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Tuesday, Sep. 30, 2014

QE3

Posted Wednesday, September 19, 2012, at 8:14 AM

Do you hear that?

What could it be?

Oh yeah, it's the sound of printing presses at the Federal Reserve firing up to make $40 billion of new month every single month "until the economy recovers."

The money printing will continue for who knows how long.

The Chairman of the Federal Reserve, Ben Bernanke, has announced to stimulate the economy; the Fed must revive its strategy of qualitative easing (QE for short).

Considering the fact that QE1a, QE1b, QE2, and "Operation Twist," have failed to work, as Bullwinkle J. Moose, magicians hat in hand, would say, "This time for sure!"

If it was such a good idea, why doesn't every country do it all the time?

Just to put things in perspective, the number 40 billion looks like 40,000,000,000.

If we were to print one dollar every second for 40 billion seconds, it would take 1,270 years.

"Well, what does all this mean to me?"

At the fundamental level, since the dollar is not really backed by anything, the value of the dollar is determined by adding together the total value of all assets in the U.S. divided by the number of dollars in existence.

The more dollars in existence, the less each dollar is worth.

"So what. Why does that matter?"

First, it means higher gasoline prices.

The amount of available oil in the world has not changed.

The owners of the oil want to get full value for it when they sell.

To do that, they need to charge more dollars for the oil.

If you remember the Clinton years (and three-fourths of the Bush years), gasoline was in the upper one dollar to $2 per gallon.

Then, the price rapidly rose to the upper $3s to $4 per gallon.

That was because we doubled the number of dollars in existence from $800 billion to $1.6 trillion to "cure the recession," boost employment and save the country's biggest banks from their bad lending practices.

Unless the printing is stopped, in 20 months, gas will cost $6 per gallon.

But gasoline is not the only thing that will go up.

Precious and industrial metals will also go up.

Grocery products are commodities, like metals, and they will also be one of the first things to go up.

Everything imported into the United States will go up.

How many of us remember "experts" claiming that people in the United States don't save enough?

Most people aren't stupid.

Even the economically ignorant can understand that if you get 1-3 percent interest in your savings, it's not worth it.

Potential savers may not "know" that an inflation rate of 3-5 percent annually means you lose money when you save, but they know that prices are always creeping up and they don't make any money on their savings.

If there is a disincentive to save, where can new businesses find startup capital?

Inflation impoverishes a nation.

The cost of raw materials for manufacturing is always the first thing to go up in price.

The last thing to go up is always wages.

The elderly lose the value of their savings and their pensions lose purchasing power.

Tell me, when has the Social Security COLA, cost of living adjustment, ever matched the increased cost of goods and services?

I don't know if the Romans were the first to debase their money, but I know that every nation since has.

Every government from Rome onward, sooner or later, has spent more than it had.

It doesn't matter if the spending was on wars, social programs, or free bread and circuses.

Eventually, every nation has resorted to using debased currency to pay its bills.

South Africa and Switzerland resisted the temptation longer than most.

The Romans started mixing other metals into their gold and silver coins.

Eventually, the gold and silver were replaced all together with non-precious metals.

Shortly after the invention of the printing press, nations started issuing paper money replacements.

Without exception, every one of those currencies ended in collapse.

Frequently, collapse of a nation.

Culturally, the United States is one of the world's youngest nations.

However, other than England, no nation's government is older.

History is brim full of examples of how this monetary experiment ends.

No one wants to be an alarmist.

But as Einstein said, insanity is defined as doing the same thing over and over expecting to get a different result.

As Paul Ryan said, this is the most predictable slow motion economic train wreck in history.

I fear that no good can come from this.


Comments
Showing comments in chronological order
[Show most recent comments first]

Charles,

On Feb. 16, 2009 Newsweek magazine declared to the nation "We are all Socialists Now". Now thanks to the Fed and EQ3 we can all be "millionaire" socialist. Oh the irony

-- Posted by hgallatin on Wed, Sep 19, 2012, at 9:08 PM

I purchased and keep in my desk drawer a 100 trillion dollar bill from Zimbabwe, a 100,000 mark note from Germany, and an old American Continental as reminders of how this always ends.

My coin collection is filled with coins of currencies that have dissappeared since the 1970's.

It honestly depresses me to know what is comming and know that the vast majority of people simply don't care.

CH

-- Posted by Charles Hear on Thu, Sep 20, 2012, at 12:17 AM

Dear Charles -

Please be advised that, despite your tendency towards alarmism and ridiculous comparisons between the United States and the Decline of the Roman Empire, most economists are not worried about inflation, they're worried about *deflation* and an uncontrollable drop in commodity price indexes, largely due to American demographics and productivity, European/Chinese slowdowns and massive overseas demand for the greenback. Yes, the Fed is in fact *praying* for a little inflation as push-back against the steady moves towards American currency deflation over the last decade, and particularly in the last year.

The only people talking about inflation right now are the Republicans trying to scare people into voting for them. And even if their argument appears intuitive, and it does from the surface, it demands some interrogation, and by nearly universal agreement on the part of economists that served in the last four presidential administrations, is totally incorrect. Printing $40 billion is an attempt at creating a little inflation to control wildly expanding deflation, which is the real concern here.

Eg, from the last couple days -

http://www.forbes.com/sites/greatspecula...

http://www.investmentnews.com/article/20...

http://www.reuters.com/article/2012/07/0...

For the origin of these policies, way before the Obama Administration from at least the Bush days, see Bernanke's 'Helicopter Speech' in 2002, where he outlines the Fed's worries about/policy for combating deflation.

http://www.federalreserve.gov/boarddocs/...

The wiki is also worth checking out - its quite detailed, with further reading and good historical comparisons.. http://en.wikipedia.org/wiki/Deflation

-- Posted by NorvalJrJr on Tue, Sep 25, 2012, at 12:27 PM

Dear Norval JrJr.,

As always, I appreciate your well reasoned and thoroughly researched responses to my columns. Not surprisingly, I disagree with your conclusions.

Recessions can be inflationary. Recessions can be deflationary. However, what is wrong with deflation? Deflation means that the value of the dollar grows and the costs of goods and services go down.

There are two basic problems with deflation. 1. The value of the national debt increases while revenues to the treasury decline. 2. Citizens are incentivized to save their money rather than spend it. To the extent that people save, they are not participating in retail sales.

Businesses don't like to see declining numbers on their quarterly reports to shareholders. However in deflation, the value of those smaller profits increases for an effective net wash.

The real looser in deflation is the government. They get whammeyed with higher borrowing costs and a debt that is increasingly hard to service progressing toward default.

The worst of all worlds is stagflation. The value of money declines due to inflation of the money supply, while prices fall due to consumers increasing reluctance to spend. Our current situation looks a lot like stagflation to me.

In this instance, I am not worried about being "alarmist." The issue is not whether the sky is going to fall. Rather, we are ignorantly traveling down a well trodden path. Since the end of World War II, forty-four nations have experienced hyper inflation and economic collapse. Each and every time it was caused by excessive government spending which could only be supplied by printing new money. Granted, the United States has advantages that Argentina does not, but that only changes the time frame, not the results.

For the majority of American history, there has been 0 inflation. With the exception of the Civil War, inflation was flat from the 1780's until about 1930. Not only that, after the Civil War was over, the U.S. Government had a policy of debt payment and deflation that quickly brought the dollar back to its historical par.

In the 1975 presidential campaign season, Gerald Ford's campaign slogan was "WIN," Whip Inflation Now. The U.S. finally abandoned all ties to the gold system in 1972 and by 1975, inflation had gotten to a horrifying 5% per annum. That with Watergate sealed the coffin lid on Ford.

Now we are conditioned to expect inflation, so long as it is consistent and doesn't exceed 5% annually. Many of us have even been persuaded that modest inflation is good. While it may be good for the government, there is no advantage to the productive citizen.

Finally, Americans have likened themselves to the Romans starting with many of our founding fathers. Truly, there is a similarity in attitude and progress with the days of the Roman Republic. 230 years ago, the fear then, as well as now, is whether we will be able to retain our republic. Rome became increasingly populist in governance. When that inevitably brought Rome to a crisis, they decided to permit a temporary dictatorship. (The Romans invented the word Dictator.) We all know how that worked out for them.

Things are far different now than they were 2000 years ago. There is reason to believe that we will not follow the same path. However, we know that human nature has not changed in 5000 years, since the writing of the Old Testament. Under similar circumstances, people are likely to react in similar ways.

CH

-- Posted by Charles Hear on Thu, Sep 27, 2012, at 7:40 AM


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