The Fed announced Sept. 13, 2012, a third round of QE (I.e. QE3) in which it’s making open-ended purchases of $40 billion of mortgage debt a month as it seeks to boost economic growth and reduce unemployment. Policy makers said they will keep pumping money into the economy until there was “ongoing, sustained improvement” in the labor market.
Federal Reserve Chairman Ben Bernanke in Jackson Hole, Wyoming, where he affirmed that the Fed would be prepared to act if the US economy remained in the doldrums
That doesn’t mean that further intervention will be effective in stimulating growth. As Chairman Bernanke said in Jackson Hole:
“Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces.”
The Federal Reserve announced on Nov. 3, 2010 that they had decided to pump another $600 BILLION into the banking system, at a rate of $75 billion per month, for the next eight months. The economic term for this is “quantitative easing.” In plain English, it’s simply “printing money.”
Fed officials led by Chairman Ben S. Bernanke implemented $2.3 trillion in two rounds of bond purchases, known as quantitative easing, since 2008 to boost economic growth.
The Fed is going to create money out of thin air and then use it to buy government and/or corporate bonds. Historically, governments have used quantitative easing when interest rates are as low as they can go and the government wants to do SOMETHING, other than cut taxes, to try to stimulate the economy.
It’s been done before, in the Weimar Republic before Hitler took power, in Japan before the “lost decade,” in Argentina before their collapse, and in England, and the US, in response to the global financial crisis.
It is normally seen as a desperate attempt to defibrillate a dying economy, and it has a terrible track record!
What are some of the impacts?
Of course, printing money out of thin air means that there are more dollars floating around. Unless we have a corresponding increase in GDP, that means that the dollar will probably drop in relation to foreign currencies. It means that anything purchased in Pesos, Euros, Rupees, Baht, or Yen will get more expensive — like fruits, vegetables, coffee, customer support for large companies, clothes, electronics, etc.
So far, the dollar has declined slowly because of people moving out of Yen and Euros and into Dollars. Likewise, inflation has been moderate because of cheap goods flooding the market from “going out of business sales” and people who’ve lost their jobs selling “all that they own.” This, of course, is not sustainable.
In any case, keep pumping money into an economy, without increasing production, and more dollars end up chasing after the same number of goods, which leads to inflation, or hyper inflation.
So, why is the Fed doing this?
Many people have made the argument that they’re trying to destroy the country. Let’s take that argument off the table and look at some of the other reasons why they would do it.
As a sign to other countries that we are through the worst of our financial troubles:
The argument here is that if we were in trouble, the Fed would have created $2.3 trillion or more. The fact that they ONLY created $600 Billion is somehow supposed to give our international trading partners confidence in our economy.
Encourage corporate spending and investing:
By pumping money into government bonds and lowering the yields, corporate bonds, corporate investment, and stock in large & small companies will look more attractive. This still doesn’t seem to be a good enough reason to create $600 billion, plus now $40 billion a month out of thin air. They could have encouraged corporate spending and investing by simplifying the tax code and streamlining regulation.
Foreclosure Crisis/Credit Default Swaps:
Right now, several major banks have so many bad mortgages on their books that if they’d foreclose on them all and sell them at fair market prices, they would lose so much money that the FDIC would declare them bankrupt and shut their doors. Many of these major banks bought insurance on the mortgage bundles that they own. This insurance was called a “credit default swap.” These credit default swaps were issued by other major banks.
This injection of money by the Fed may be necessary to prevent another round of bank bankruptcies like Merrill, Lehman, and AIG. If nothing else, it’s easier for the general public to stomach than another “bailout” or “stimulus.”
Perhaps the FED is running out of Options:
The quantitative easing, along with the convenient timing of the recent suspension of foreclosures by Bank of America, and others, are signs that the Fed is running out of levers to pull in order to keep the banking system running in its current form.
What to do?
This is the big question. Of course, quantitative easing isn’t the problem — it’s merely an outward sign of a long term financial cancer.
So, whether you think it will lead to no inflation, some inflation, or hyper inflation, one of the smartest steps that you can take, over the next few days and weeks, is to start buying more of the foods that you currently eat than you are consuming. Start buying gold and silver which have a long history of hard value. Buying storable, gourmet, “survival food,” that you will actually eat, no matter what happens, is one of the wisest things you can do!
Quantitative easing is the wakeup call to get your family prepared QUICKLY, before inflation takes hold, before China drops the dollar, or before the dollar collapses!