I’m somewhat convinced that by now most people have heard that the “Government is printing more money”. But the way it’s presented to us by “modern” economists is different since most people are smart enough to understand what it means. The fancy words – for the same principle – are Quantitative Easing (QE) and whether we like it or not it has the same meaning.
In a nutshell here is the process. First, the Federal Reserve – a quasi private entity, aka the Central Bank – buys government bonds and other financial securities in volume from the government via the big New York City banks. Newly created electronic money is used to pay for these bonds, using computers to change the records of the banks’ accounts at the Fed. It costs nothing to create money in electronic form since all the Fed has to do is input whatever amount is called for in the computer. When a magician pulls the rabbit out of a hat we know the rabbit was hidden somewhere before it magically appeared out of the empty hat. The rabbit existed in its physical form before the magician did his trick. Unlike the magician the Federal Reserve creates electronic money out of thin air so there is no limit of how much newly created money can come into existence. If the banks want paper dollars – aka Federal Reserve Notes – the Federal Reserve informs the Department of Treasury, which in turn gives instructions to the U.S. Bureau of Engraving and Printing to print and send new dollars to the Federal Reserve which forwards them to the banks.
According to the Austrian School of Economics there are at least two major repercussions to the QE:
1. Interest rates are not allowed to work freely according to the law of economics of supply and demand. In this case the rates are suppressed. The government and the Federal Reserve claim that low rates will increase investment spending which will increase employment and therefore help the economy recover (Keynesian-ism). Witnessing this past decade’s events it’s clear that it doesn’t work. In the real world printing money distorts markets and slows the recovery as capital is again mis-allocated. Do you remember the artificial prosperity during the housing bubble and the tech bubble? Do you remember how the Federal Reserve Chairman Ben Bernanke kept on telling us for years that there was no housing bubble and that everything was fine? And finally, do you now understand why we had historically low rates for such a long period of time?
2. Leads to Inflation. Inflation is a more sinister form of taxation because it occurs through the back door and most people don’t understand its real cause. They think it’s a result of a free market and it’s beyond human control. Inflation is the result of unsound currency which in turn is the result of a currency system that has no limits when it comes to money expansion. So when someone says that Gold is up you may associate that with the dollar going down in value.
Quantitative Easing is synonymous with printing money and expansion of money supply. Why it affects most of us?
1. It does NOT help the economy recover and it actually puts the economy in a more dangerous stage.
2. It diminishes the value of our savings, decreases our purchasing power, and lowers our standard of living.
You and I can’t control what the government and the Federal Reserve are doing but taking the steps to protect ourselves and our assets is what real economists would recommend. So, next time when you hear about another QE granted by the government think of how it will affect your pocket.