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Will Quantitative Easing By The Federal Reserve Unleash Economic Hell?

Prior to the financial crisis of 2007 and 2008, the Federal Reserve could always count on being able to stimulate the U.S. economy with a quick cut to interest rates.  But now with interest rates just barely above zero, the Federal Reserve is searching for other ways to pump life into a U.S. economy that is staggering about like a drunken college student.  One of the ways that the Federal Reserve can do this is through something called "quantitative easing".  In essence, what happens is that the Federal Reserve creates money out of thin air and starts buying things like U.S. Treasuries, mortgage-backed securities and corporate debt.  But many economic analysts are now warning that further rounds of quantitative easing by the Federal Reserve could end up setting off a series of events that could ultimately unleash economic hell.  In fact, there are quite a few high profile commentators who now believe that hyperinflation in the United States is absolutely inevitable.

For those not familiar with quantitative easing, Wikipedia has a pretty good definition....

The term quantitative easing (QE) describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.[citation needed] A central bank does this by first crediting its own account with money it has created ex nihilo ("out of nothing").[1] It then purchases financial assets, including government bonds, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations.

But is it really a good idea for a privately-owned central bank to have the power to create money out of nothing and to do whatever it wants with it outside of U.S. government control?

Of course not, but we dealt with those issues in another article.

What we will concern ourselves with in this article are the negative effects that could be unleashed as the Federal Reserve further abuses this power.

Now keep in mind that disasters don't usually happen overnight.  They usually build over time.  When the Federal Reserve begins new rounds of quantitative easing, it will take time for the effects to be felt.

And so far, the new quantitative easing measures that the Federal Reserve has implemented have been relatively mild....

*The Federal Reserve has announced that it will "continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature".

*The Federal Reserve has also announced that it has decided to reinvest principal payments on mortgage holdings into U.S. Treasury securities.

*The Federal Reserve Bank of New York announced on Wednesday that it will purchase $18 billion in U.S. Treasury securities between now and mid-September.

But most analysts are expecting quantitative easing by the Fed to accelerate - especially if the U.S. economy continues to flounder.

So is there a reason we should be concerned about all of this?

Well, yes there is.

Marc Faber, the author of "The Gloom, Boom and Doom Report", recently warned CNBC that all of this intervention by the Federal Reserve is going to create a "final crisis" that will destroy the U.S. financial system....

"Investors should have listened to me already six months ago when I wrote that the Fed will continue to monetize … they will print and print and print until the final crisis wipes out the whole system."

In a recent article, Bob Chapman of the International Forecaster described some of the financial gymnastics that our "financial authorities" go through just to keep the current shell game going....

But first, we ignore things like monthly hundred billion plus mathematical discrepancies between the amount of the government's deficits and the amount of treasury bonds being sold.  Then we give the proceeds from the bogus excess treasury sales to foreign countries, foreign central banks and sovereign wealth funds as well as Cayman Island hedge funds so they can do what with it?  Why, so they can buy US treasury paper and agency paper, among other things.  Yep, we set up the straw men, fund them with counterfeit money illegally created out of thin air beyond what is needed to fund the ever-increasing deficit being created by the drunken sailors running the US government, and we then magically create categories of new mega-buyers in our financial reports to show everyone how our treasury paper is just as "beloved" as in the old days.  Why, even the totally bankrupt UK has magically created $180 billion for the express purpose of buying up those treasuries to keep the whole rip-off party going.

What a mess they have created.

Things have gotten so bad that even CNN is publishing articles that openly acknowledge the crisis.  In a recent article on CNN entitled "Is This Finally The Economic Collapse?", Keith R. McCullough warned that the Federal Reserve openly buying large amounts of U.S. government debt is a very dangerous threshold to cross....

Now that the US can't cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing -- buying Treasury debt. And that could lead the country to the brink of collapse: According to economists Carmen Reinhart & Ken Rogoff, whose views we share, crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It's a point from which it's almost impossible to return.

And that is the crux of the problem - the U.S. government has a debt that is absolutely spiralling out of control.  This is a problem that has been building for decades and there simply is no quick fix for it. 

But the truth is that it was seen as far back as 1835.  In his article for CNN, Keith R. McCullough included a very appropriate quote by Alexis De Tocqueville, the author of Democracy in America....

"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

Today, approximately 57% of the U.S. government budget is spent on direct payments to American citizens or is money that is spent on behalf of individual American citizens. 

For decades, the "Congress critters" have been bribing the American people (and each other) with massive payouts and have been getting away with it.

But now we are starting to pay the price.

The truth is that the U.S. government has become an expert on wasting money.  Most of the folks populating Congress are so incompetent that they should not even be hired to mop the floors of a Dairy Queen, and yet they control how trillions of our tax dollars are spent. 

The end result is that we have a financial mess that is absolutely unprecedented.

The U.S. financial system is doomed.  The U.S. government and the Federal Reserve will probably end up trying to save it with a massive flood of paper money, and in the end that will likely result in the collapse of the U.S. dollar and hyperinflation.

But hopefully all of that is still a while away yet.  For now, the Obama administration and the Federal Reserve are trying to play a very delicate balancing act and are trying to keep this giant house of cards from collapsing.

As incompetent as they are, let's hope that they can keep things together for at least a while longer, because when things really fall apart we are all going to be feeling the pain.

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  • Maria

    We certainly are feeling the pain….with much more to come. Thanks a lot Congress! Even though it is too late to stop this depression, I hope our new Congress will have the decency to abolish the Fed. For those of us who survive this mess, I have two words….GOLD STANDARD.

  • http://colonelgirdle.wordpress.com/ colonelgirdle

    Good essay, in spite of the insult to the Dairy Queen floor-moppers. I am certain said moppers perform their job with far more competence & integrity than the members of the Congressional millionaires’ club.

  • Joe Pizzolato

    Just a matter of time before the entire system collapses and there is no more money.

  • http://Theeconomiccollapse Dang

    Hyperinflation never happen since. The money created by stimulis an spent by the gov never reaches the american people. There out of the loop. Becasue they buy treasures with it. It never makes it into the economy. Also seems like the gov is anti capitalism. There laws all they make hurts its.

  • Teemancan

    No paper money system in history has ever endured. The dollar is no different. It is terminally ill and we are witnessing a slow but sure death.

  • David M

    Not that I am a financial expert…

    But with the job market shrinking.
    More people retiring to Social Security.
    Small businesses closing.
    Consumer spending down.
    New home sales way down.
    Foreclosures way up.
    More banks being taken over for failure.
    Fanny and Freddie getting bailed out for 10′s of Billions every quarter for their losses.
    GDP spending taking a nose dive(5% end of 2009, 3.7% end of 1st quarter 2010, 2.4% 2nd quarter 2010)and likely to be revised downwards.
    Many new taxes kicking in starting 2011.
    Government deficit spending over a trillion a year.

    And the Federal Reserve point blank monetizing our debt.

    I don’t think we have a year.

  • rick

    Well…here it is QE part 2 in effect…so it begins.
    http://www.newyorkfed.org/markets/opolicy/operating_policy_100810.html

    http://blogs.wsj.com/economics/2010/08/11/ny-fed-to-buy-18-billion-of-treasurys-in-reinvestment-program/

    no sooner was this article written did the boys with the printing press finally hammer in the last nail.

  • Richard

    I am panic buying cans of tuna!

  • Spencer

    The thing about hyperinflation, historically, is that it happens nearly over night. It doesn’t take time, it doesn’t take a year to get there…suddenly , collectively, no one trusts the dollar anymore and it becomes a big game of hot potato.

  • sharonsj

    It doesn’t seem that the Fed’s actions have anything to do with the current problem of no jobs. The policy of giving banks money for almost no interest has not translated to the banks giving that money to the average human being.

    As for hyperinflation, we have had creeping inflation for the last few years without a peep from the mainstream media. It’s as if it will go away if not spoken about. However, when pet food and sugar goes up 35% in price, and packaging goes down 33% but the price stays the same, we are being screwed and squeezed.

    Nor can I wait for next year when the cap comes off my local electric company. Bills are expected to jump about 50%. I wonder if the media will finally get around to mentioning all those dead frozen people?

    30,000 show up in Atlanta just for housing applications–and there are only 13,000 applications and even less actual apartments available. Then you’ve got 14,000 people living in tunnels under Las Vegas. I don’t now if there’s a head count of the tent cities.

    When you have all this going on, talk of hyperinflation seems redundant. But it could be the spark that finally gets the sheeple off their couches.

  • TnAndy

    “Hyperinflation never happen since. The money created by stimulis an spent by the gov never reaches the american people. There out of the loop. Becasue they buy treasures with it. It never makes it into the economy.”

    Wrong. It’s a two step process.

    The Fed buys the Treasuries, which allows Congress to THEN funnel the fiat to people.
    You see the 26 billion they passed the other day for “schools/teachers” ? ( Actually, only 10 billion went to education, the other 16 billion to bail out the States medicare problems )

    Those 30,000 that showed up for the 13,000 applications for subsidized housing in Hot-Lanta the other day ? More federal spending

    The 30 billion ‘extended funding’ for the war of aggression in Afganistan ? More federal dollars that flow to suppliers/etc ….

    The real problem is a debt based money system….it HAS to constantly expand to be able to pay back the original made up money PLUS interest. Inflation is built into the equation from that constant expansion…..no way around it.

    Once the people have take on all the debt they can handle, phase 2 is the govt takes over. That is where we are now. As they run up more and more debt, the folks that were LEGITIMATELY buying it back away from the table, also where we are now, and the games begin in earnest ( they have been using shell corporations for years now to “buy” Treasuries, but are no longer able to hide it when the amounts get at large as now ). The game will continue until countries that provide what we need ( like oil ) will no longer accept our paper for real goods. THAT is the point you will see hyperinflation hit…..and we aren’t too far from it.

    China just nosed out the US as the world’s largest consumer of oil…and they will pay with real money redeemable in real goods their factories produce. ( quality issues aside ).

    Get ready for $10/gal gasoline….don’t worry, though….the govt will provide the ‘po’ folks with vouchers for theirs. Then it will jump to 20/gal, and more of us will qualify for our vouchers ( since more will be thrown out of work due to oil prices ), then shortages will be here, gasoline first, followed by every good that moves by truck….and you will pay whatever you have to for a loaf of bread.

    Coming to a neighborhood near you soon.

  • David M

    Richard is right. Stock up on food.

    I have 400 Lbs of rice and some 900 cans of veggies, tuna, chicken chunks, and soups.

    If we have a deep recession, will make things easier. If we have a collapse, will keep me and my family alive.

    If we have a miracle recovery and its about to go bad, I’ll donate to a church of food shelter.

  • Matt

    save yourself and your family by trading in your paper dollars and eDollars for real money: gold and silver – while they are still cheap

  • http://www.watchman2009.blogspot.com Cliff Hilbert

    I wrote this on my blog one year ago.

    Friday, August 14, 2009

    The Eye of the Storm

    Right now we are in the rather calm eye of the storm. But the worst damage comes after the eye passes and the winds come from the other direction. The first winds of this storm weakened the economic structure in this country, but they didn’t destroy it. At this date, there is a relative calm in the economy of this country – it seems to have stabilized and the stock market has rallied. Our politicians and newspapers are declaring that the recession is over and there will be good times ahead. DON’T BELIEVE THEM!!!!

    This is just the calm in the eye of the storm. The winds are about to hit us from another direction and they will completely destroy the economy of this country. It is coming very, very quickly. Be prepared to live on virtually nothing. Be prepared to live without many of the conveniences you have today. Be prepared for exhorbitant price increases on everything from food, to electricity, to gasoline, to clothes, to just about anything you buy. Hyperinflation is coming very, very quickly.

    You must learn to do with much less than you have today. Energy prices will skyrocket to unbelieveable levels and many of you will not be able to afford to air-condition or heat your homes. Gasoline prices will be higher than anyone could ever have predicted, be prepared to drive only for essential errands. Food prices will skyrocket and you will be able to afford only the basic necessities. Salaries WILL NOT rise accordingly. Cut back on your expenses and save as much money as you can.

    I can’t tell you how dire this warning is! It is from the Lord. When I woke up this morning I had no idea that I would be writing this today. But I read something in this morning’s Dallas Morning News Business section where the reporter asked the question “Are we in the eye of the storm?” Then the Lord put this message upon my heart.

    What should you do? I don’t give blanket advice except to tell you to spend more time in prayer and fasting, asking the Lord what He wants you specifically to do. His direction will be different for different people. I do believe that many families and friends will be living together to try to conserve money and resources. I do believe that it is time to begin planting your own vegetable gardens. I do believe that it is time you learned to ride bikes again. I KNOW that it is time to get your prayer life in order and make it the most important part of every day. Turn off that idiot box and pray and read the Bible. Seek the Lord while He may be found. The days of darkness are almost upon us.

    http://www.watchman2009.blogspot.com

  • lostinmissouri

    The Bankster mafia that has control of our country will not stop, or be stopped until the entire system breaks down.

    When that happens, it will be blamed on WW3, that kills 40% of the world’s population.

    Then these same Banksters will be the ones, who will save us all, with a “new currency” and the game will begin again.

    It’s an old record, that has played many times before. We do live in interesting times.

  • http://Theeconomiccollapse Dang

    TnAndy yes i agree the gov does spend the money. But most is outside the usa, most of the stimulis monies went over seas to pay off dirievites bad bets. But if 100% of this money went into our banks here an they loaned it to the american people yes inflation would be much hotter.

  • schwartzer

    You folks are certainly batting 1000 on this blog lately. I may even give you a referral. John Williams says 6 months to 1 year at most and Schiff recently said perhaps before or around election.
    This is NOT going to end in a good way.

  • mbabsit

    Some of us prepared for this years earlier. We read the the then-heretic Harry Browne, and bought gold and silver. We also took a page from the LDS, and stocked up on a year’s supply of “beans, bullets, and band aids.” We also started gardening, and began taking steps living off the grid. We were laughed at, and called “preppers.”

    Question: who is laughing now?

  • Chuck

    In defense of the education and intellectual capacity of any given Congressman: it is not that they are either inept or useless, it is only that we are not on the receiving end of their legislative charity.
    For those people and corporations who pay handsomely to get things done they way they want them, Congress operates with an excellent rate of efficiency.
    Don’t get me wrong. I don’t care for the system as it is, but it is what it is. If we didn’t allow corporations the rights of “persons” and banned money-driven lobbying by special interets and others, as well as found a way to insulate representtatives from the business community, we would have 545 great people working for us.
    However, the nature of our system–really, it is the worlds system historically, isn’t it?–is such that the wealthy lead and the poor suffer. Our representatives are simply incidental instruments of such a construct.

  • Farmer

    Dang,

    The money is making it into the system in the form of bloated Federal Employee rosters and salaries. The same thing happened in Weimar where Civil servants were always paid the inflation to keep them on the job and in Zimbabwe where solders were paid to keep them on the job. The money gets spent into the system one way or the other. Eventually it will make it into our system as well when everyone works for the Government. It could take a long time.

  • http://dfc-economiahistoria.blogspot.com DFC

    I agree totally with the comments of the famous economist Mr. Koo, that follows the recipes Keynes propose and FDR did in the 1929 recession

    Now the monetary policy alone is worthless, the economic agents are so depressed and afraid about the course of the economy, that nobody take any risks, so nobody invest, borrow a loan, lend money, open a new business or consume more than the strictly needed, even with very low interest rate.
    There must be “somebody” to make demand to growth, and the only economic agent that can do that is the administration.

    This was the same policy Nazis made in Germany, even they did not know they were “Keynesians”, that was the way they finish the huge unemployment in those days, putting the people to work in the autobahnen (motorways) network they made in the 30’s, that had an effect of “multiplier” for the productivity and helps the private recovery, in the same way FDR with his New Deal, and in both cases that works (unfortunately in the case of Germany the Nazis was the worst choice germans could have made)

  • nakedguy

    if you live anywhere you need a furnace you will be in trouble , live somewhere you can grow food year round

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