Dog Days for the Dollar
As the troubled American economy continues to stumble toward an uncertain future, some very powerful decision makers are positing that a new influx of cash will solve the problem. Wait, haven’t we heard this before?
In the video above, Xtranormal makes a great point about quantitative easing. The Federal Reserve is injecting a mountain of money into the market by buying bonds from the private sector. This is supposed to create more spending power for individual consumers and businesses. However, quantitative easing is an economic experiment that has been tried several times, by several governments, and the desired effect is not guaranteed.
Deflation is considered bad because the market shrinks and less cash flows through the economic system. However, by injecting more money into our economy, the Federal Reserve is merely compounding the problem. William Poole, former head of the Federal Reserve Bank of St. Louis, discussed the issue in 2010, right after the second round of quantitative easing. According to Poole, the economy wasn’t rebounding because it was operating under a slew of new regulations that create fear and uncertainty in the market, causing investors and banks to hold onto the money they’ve accrued because the government had implemented thousands of pages of new regulations. Listen to his interview here: http://www.cato.org/multimedia/daily-podcast/quantitative-easing-youre-soaking-it
Whether Poole is correct, the fact remains: our market is not rebounding. We’re facing the third round of quantitative easing, and while the influx of cash has certainly prevented total economic meltdown, it may have only made the problem even more difficult to fix in the long run. The first influx came to keep AIG from bankruptcy, and Chairman Bernanke called it “credit easing.” Poole asserts that the Fed will eventually have to remove the extra cash from the market to ensure that the dollar remains stable. Why, then, does our government believe that injecting even more money, which will eventually have to be removed, will help our economy?
The entire idea seems ludicrous, which is why the video from Xtranormal makes such an excellent point. According to current economic policy, the shrinkage of our economy is undesirable. However, if one thinks of the economy as an organism, then times of “rest” and “relaxation,” or economic shrinkage, should be understood as the free market trying to regulate itself internally. In essence, the government is forcing our economy to act almost cancerous.
No system can suffer continual growth without collapse. Perhaps the government should consider what will happen if this new round of quantitative easing should fail. Not only will our economy be in dire straits, but the dollar will have lost stability.
Other countries or confederacies, such as the EU, have used quantitative easing, and according to the Financial Times Money Show on July 5, 2012, quantitative easing has caused retirees living on pensions and fixed incomes to have less purchasing power for their money. Because quantitative easing drives up the price of bonds, people holding securities who need to use the money as income are getting a lower yield.
The following link will allow you to listen to the FT Money Show podcast, “Quantitative easing, the retail distribution review and where to get the lowest mortgage rates”: http://podcast.ft.com/index.php?pid=1533
Savers are suffering, and the podcast brings up another great question. Why are our governments decreasing the value of currency? Though I can only speculate, I think we can safely assume the government is using quantitative easing as a last resort. Our economists are as mentally bankrupt as the global economy they are trying to save.