Tags: Quantitative | Easing | Growth | Crisis

Quantitative Easing: It Isn’t to Spur Growth, It’s to Avert a Crisis

By    |   Friday, 16 Mar 2012 01:41 PM

In the trading days after this week's Fed statement, there was a steep sell-off in gold and bonds.

The reason is because bonds are the asset class the Fed has been buying. Quantitative Easing, or QE, is seen as money printing that dilutes the dollar and is good for gold.

Now in the long run, QE isn't why gold has been going up in price. It has been rising because of deficits that are too large and the ultimate decline of the U.S. dollar as the world’s reserve currency.

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However, on recent news that the economy has been pretty good, gold and the bonds were sold off as some investors no longer think another round of QE is on the horizon.

However, the numbers say differently. In 1997, the national debt was below $5 trillion and interest payments on the debt were about $250 billion. In the most recent fiscal year, the national debt has tripled to more than $15 trillion yet interest payments are lower at $178 billion a year.

This is due to ultralow interest rates, where the government can borrow at one-year at under 1 percent and at 10 years at just more than 2 percent (rates were more than triple this level 15 years ago).

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If we had the same interest rates as 1997 today, we would have about $800 billion a year in interest payments. This would add $500 billion to the deficit, making it more than $1.6 trillion overnight — not to mention the slowing of the economy this would cause.

Therefore, the only thing holding this ship afloat is ultralow interest rates.

This is why QE, or the printing of money to buy debt, won't end. There is no other way the federal government can operate or pay for itself.

For example, ever since Operation Twist was put into action (and the Fed moved into buying the long end of the bond market), it is estimated that the Fed has purchased 86 percent of 10-year bonds issued in that period.

China is actually slowly their purchases of Treasurys. Japan recently started to buy Chinese bonds to diversify out of the dollar. Therefore, as the $15 trillion debt is rolled over, the only way that the government can pay for it is by printing money to buy its own debt.

Therefore, forget all the so-called good economic news. The government will have to continue to print and print and print for the foreseeable future.

About the Author: David Skarica David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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