The Fed to Buy $600 Billion in Government Bonds

Posted by PITHOCRATES - November 5th, 2010

The Fed’s $600 billion government bond Purchase may Worsen the Recession

The Fed is preparing to buy some $600 billion in government bonds.  They call it quantitative easing (QE).  The goal is to stimulate the economy by making more money available.  The problem is, though, we don’t have a lack of money problem.  We have a lack of jobs problem.  Unemployed people can’t go to the store and buy stuff.  So businesses aren’t looking to make more stuff.  They don’t need more money to borrow.  They need people to go back to work.  And until they do, they’re not going to borrow money to expand production.  No matter how cheap that money is to borrow.

This isn’t hard to understand.  We all get it.  If we lose our job we don’t go out and buy stuff.  Instead, we sit on our money.  For as long as we can.  Spend it very carefully and only on the bare necessities.  To make that money last as long as possible to carry us through this period of unemployment.  And the last thing we’re going to do is borrow money to make a big purchase.  Even if the interest rates are zero.  Because without a job, any new debt will require payments that we can’t afford.  That money we saved for this rainy ‘day’ will disappear quicker the more debt we try to service.  Which is the opposite of what we want during a period of unemployment.

Incidentally, do you know how the Fed will buy those bonds?  Where they’re going to get the $600 billion?  They going to print it.  Make it out of nothing.  They will inflate the money supply.  Which will depreciate our currency.  Prices will go up.  And our money will be worth less.  Put the two together and the people who have jobs won’t be able to buy as much as they did before.  This will only worsen the recession.  So why do they do it?

Quantitative Easing May Ease the Global Economy into a Trade War

A couple of reasons.  First of all, this administration clings to outdated Keynesian economics that says when times are bad the government should spend money.  Print it.  As much as possible.  For the economic stimulus will offset the ‘negligible’ inflation the dollar printing creates.  The only problem with this is that it doesn’t work.  It didn’t work the last time the Obama administration tried quantitative easing.  As it didn’t work for Jimmy Carter.  Of course, when it comes to Big Government policies, when they fail the answer is always to try again.  Their reason?  They say that the government’s actions that failed simply weren’t bold enough.

Another reason is trade.  A cheaper dollar makes our exports cheaper.  When the exchange rates give you bushels full of U.S. dollars for foreign currency, those foreign nations can buy container ships worth of exported goods.  It’s not playing fair, though.  Because every nation wants to sell their exports.  When we devalue the dollar, it hurts the domestic economies of our trading partners.  Which they want to protect as much as we want to protect ours.  So what do they do?  They fight back.  They will use capital controls to increase the cost of those cheap dollars.  This will increase the cost of those imports and dissuade their people from buying them.  They may impose import tariffs.  This is basically a tax added to the price of imported goods.  When a nation turns to these trade barriers, other nations fight back.  They do the same.  As this goes back and forth between nations, international trade declines.  This degenerates into a full-blown trade war.  Sort of like in the late 1920s.  Which was a major factor that caused the worldwide Great Depression.

Will there be a trade war?  Well, the Germans are warning this action may result in a currency war (see Germany Concerned About US Stimulus Moves by Reuters).  The Chinese warn about the ‘unbridle printing’ of money as the biggest risk to the global economy (see U.S. dollar printing is huge risk -China adviser by Reuters’ Langi Chiang and Simon Rabinovitch).  Even Brazil is looking at defensive measures to protect their economy from this easing (see Backlash against Fed’s $600bn easing by the Financial Times).  The international community is circling the wagons.  This easing may only result in trade wars and inflation.  With nothing to show for it.  Except a worse recession.

Businesses Create Jobs in a Business Friendly Environment

We need jobs.  We need real stimulus.  We need to do what JFK did.  What Reagan did.  Make the U.S. business friendly.  Cut taxes.  Cut regulation.  Cut government.  And get the hell out of the way. 

Rich people are sitting on excess cash.  Make the business environment so enticing to them that they can’t sit on their cash any longer.  If the opportunity is there to make a favorable return on their investment, guess what?  They’ll invest.  They’ll take a risk.  Create jobs.  Even if the return on their investment won’t be in the short term.  If the business environment will reward those willing to take a long-term risk, they will.  And the more investors do this the more jobs will be created.  And the more people are working the more stuff they can buy.  They may even borrow some of that cheap money for a big purchase.  If they feel their job will be there for awhile.  And they will if a lot of investors are risking their money.  Creating jobs.  For transient, make-work government jobs just don’t breed a whole lot of confidence in long term employment.  Which is what Keynesian government-stimulus jobs typically are.

We may argue about which came first, the chicken or the egg.  But here is one thing that is indisputable.  Jobs come before spending.  Always have.  Always will.  And quantitative easing can’t change that.


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