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quantitative easing round two

“By buying government bonds, the Fed aims to keep long-term interest rates low, hoping it will lead consumers to spend and companies to invest more, thus helping to propel the economy forward. Short-term interest rates were slashed close to zero in Dec. 2008, so the Fed no longer has its traditional weapon to boost the economy.”

This quantitative easing magic accounting act will see another half a trillion and change being created out of thin air and frantically shoveled to the banks through auspices of the Fed’s keyboards. It will subsequently disappear from the American economy, only to materialize as off shored investments to the more lucrative profit generating regions of the world such as China and India, anywhere really that better capitalizes on maximizing gains from the largess generated by low labor and environmental overhead. This is what Crony Capitalism at its finest does, as it seeks out the most competitive rate of return come hell or high water. Meanwhile the US taxpayers is once again left holding a bag of their own IOUs for bankster smash and grab artists who have made off with the real loot.

Meanwhile, overseas purchasers of US government debt continue to witness the watering down of their dollar based investments, as well as the flood of fiat currency into their economies, which puts additional upward pressure on domestic currencies and negatively impacts their export driven economies. Essentially, the Fed’s latest gambit will only produce a new round of misery for everyone except the banking cabal who run the joint. When the Chinese push the “sell” button on their US dollar reserves, then we’ll see a show! Unfortunately the average American is too busy watching The View, Dancing With The Stars, American Idol, and UFC to care about the impending cloud of doom coming their way.

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Fed to Buy $600 Billion of Treasurys By LUCA DI LEO And TOM BARKLEY

The Federal Reserve Wednesday unveiled a controversial new plan to buy U.S. Treasurys, hoping to spur growth in a disappointingly slow U.S. economy.

After two days of discussions, Fed officials decided to go ahead with a much anticipated program, saying they will buy $600 billion of U.S. government debt over the next eight months.

The Fed’s policy-setting body said it stands ready to purchase more bonds if the economy’s persistent weakness leads inflation to remain too low and unemployment too high.

The Fed’s first $1.75 trillion bond-buying program, which ran from Dec. 2008 to March 2010, is credited with helping the economy when the U.S. was hit by a financial crisis and a deep recession. The latest move is more controversial because the economy is now growing — albeit slowly — and financial markets are no longer under severe stress.

Fed to Spend $600 Billion More To Help Boost US Economy by Reuters with CNBC.com

In its post-meeting statement, the Fed described the economy as “slow”, and said employers remained reluctant to add to payrolls. It said measures of inflation were “somewhat low.”

“Although the committee anticipates a gradual return to higher levels of research utilization in a context of price stability, progress toward its objectives has been disappointingly slow,” the Fed said. (Click here to read Fed statement.)

What does this all really mean?

Borrowing from the future to spend today was encouraged to excess by artificially low interest rates which fueled asset price rises (housing) which temporarily seemed to justify the borrowing. Artificial interest rates occur because the governments and central banks manipulate the money supply and interest rates rather than letting the market establish the balance between savers and borrowers.

Remember that savings represent the deferred consumption of the saver. If credit is available in excess of real savings, prices of goods and assets get bid up and unsustainable borrowing (especially for consumption) and malinvestment occur. Any spending funded by borrowing comes with a price. If this spending is not for quality investment , for which the debt is self liquidating (indeed, investment must more than pay back the cost of borrowing if it is to be justifiable), then it necessarily means that future spending will be reduced by the magnitude of the spending PLUS the debt service.

Government borrowed spending is largely non-self liquidating and is a net negative. It is equivalent to the young profligate spending his inheritance before he has it, creating some temporary economic activity at the expense of future needs. Governments, corporations and individuals must live within their means. Borrowing by the government to fund stimulus and unemployment programs will only ultimately prolong the correction.

This is all well described by Austrian economics, which predicted the Great Depression as a consequence of the loose credit of the Roaring Twenties.

This entry was posted on Wednesday, November 3rd, 2010 at 4:18 pm and is filed under All Posts, Bankruptcy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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