Anyone sharing a belief that government always ‘cures’ the ills it causes by applying more of what caused them, will be unsurprised by Fed Chair Ben Bernanke’s retreat from ‘tapering,’ the current euphemism for slowing the Fed’s manufacture of money and credit. The 3D money printing will roll on, successfully camouflaged by the title: “Quantitative Easing” bestowed by Mr. Bernanke. Only 27% of Americans polled knowledgeable enough to define the term.
For the 73% who didn’t sit through ‘Snake Oil Finance 101’ at some point: Quantitative Easing, presently QE3, is the government’s term of art intended to lull us from what amounts to legal counterfeiting. It is necessary because the government has too little money to support its level of spending and must therefore, borrow, since it is unwilling to reduce the spending to equal its income. However, willing lenders have disappeared or at least, too few remain so how can deficit spending be continued as our leaders wish?
This is a problem because taxes collected won’t support existing Medicare and Social Security payments, let alone military adventures in places like Syria. And forget Obamacare! Even governments have to pay their bills or be shut off; that has been accomplished by borrowing (creating the National Debt) from such as China, until lenders worried about repayment and cut back lending. So our government switched from borrowing from China to borrowing from its own supposedly independent, Federal Reserve, instead. To the present tune of some $85 B per month.
Where, a curious realist (that 27% of the population) may inquire, does the Fed find that $85 B a month to lend the U.S? It magically produces it like a genie, out of as skeptics like to say, thin air. And as soon as the Fed says: “Lo! this is money!” from there on, everybody pretends that it is indeed, money. That is much easier than it used to be, since today, most money is just electrons.
Even Ben Bernanke knows that pumping funny money into the system dilutes the real money until eventually, so much money is sloshing around that none of it will buy anything anymore; that was proven for moderns in 1923 in Germany and more recently if less famously, in Zimbabwe. That is why Mr. Bernanke planned his ‘taper’ or more honestly, to begin retreating from pumping out funny money so as not to collapse the system. But…
See, to a politician, long term is the next election he faces. If the pumping tapers off, the interest rates it has been suppressing by making so much money that is is seen as cheap to borrow, will rise to realistic levels. Government debt is so huge, that there is no way it can pay additional interest…it can’t even repay what it owes! So if Benjy tapers off, the government goes bust and the system comes down. And if Benjy keeps printing money, the flood destroys the value of the dollar and the system comes down. But notice, that will take longer to happen, while tapering hits quick. So, the Fed is retreating from the taper, what a surprise!
In Zimbabwe, the smart folks exchanged their local money for safer (well, then) U.S. dollars. But the dollar is the international standard, there’s no such haven when it’s the dollar in question. What do you do? You plan on a black market taking shape, as is happening now in Europe. With currency problems, such markets quickly accept precious metals or valuable goods as payment. It’s not a good time for investments in money; both loans and banks can lose value overnight. Commodities and property may lose value too, but will likely recover; money probably won’t. President Roosevelt and Congress closed the banks in 1933, during the Great Depression; folks who had a little cash on hand were happy for it. Their money was devalued some 40% but it didn’t go worthless. Or I guess, you could eat grass and burn furniture for heat. Those were reported, too.
Maybe some politicians will grow spine enough to stand up and fulfill their responsibilities by leveling with us and reining in the party we haven’t realized we’ve been enjoying. We won’t like that, but it will help limit the worst of the effects we’re going to see one way or another. Maybe that’s not the way to bet.
We in the U.S, Europe and everybody else on this globe are facing a Wily E. Coyote moment. Devotees of the old Roadrunner cartoons will remember when the hapless coyote inevitably chased the bird off a cliff, continuing safely on in mid air…until the moment he looked down and noticed there was nothing supporting him. At that point, it was too late…