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Earlier this month the Federal
Reserve announced its latest round of quantitative easing, long ago dubbed
QE, but it should be called by what it really is – money
printing. The Fed buys US government debt and turns it into
currency. The process is somewhat arcane, but very simple at its core.
US government debt does
not circulate as currency. That would be too obvious a violation of the
Constitution. The framers scorned “bills of credit”, which
were the IOUs given to merchants and other suppliers who provided goods and services
to the Continental Congress. These IOUs then circulated hand-to-hand as
currency. They are similar in nature to the warrants issued by the
insolvent government of California to its suppliers, though as I understand
it, these warrants do not circulate as currency. Rather, these warrants
are bought at a discount to their face value by banks in exchange for
dollars, which then circulate as currency – which violates the intent
and spirit but perhaps not the letter of the Constitution. It is the
same result for QE, except that the players and the debts are
different.
With QE, the Federal
Reserve buys debt from the banks in exchange for dollars. These dollars
do not come from a printing press because the banks are not seeking
cash-currency. Rather, the dollars are bookkeeping entries on the
Fed’s balance sheet, and this newly created deposit-currency can be
used by the banks to pay bills, make loans, or simply be left on deposit at
the Fed to earn interest.
The explanation given by
the Fed for this latest QE maneuver was to “promote a stronger pace of
economic recovery and to help ensure that inflation, over time, is at levels
consistent with its mandate.” These platitudes sound good, but do
they ring true? Here is some data to help you judge for yourself.
Even though the first QE
program was not announced until March 2009, the Fed actually started
expanding its balance sheet in 2008 as a result of the banking crisis brought
on by the Lehman Brothers collapse. GDP for the 12 months ending that
September 2008 was $14.48 trillion. GDP for the 12 months ending
September 2010 was $14.73 trillion, or only $0.25 trillion greater. On
an inflation-adjusted basis, the growth in GDP over this period was even
less, just $0.04 trillion, or basically no growth at all. Nevertheless,
since the Lehman collapse, the Fed has increased its balance sheet by $1.3
trillion, clear evidence that this huge amount of QE did little to help
economic activity.
Has the Fed done any
better with regard to inflation? If its mandate is to increase
inflation, rather than keep it subdued, the Fed has succeeded. For
example, over the past twenty months since the date of its March 18, 2009 QE
announcement, the CRB Continuing Commodity Index has risen 61.7%. Gold
has risen 54.0%, while the US Dollar Index has dropped -7.2% as people and
central banks around the world exit the dollar for safe havens, which is the
important message of QE. Namely, the Federal Reserve is debasing the
dollar, so avoid it and instead own safe havens like gold and silver.
James Turk
Free Gold Money
Report
Article originally published by the Free
Gold Money Report.
James Turk is the founder
of the Free Gold Money Report and of GoldMoney.com. He is also the co-author
of The Coming Collapse of the Dollar (www.dollarcollapse.com).. Copyright
© by James Turk. All rights
reserved.
Copyright © 2008. All rights reserved.
Edited by James Turk
This material is prepared for general circulation and may not have
regard to the particular circumstances or needs of any specific person who
reads it. The information contained in this report has been compiled from
sources believed to be reliable, but no representations or warranty, express
or implied, is made as to its accuracy, completeness or correctness. All
opinions and estimates contained in this report reflect the writer's
judgement as of the date of this report, are subject to change without notice
and are provided in good faith but without legal responsibility.
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