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Fed Printing $600 billion to Finance Borrowing

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Frankly, I’m disgusted that this has gotten so mired in the weeds of economic jargon.  Quantitative easing, economists theorize, blah blah blah.  A lot of stories about how the Fed is going to buy $600 billion in treasury bonds, very few including the most salient detail, that this purchase is funded by dollars that were pulled out of thin air.

The Federal Reserve is trying to take out an insurance policy against the risk of deflation and a return to recession.

The price tag for that insurance: $600 billion.

That’s the amount the Fed said Wednesday that it will spend over the next eight months to buy US Treasury bonds. The idea is to pump new money into a weak economy, boosting both economic growth and inflation.

How is it intended to work?

Economists at the investment bank Morgan Stanley, in a note to clients Wednesday, cited several channels by which the Fed’s policy may help lift growth. The Fed begins by using its power to create money, and using it to buy bonds. Pumping new money into the economy can push up the price of assets (such as corporate stocks), lower the dollar’s exchange rate (making US exports more attractive), and raise inflation expectations (thus reducing real interest rates).

Let me say that I’m just so pleased to know that the Federal Reserve is led by people who haven’t grown passed the stage of the 6-year-old asking “Daddy, why don’t they just print more money so we can all have more?”  I’m assuming that was a normal question for a 6-year-old to ask.

Alright, I’m being a little facetious.  The justification is the same as it’s been for all of the obscenely dangerous actions taken by the jackasses at the Federal Reserve and Treasury Department since the popping of the housing bubble, it’s not obscene, it’s just a Keynesian short-term adjustment. As it is with most Federal Reserve Caligulan Orgy Policies, the aim is to fight deflation.  Deflation is when prices and wages drop, i.e. the dollar increases in value.  When this happens, people who have debt wind up having to pay a lot more than they initially intended, as each dollar they pay is worth more than each dollar was worth when the debt was assumed.

So in order to counter act the deflation, the fed prints money.

The issue is, once again, the economy is trying to right itself and, once again, the government isn’t letting it.  Demand has dropped, and the only upside is that savings were increasing, the best way to address long-term problems stemming from over-consumption.  People are rightfully worried, and they’re only going to stop being worried when they’re sitting on enough money to feel safe again.  When the value of the dollar drops, the value of those savings drop as well, with that money going to the Treasury Department and people who assumed too much debt.  So instead of building a base for a healthy economy, we are subsidizing over-consumption as a cure for over-consumption.  End result?  No consumption.

Here’s the part that’s really rich:

However, Robert J. Gordon, an economist at Northwestern University, said that without additional government spending to match the Fed’s loose monetary policy, the economic frailty was bound to persist.

“Virtually everything on the fiscal policy side will be off the table in the deadlocked partisan world we face in 2011 and 2012,” he said. “This greatly increases the probability of a Japanese-style lost decade that would span the decade 2007-17.”

Now for those of you unfamiliar with the Japanese economy, following World War 2 it’s been a Keynesian paradise.  The best and the brightest staff a bureaucracy that is actually the modern equivalent to the Samurai class (I’m not kidding).  They have controls over every aspect of the economy and have the absolute best minds in charge of reading the indicators and pointing the ship towards growth.  The “lost decade” happened because their government did what our government is doing now, they manipulated people to the point that people stopped transacting, and then the government spent a decade trying to manipulate them out of it.

It’s not going to work.  The economy is not going to get back on track until the government backs off.  Prices need to drop, bankruptcies and evictions need to happen and things aren’t going to turn around until that happens.  If a preschooler can figure out it’s better to just rip off the damn band-aid, how is it this hard for these guys?  The time to help the people losing their homes what when you were deliberately inflating home values and lowering interest rates.

Bullet points:

  • This is not an issue of the value of the dollar spinning out of control.  This is an issue of the leaders in Washington thinking they know how you should use your money than you do.  Argentina-style inflation and truly monetizing our debt is a far way off, but the effect this has on people who aren’t going to spend until they’ve saved is at least as insidious.
  • The Japanese Lost Decade was lost because the Japanese economic authorities refused to admit the jig was up, not unlike the current American economic powers-that-be.  This is like a communist saying “Come on, you’ve got to become communist.  You don’t want to end up like China under Mao, do you?”
  • The same goes for the Great Depression.  The Depression continued for a decade under FDR’s meddling, because people can’t do business when there’s some all-powerful jackass screwing everything up.
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