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What does quantitative easing (QE) really do? Nothing good…
Not much action yesterday. Everyone is still waiting for the Fed to say something.
QE3 'Could push gold over $1,800', says a headline from BullionVault, quoting Chen Min at Jinrui Futures in China.
As for QE, today’s the big day.
And most people are betting that the Bernanke team will come up with more QE to give the economy a lift before the election. The Fed is expected to announce QE3 and a continuation of ZIRP (zero interest rate policy) until 2015.
But phoney money does not create a real economy. It creates a phoney economy. Now, this is a long discussion,if we approach it seriously. So, let’s approach it some other way.
Jealousy, envy, resentment! Yes, let’s act like politicians. Let’s appeal to low, unworthy emotions.
Here’s the latest news from Bloomberg: Rich-poor gap widens to most since 1967 as income falls
What kind of an economy does phoney money produce? You just saw it. One where most people get poorer, not richer. Why is that?
We’ll go back to basics.
A society is made wealthy by accumulating capital. Not by spending money. Not by having a good time. Not by being nice, respecting women, following the Koran, borrowing, singing well, or bathing regularly. Capital is not wealth itself. But it’s what allows a society to create wealth.
You can understand that just by comparing farmers in very poor countries to farmers in very rich countries. The poor farmer has to till the land by hand. The rich farmer uses a tractor. The poor farmer can produce, maybe, 1,000 bushels of corn. The rich farmer can produce 100,000. The rich farmer is 100 times richer. Is he smarter? Is he nicer? Is he more honest or a better story teller? Who knows, and who cares? He has a tractor!
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"But don’t worry", says the poor man. "I don’t have any savings, but my central banker is going to print up some money."
Will that work? Only insofar as the central bank can get away with its flimflam. The tractor seller may believe the money is real, for a while. He may sell the tractor to the poor farmer, take the new money that the central bank printed up, and send an order to the factory for another one, thus setting off a boom in the tractor business.
But who believes QE money is real today? It’s too late. The world is hip to the central bank scam.
That doesn’t mean QE will have no consequences. Speculators might make money. The rich might see their assets (and their wealth) increase. But most people will get poorer.
First, super-low interest rates will encourage people to keep their money in mattresses, rather than lend it out. Why lend it when you will earn a negative interest rate?
Second, oil and commodities – food and energy prices – rise as soon as there is any hint of more QE. This leaves the poor and middle classes with less discretionary income. Not only are they poorer, they are also less able to push the consumer economy forward.
Third, negative real interest rates take money from savers,and reduce the amount of savings (capital) in an economy.
Fourth, eventually, the build-up of phoney money leads to higher rates of consumer price inflation, further reducing the real standard of living of the typical household, and reducing the real value of the nation’s capital savings.
What is the real consequence of reducing the real savings in an economy? We’ve already seen it. Mother Jones tells us: Ten eye-popping Labor Day stats
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