The Federal Reserve created $4 trillion of electronic money when the economy tanked in 2008. It could have used this $4 trillion to write down the debt; it could have used it to spread into the economy and create a sort of recovery but, instead the Fed gave all the money to banks claiming it would help the economy. What a stupid idea – improving the economy with more debt! Does that work with your budget?
They had their fingers crossed that the banks would loan this money at incredibly low interest rates to individuals to buy homes, thereby driving up housing prices and saving the banks from those bad mortgages they had already made. The banks would also loan money to businesses at cheap rates allowing them to expand, and increase employment. At least that was the lie they wanted us to believe or the delusion they wanted to believe themselves.
In actuality, rather than expand or hire, large corporations used the money to buy back their own stock thereby driving stock prices up and the housing bubble popped. The only winners of this scheme were the banks and large corporations.
Measures that began as emergency intervention became routine as the Fed continued to expand its asset purchases with “electronic” money because the recovery was “slow” to materialize. QE2 produced another $600 billion and QE3 has been in use since September 2012, with no signs of an end. I’ve even heard rumors of a QE4. In this new paradigm, big banks, politicians and academics get to decide market outcomes, bankruptcies, interest rates or bond yields, as well as when to apply accounting rules, regulations and laws. Rather than repairing the financial system, mounting government debt has led to de factor financial repression.
Debt monetization which can be a tool of financial repression, destroys savings and zero interest rate policies, while reducing govenment borrowing costs, deprives savers and pensioners of interest income and can very well, and probably will, lead to inflation.
Former Assistant Treasury Secretary Dr. Paul Roberts called it correctly when he said that the Feds would not raise interest rates. “They most certainly are not going to raise them because they’ve spent seven years keeping them at zero…if they raise the rates, they will destroy all their efforts to keep the big banks afloat. They also would destroy the stock market….the dollar is the main source of Washington’s power so if the dollar starts going down, this is disaster…They may lose the reserve currency status; ….they would lose the ability to pay their bills by printing dollars…”
Unfortunately, the Fed has painted itself into a quandary where there is no solution. Mathematicians call this the optimum solution, or the optimum position where you can’t make a move without making things worse. And that’s the position in which we stand, there is no way out and it’s downhill from here.
Because the Fed started something they cannot finish, everything is vulnerable to toppling over the moment their monetary policies change. There has been a continuous downpour of liquidity under a zero percent interest rate since 2008 which has gone so far that interest rates have actually reached negative. Negative is less than zero. Negative means that investments produce no returns and may carry costs. Negative means that savers, pensioners and insurance policies cannot operate normally, undermining the normal function of an economy and only serves those at the very top with free access to the feeding trough.
The American economy is propped up with fraud and crime and time is running out according to Greg Hunter, journalist and creator of USAWatchdog.com, who believes that instead of a rate increase, we should prepare for another round of quantitative easing. The market crash is “unwinding in front of our eyes. I think when it blooms in its full glory, it is not going to be called a crash. It’s going to be called the dark ages.”
Under an ongoing regime of financial repression, savings, jobs, economic opportunity and living standards will all suffer. The middle class will be reduced as generations of socio-economic progress is gradually reversed. Millennials, mired in stagflation, will be left behind in terms of income and economic opportunity, which will have long-term negative effects. Since U.S. banks stand to profit from financial repression, it will increase income disparity and the concentration of wealth in the hands of the few.
The destructive forces set in motion by the Federal Reserve will fail to alleviate government debt unless tax increases and austerity measures follow, which could turn the U.S. into another Greece. In theory, financial repression, together with other measures, can liquidate government debt but, in practice, it is a destructive and highly destabilizing approach that will result in a net loss of wealth to society. But, perhaps that is exactly what they wanted!