is false. However the Fed and the government must maintain illusions so that the masses submit to austerity, so that the One Percent can continue increasing the gap between themselves and everyone else. The call for a “balanced budget” is also a scam. With a growing population, even a perfectly balanced budget (federal spending = federal taxes) reduces per-capita GDP, so for the economy to grow, the deficit must grow. But politicians want to “reduce the deficit.” This is yet another scam.)
Another possibility would be the sort of “quantitative easing” first proposed by Ben Bernanke in 2002, before he was chairman of the Fed—just drop hundred dollar bills from helicopters. (This is roughly similar to the Social Credit solution proposed by C. H. Douglas in the 1920s.) As Martin Hutchinson observed in Money Mornin
With a U.S. population of 310 million, $31 billion per month, dropped from helicopters, would have given every American man, woman and child an extra crisp new $100 bill per month.
Yes, it would produce an extra $31 billion per month on the nominal Federal budget deficit, but the Fed would have printed the new bills, so there would have been no additional strain on the nation’s finances.
There would have been no bureaucracy involved, just bill printing and helicopter fuel.
The money would nearly all have been spent into the economy, increasing consumption by perhaps $300 billion annually, creating perhaps 3 million jobs, and reducing unemployment by almost 2%.
(COMMENT: Exactly. I favor dropping money from helicopters, as I have explained before at WUFYS. We have a depression because there is not enough money changing hands. Whenever someone suggests increasing the money supply – i.e. the amount of money changing hands – some idiot falsely screams that this will cause “hyperinflation.” The truth is that inflation can be easily controlled by controlling the money supply. Bernanke was much more truthful before he was installed in his position. Same with Obama.)
Dropping money from helicopters would not cause hyperinflation. According to the Fed’s figures, the money supply in July 2010 was actually $4 trillion LESS than it was in 2008. This means that $4 trillion more needed to be pumped into the money supply just to get the economy back to where it was before the banking crisis hit.
(COMMENT: And yet, politicians want to “sequester” (i.e. slash) federal spending on social programs, thereby reducing the money supply even further, thereby worsening the depression. This is deliberate. Politicians want you to grovel before them.)
As the psychological boost from QE3 wears off and the “fiscal cliff” looms, perhaps Congress and the Fed will consider some of these more direct approaches to relieving the economy’s intractable doldrums.
(COMMENT: The “fiscal cliff” means automatic reductions in federal spending on social programs. The cuts are known as “sequestration.” Politicians like Carl Levin, John McCain, and Lindsey Graham voted for “sequestration.” They openly admit it will devastate the economy and worsen the depression, since it will reduce the money supply even further. Now the same lying politicians are suddenly panicking that “sequestration,” which they voted for, could slightly reduce the river of money that flows to war and to military contractors.)
The article above was written by Ellen Brown. She is saying that the masses desperately need more money. But if the masses had more money to spend, and the depression eased, then the gap between the One Percent and everyone else would not continue to grow so rapidly.
That, of course, is unacceptable. For the rich, their pleasure is directly proportionate to your agony. And the more you are in agony, the more the rich and the U.S. religious right wing can disparage you as a lazy free loader who has adopted what wealthy Mormon Mitt Romney sneeringly calls “the culture of dependency.” (Mormons also adore Israel. They also believe that god is a man who lives on the planet "Kolob" and spends all his time having sex with young nubile girls. If you think this is a distortion of Mormon beliefs, then you do not know about those beliefs.)
As you can see, Romney's speechwriters work for Wall Street. By deliberately making Romney seem nauseating, they ensure that Obama will be re-installed.