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.

Four Branches of Dysfunction in US Government, Part V

Dysfunction-Jct

By Mike Cronin

To recap the first three major strains of dysfunction in our government: Keeping the institution of slavery while proclaiming all men are created equal introduced the strain of accommodating hypocrisy in our national psyche right from the birth of the nation. Trying to maintain that contradiction led to the Civil War, which ended the chattel slavery of blacks…but the income tax, given its first trial run during the Civil War and made permanent in 1913, made all of us tax slaves to the government and thieves to our fellows.

The fourth major branch of dysfunction is currency debasement. Currency debasement is the act of reducing the value of money by increasing its supply. This can only be done with fiat currency, and usually by central, or national, banks, such as the US Federal Reserve.

So what is fiat currency, and why is currency debasement a dysfunction?

Fiat currency is money that has nothing backing it. US dollars used to be backed by gold. For a long time in this country, you could exchange a given amount of dollars for a given amount of gold, and the prices of goods and service remained relatively the same. A man from 1800 would not have been shocked by the prices in 1900. This is what the original meaning of the term “gold standard.” Our money was as good as gold.  Then, in 1913, the Federal Reserve was established, and it began manipulating the economy. In 1973, President Nixon dissolved the gold standard altogether, our money became mere paper, and the only thing backing it became faith.

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Once a currency becomes fiat, it is relatively easy for the central bank to manipulate the value of the money. Central banks ostensibly manipulate the currency to control inflation by “stimulating” the economy or changing interest rates, but the reality is that injecting additional money into the economy is the source of inflation. There are two aspects to inflation. When the newsies report inflation, they are usually talking about price inflation. When the Fed injects money into the economy (i.e. by stimulus, AKA quantitative easing), it is inflating the money supply. That is monetary inflation. Monetary inflation dilutes the value of the money already in existence, so merchants have to raise prices in order to receive the same value for their products. Monetary inflation is meant to control price inflation by “stimulating” consumption, but it actually causes price inflation because it makes our money worth less than it was before!

This leads to all kinds of trouble. First, just like income taxation, it concentrates power that should belong to the people into a few select hands, namely the operators of the central bank. (In the case of the US, it’s the board of the Federal Reserve). Second, when a powerful group like the Fed lowers the value of your money, it is, just like income taxation, using the force of government to take value from you. Third, if the central bank goes too far with its machinations, it will create hyperinflation. This is when the money loses value so fast that prices may rise weekly, daily, or even hourly.  The money literally becomes more valuable as fuel for the fireplace or as wallpaper than as currency. If it is still accepted, it will take a literal wheelbarrow full of cash to buy a loaf of bread.  Can this happen in the US? Consider:

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