On September 13th the Chairman of the US Federal Reserve, Ben Bernanke announced the latest round of QE (Quantitative Easing) but with a dangerous twist. Unlike previous rounds in 2009and2010 although large in scale included limits, this time there are no limits and Bernanke effectively indicated that the government will do whatever it takes to achieve various targets, notably employment growth. It is very doubtful that this new policy will work, the previous rounds have summarily failed to stimulate employment and the economy continues its lethargic path. But of far greater note is the open ended nature of the current commitment, and its disastrous consequences on the US dollar and in fact fiat currencies globally.
Quantitative easing is a convoluted way of describing money printing, and printing with nothing to back it up. As with all economies, companies or indeed families, it is not unusual for budgets to not balance, for short term deficits to arise, for loans to be required. Yet the US economy is in chronic deficit, with an enormous $1.5 Trillion dollars yearly shortfall within its $15 Trillion economy. For Obama’s last budget he expected to overspend their tax revenues of $2.5 Trillion by $1.33 Trillion (53%). Like the recalcitrant debtor which never balances the books the US is taking advantage of several factors in its favour.
Of paramount importance to the US is the status of the US dollar as the defacto world currency, a position it has held for most of the past century since Bretton Woods in 1944, with a fixed conversion rate of $35 to an ounce of gold, from which the rest of the world then set fixed rates against the dollar, the US had the strongest economy and the most gold. The US again set the pace when unilaterally Nixon took the US and the world, by default, off the Bretton Woods form of gold standard and launched our current reality of free floating exchange rates, with no world currency backed by any tangible assets. The results have been predictable with currencies unilaterally devaluing against gold rapidly. Since 1971 the US dollar has devalued by 98% from $35 per ounce to $1780 per ounce. The latest ruse of Bernanke’s with open-ended QE shows all likelihood to take the dollar to complete nothingness. However, the US is leading the other main economies of the world down the same path. Faced with a global recession a competitive devaluation of your currency versus your export competitors policy is rampant, its a “beggar thy neighbor” stance where your exports will be cheaper – but is in effect an impossible policy – over the longer term no one can win, and the British, Japanese, Brazil and now likely Europe and even China are following fast in the QE train. If all are devaluing their currencies it becomes difficult to gain an advantage, but the costs to the economies are enormous.
The main cost is of course via inflation whether overt or hidden, printing of substantial amounts of new money without growth in goods and services (the economy) means inflation. That it is not so obvious yet is due to the governments covertly changing their measurement of inflation in ways that underplay its true reality (since the time of Clinton the calculation of the consumer price inflation basket of goods has changed in such a way that the inflation rate has effectively halved) and due to the banking industry salting away much of the newly created money to strengthen their heavily weakened balance sheets.
Ben Bernanke’s recent announcement is nothing but a continuation of the policies to prop up a bankrupt banking system. Since 2007 he has:
- Cut interest rates from 5.25% to .25%
- Taken on $30 Billion in Bear Stearns junk mortgages prior to its sale to JPMorgan
- Provided virtually open-ended lending facilities to US and related global banks
- Provide up to $400 Billion for the Fannie Mae Freddie Mac bailout
- Taken over the bankrupt AIG Insurance group for $85 Billion, then provided a further $45Billion
- Provided $700 Billion for the euphemistically named “Troubled Assets Relief Programme” (TARP) for the Banks – effectively buying Bank junk assets to bail out the banks from imminent collapse.
- Provide $540 Billion in back up loans to money market funds
- Provided $280 Billion to back up Citigroup (Oct 08)
- Provided $140 Billion to back up Bank of America (Jan 09)
- QE1 of $1.25 Trillion of mortgage debts and government treasuries (Mar 09)
- Further QE of $200 Billion in Aug 10)
- QE2 of $600 Billion in Treasuries in Nov 10
- Operation Twist (Nov 11)
- And now QE3 of $40 Billion of mortgage backed securities every month from now on (Sept 12).
There is a consistent theme to the above spending, apart from there being no real money surplus to meet the payments! They are predominantly geared around the banking/financial collapse. Rather than feed money to those that are losing their homes (home price/jobs collapse) Bernanke has channeled the money to those holding the mortgages and losing derivatives gambling stubs (the bankers). With the bankers jealously holding onto the money to rebuild their balance sheets. To add insult to injury the provision of more money to banks in buying Mortgage backed securities (the latest QE) will enable the Federal Reserve to take over the multitude of mortgages which were packaged together into instruments like Collateralised Debt Obligations – many of which have severe ownership issues. The Fed will be in a strong position to foreclose on those homes where the banks dithered and struggled under a barrage of legal challenge. With partial ownership and influence (including over Board membership) of the Federal Reserve exercised by the major US banks, it is little surprise that the policies of this body overwhelmingly meets the interests, bailout and liquidity needs of those least deserving from the banking sector.
Bernanke caveated the latest “potentially unlimited” QE with the aim of getting the stubbornly poor employment figures of the US back on track. None of the earlier versions of QE have helped employment in the US or elsewhere, we are in the midst of a deep recession and throwing money at banks to keep them afloat is not helping employment other than Bank executives which of all people should be the first into the dole cue.
In this US election year Obama is sweating over the official unemployment rate which is stubbornly over 8%, and has remained above 8% throughout his administration, yet like the inflation “figures” the administration is adept at presenting as good a picture as possible. The 8% figure is only possible by taking more people from the labour participation rate in the US which is now at an anaemic 63.5% (less than two thirds of the population are even included as working or looking for work – and not all of the 36.5% are retired or under-age). Also little comment is made of the fact that many of the jobs that have come into the economy in recent years are part time. Western economies are severely compromised, governments are facing growing deficits and no growth. Unemployment is rising. Unofficial, yet credible independent employment statistics (shadowstats.com) show US unemployment at 22.8% with no signs of recovery on the horizon.
A Golden future?
Perhaps the biggest scandal of QE is that it is a direct theft of wealth from the masses. The constant devaluation of currencies is nothing but a hidden and oppressive tax on a massive scale. Anyone with monetary and related assets finds their purchasing power constantly eroded and wages do not keep pace with the real inflation created by money printing. The 1% are well protected, know the game, and act accordingly – keeping their wealth in commodities and real assets like land in these inflationary times. The poorest in society suffer from the lack of jobs and opportunity and without assets of note generally depend on societal welfare programmes (46.5 million Americans depend on food stamps for survival). The rest – the vast majority in society – whether in work or looking over their shoulders as companies close and austerity programmes bite, are having their wealth stolen. The high and rising costs of energy and food are strong indicators of the inflation working into the system, and it will only get worse.
The only protection that populations have in the face of this theft is via real money – gold and silver – which has a history of acting as a true store of value over millennia. As assets which cannot be produced at the flick of a central bankers computer print button, and which have intrinsic value (jewellery, industrial use, etc) they are really the only suitable medium of exchange the people deserve. The central bank dominated capitalist world will fight against gold and silver and their right to inflate tooth and nail. It is really left to the Islamic world under the Caliphate system which obliges gold and silver as currency, to lead the way back. Of course the Bernanke’s of this world are walking a tight rope between printing and a deflationary depression. The academic inside of Bernanke (he produced his doctoral thesis on the 1930’s depression) is convinced he can control the printing presses he administers without falling into a hyperinflationary spiral which will destroy not only the US dollar but most western economies, plunging the world into a protectionist and depressionary mess. Even if they can avoid hyperinflation, the high levels of inflation which his “unlimited” QE will cause, is slowly but surely killing the US and defacto world fiat currency.
Ironically the latest phase of the currency wars has seen the US attack the Iranian Rial via sanctions and market operations as part of its covert war to stop Iran’s nuclear march (the Rial has lost 80% of its value this year). The unintended consequence of which is the use of gold again in international transactions in the settlement of oil deals between Iran and China. The BRIC (Brazil, Russia, China and India) countries are already settling increasingly with their own currencies rather than the US dollar, and for very good reasons.