Quantitative Easing or Quantitative Fleecing?

By Mike Cronin

Q: You’ve heard the talking heads talk about quantitative easing, so what the heck is it?

A: Put in the most basic terms, quantitative easing, or QE, is weasel-ese for the Federal Reserve (aka “the Fed”) attempting to stimulate consumption by making up money out of nothing and injecting it into the economy.

Q: What’s wrong with that?

A: Multiple things:

  1. The Constitution gives the government the power to print and coin money. That is one of the functions of the Dept of the Treasury.  The Constitutionality of the government making monetary policy (i.e. manipulating interest rates or “stimulating” the economy) has been debated since the time of Jefferson and Hamilton.  The powers enumerated to the government in the Constitution manifestly do not include allowing it to charter a central bank (which is what the Federal Reserve is), but Congress created one anyway with the passage of the Tenth Amendment in 1913.
  2. The “money” that the Federal Reserve puts into the economy is created out of thin air. The process is convoluted, but the net effect is that the Fed accomplishes QE by changing the balance in the accounts it is “depositing” the money into, i.e. creating electronic “money” out of thin air. The theory is that by giving banks more money (quantitative) to lend at low rates (easing), more businesses will borrow that money and put it to work, which will in turn generate more commerce.  In other words, the economy will have been “stimulated.”  The problem is, after the financial crises in 2007-2009, banks are only lending money to those with top-tier credit ratings.  A great deal of the money that is meant to stimulate commerce has instead stimulated stock trading.  That’s why we can have record stock prices even as the rest of the economy (especially on the employment side) is unspectacular.
  3. Since the value of a thing, including money, is directly related to its relative scarcity, adding hundreds of billions, or even trillions of dollars into electronic circulation reduces, or debases, the value of our already existing money. If the money isn’t worth as much as it used to be, but the value of the things we buy hasn’t changed, the price will have to go up. That’s price inflation.  If your income rises with prices, inflation may not be alarming, but how often do you get a raise just because your money loses value?

Q: If I’m not going to make more money at work, making money in the stock market isn’t so bad, is it?

A: In and of itself, making money on stocks is not bad.  The problem is that there shouldn’t be any QE and there shouldn’t be a central bank!

In reality, instead of stimulating the economy, QE amounts to a second, insidious way to tax you.  The first way is income and capital gains taxes. They are painful, but at least they are overt and articulated in law.  The second is in currency debasement (the deliberate erosion of the buying power of the dollar to increase the amount of dollars moving in the system) by the unelected, unaccountable, and opaque Federal Reserve.  It is not nearly as overt, but it takes value from you just the same.

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