Mark Zandi, chief economist at Moody’s Analytics, who is often quoted in economic matters, said, “Bottom line: The plan provides a boost to the economy’s growth, but it is not going to solve our problems. Even with the Fed’s action, we’re going to feel uncomfortable about the economy in the next six to 12 months.”
The latest purchase of bonds is smaller than the $1.7 trillion worth of Treasuries and mortgage-backed securities the Fed bought in its attempt in 2008—QE1– to battle the financial crisis. The action lowered the yield on those securities, pushing down interest rates for consumer and business borrowing, as The Wall Street Journal observed.
Although the Fed has been holding short-term interest rates close to zero since December 2008, the economy continues at a near standstill. “The Fed is falling short on its two primary mandates: unemployment, at 9.6 percent, is well above ‘maximum sustainable employment’ and inflation is running below what the Fed considers to be ‘price stability,’ an informal target of 1.75 percent to 2 percent,” The Journal article of Nov. 2 said.
In using quantitative easing to stimulate the economy, the Fed bought assets, such as bank loans, mortgage-backed securities, and U.S. Treasury notes. The Fed issued credit through its Trading Desk at the New York Fed. This has the same effect as printing money. It enlarges the money supply. When a central bank prints money in excess of revenue coming in, it is monetizing the debt.
Many economists believe that the election results will make it difficult for Obama to push through any major spending initiative he thinks could stimulate the economy, thus placing more pressure on the Fed to try to get the economy going. One member of the Fed’s Open Market Committee, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said the new Fed move was too risky. But Fed Chairman Bernanke wants to jack up inflation from its current bottom. He claims that a little inflation can help the economy by encouraging people to spend their money rather than save it.
The potential risks are that any inflation will suck more strength from the dollar—already weak—stirring trade disputes with other nations. Probably most dangerous is flooding the economy with billions of dollars that the fed has to print will dilute the value of our existing money. And there is no guarantee that any lower interest rates will make people spend more money or that business will hire more people.
Rep. Ron Paul (R-TX), who will chair the subcommittee overseeing the Fed, told Reuters Nov. 4 the Fed is totally out of control. “Eventually we’re going to have monetary reform.”
The manager of the world’s largest mutual fund, Bill Gross, said on CNBC Nov. 3 that he thinks the Fed’s quantitative easing will cause the dollar to collapse by another 20 percent over the next few years.
By flirting with inflation, to just get a little bit, you run the risk of an inflationary spiral that’s hard to stop. Ask anyone who lives in Zimbabwe, where about $200,000 in Zimbabwean dollars is worth about .10 U.S. cents.
As Peter Schiff, president of Euro Pacific Capital, has said: “The sad truth is that the productive capacity of the American economy is largely in tatters…Introducing freer flowing credit and more printed money into such a system will do nothing except spark inflation.”
Our government has so far been able to borrow money from other counties at low interest rates. But as the Fed keeps buying up hundreds of billions in U.S. Treasuries, the rest of the world may soon refuse to take part in what some see as a Ponzi scheme.
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