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Bernanke: Will he ‘Counterfeit’ or will he Not?

August 28, 2012

Why is the process called QE really ‘official’ counterfeiting?

This Friday, August 31, our Fed Chairman is supposed to speak to the Nation and the Markets re: policies that could be implemented to further manipulate our markets. Will Ben resort to more QE counterfeiting in the coming weeks and months? Why is this process called Quantitative Easing (QE) really pernicious and detrimental to our markets and for economic growth?

The real purpose and goal of money creation is so that we can INCREASE our economic wealth (material goods for our society). If new money is created (say via a loan) that represents real material goods (say corn that is planted and destined for harvest) then this money creation is good and proper. But if a commercial bank just creates money units (dollars) with no corresponding growth in real wealth, then all we get are ‘price’ distortions in the greater marketplace. In other words, money is supposed to be a proxy for the ‘value’ of material goods created for the markets. This principle was followed (for the most part) prior to the closing of the gold window (1971).

Today, the Fed can manipulate prices with artificial money creation that has no benefit for economic growth. QE is nothing more than creating new money units (dollars) in exchange for some EXISTING ASSET (say government bonds). Does this process increase the WEALTH within our economy? Probably not! What happens is that dealer banks and similar financial institutions receive newly created money units from Ben’s QE operation and then they reinvest these proceeds into new government bonds or similar to earn interest income. Does this process help our economy? Probably not! Does it promote ‘confidence’ and ‘trust’? I don’t think so!

First of all, the commercial banks and dealer financial institutions do not need newly created QE units today. These entities already have sufficient ‘excess reserves’ at the Fed for all their lending purposes. They can make $trillions in new loans now with no new QE units. So what does Ben’s QE units actually accomplish? I would say nothing of significance! What mainly seems to happen is that these new units enter the marketplace and create some ‘asset price inflation’ for key assets and some commodities. Oil, gold, farm commodities, government securities, and mortgage interest rates usually change from this policy. None of this change, however, is beneficial for real economic growth and/or confidence! All this money manipulation and central planning destroys the ‘confidence’ within the markets!

 
My personal sense is that Ben probably has reached this same conclusion but his options as a Central Planner are now limited and ineffective. The Fed has evolved into a Central Planning entity which is now merely attempting to keep our ‘ship’ of state from sinking. Ben has few viable options left to affect the psychology of the markets. This same situation has developed over in Europe. Mario Draghi is attempting to copy what Ben has done these past few years so that the European situation can be ‘kicked’ down the road. There are no viable options left for these Central Planners and at some point they must allow the MARKETS to clear (the markets need to liquidate all the mal-investments which have emerged since the closing of the gold window in 1971). There is no other viable alternative!
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