“They” is Ben Bernanke and his Federal Reserve Board.
Of course, the headline is a statement that many people would agree with — it’s the nature of the Fed.
But there is something specific I am talking about in regard to the recennt announcement that the Fed may begin permanent quantitative easing (QE) operations in the next few months.
Again, quantitative easing is the Fed’s feel good term for printing money by buying bonds.
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They say that the “shock and awe” approach of buying lots of bonds quickly, as they did in 2009, is not the right way to boost the economy going forward.
The right way is to make more limited purchases of maybe $100 billion a month and then review the policy at each Fed meeting.
Let’s put that number in perspective.
Before the financial crisis, our entire money supply (as defined by the monetary base) was about $800 billion.
Now they are proposing that, after buying almost $1.7 trillion worth of bonds since 2008, they will start buying maybe another trillion dollars a year. That’s a doubling of our 2008 money supply. And maybe they will keep doing it for another year.
Printing money without end. Wow.
What is prompting such an extraordinary and unprecedented action by the Fed?
Is it the collapse of the financial and stock markets that prompted the earlier purchases?
No. According to the Fed, it is simply that the economy isn’t growing fast enough.
The current 2 percent or 2.5 percent growth rate just isn’t good enough and since Congress no longer seems willing to borrow much more money to boost the economy, the job now falls to the Fed to print money to boost the economy.
But why is it so critical to have a growth rate of more than 2 percent? Why such an extraordinary action just to boost a slow-growing economy? Do they know something more than they are saying?
What makes it even stranger is that only a few months ago, the Fed was talking about its exit plan — how it was going to sell off or reduce its bond holdings to reduce the threat from inflation due to the massive increases in the money supply they are causing.
Why such a big change?
Again, do they know something more than they are saying?
Few people are asking why the Fed is making such a radical change and taking such a radical action as printing on a continuous basis just to boost a slow economy.
They either buy into what the Fed is saying or they are hoping it will boost the stock market and don’t care.
Honestly, I am surprised a bit by the Fed’s plan and have said earlier that the Fed would not take a large action, such as buying another $1 trillion or $2 trillion, unless we had a big collapse in the stock market (a loss of 2,000 points or so) that threatened to disrupt the financial markets again.
Outside of a big drop in the stock market, I thought they might print another few hundred billion dollars to boost investor confidence and that’s it.
I wouldn’t think they would make a policy of long-term permanent printing of massive amounts of money. It’s a bit drastic for the Fed.
But listening to the Fed, you’d almost have thought somebody there had read "Aftershock," or at least part of it. The part that says we have a number of asset bubbles in stock, real estate, private credit and consumer spending.
And, as one bubble pops, it will put more pressure on the other bubbles, thus further pushing down the economy. Maybe the Fed is seeing we still have some big bubbles in the stock and real-estate markets and is scared to death they will pop further.
Hence, it is trying to do everything it can to keep that from happening. They don’t talk about a bubble economy, but they sure are acting like we have one.
Trying to increase our growth above 2 percent isn’t very important to the short-term economy, but trying to keep the bubbles inflated sure is.
And maybe they know it. Printing massive amounts of money is their only tool to keep bubbles inflated.
Of course, they seem to be overlooking the other part of the book that says printing money will put increasing pressure on the dollar bubble and pop that bubble too. Maybe they are hoping that they can keep the other bubbles from popping, while not putting too much pressure on the dollar bubble. Past printing hasn’t caused a lot of inflation right away, so it must be OK to print more, right?
One thing’s for sure, they know a lot more than they’re saying.
Their words are soothing, but their actions speak loudly of a bubble economy they are desperately trying to protect.
And, of course, long term, they are taking exactly the actions that will guarantee it will pop.
About the Author: Robert Wiedemer
Robert Wiedemer is president of the Foresight Group, a macroeconomic forecasting firm that customizes its forecasts for specific businesses and investment funds. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here
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