Could QE be back? Despite the fact that the government insists the economy is doing well, or at least OK, the Fed has now cut interest rates three times this year, depressing the Fed funds rate to 1.5-1.75%.
We are told that we are doing better than other economies like the EU and Japan because they are into negative interest rates and we’re not. Yes, that should make us feel so much better. What we are not told about are the results of artificially depressed interest rates. First, they eviscerate fixed income retirement plans, which most senior Americans rely on. Second, they provide artificially low loan rates, attracting borrowers who are otherwise a bad credit risk. Third, they devalue the dollar which is inflationary, but not called out as such. All together what the Fed is doing is monetizing debt, historically a bad idea.
The Fed is caught in a squeeze; if they allow interest rates to reflect market they would rise in accordance with a simple economic basic called the time value of money. The Fed rate is for interbank funds, not commercial paper, so they principally affect short term rates. If the Fed allowed the rate to float per the market the US would be unable to even pay the annual debt service let alone pay down the principal. The Fed itself has calculated that were that to happen, the debt service alone would rise to $1T/year, more than the current budget deficit.
The US is now the largest debtor nation in recorded history, with Federal debt at about $22T; that does not include unfunded off-budget liabilities. Then there’s corporate and consumer debt, about another $20T, with defaults in high yield bonds, auto loans, student loans and credit card debt rising. The Fed has gotten us into such a terrible credit bubble that other countries have not just slowed our bond purchases, but have started to unload. The world is beginning to understand that one of two things will have to happen, i.e. the Fed will go to QE4 buying more debt in conjunction with increasing the M1, or the US will default.
Doing the former will only make the credit bubble even worse, and the end game will make 2008 look like a small blip comparatively; default will have the same results. In both cases, creditors will be forced to carry a burden that will likely crush them, leading to many bank failures. In 2008 through 2010 there were more than three hundred bank failures; this time it will be much worse.
The 2008 crisis was precipitated by a massive credit bubble in insolvent mortgages, but the credit bubble we have now is even greater than that. The Fed tries to sell the world that QE saved the day, but it didn’t; it just kicked the can down the road. If we were in a true recovery, there would have been no need for QE2 and QE3, but like true shysters, the Fed sold everyone on the greatest Ponzi scheme in history. There’s a current joke going around that Madoff should have succeeded Janet Yellen as the Fed chairman, not Jerome Powell, because Madoff had a proven track record in Ponzi schemes.
The fact that household net worth was greater in 2008 than it is today is the most telling evidence that there was no recovery, and the way the government manipulates data to cover their tracks is laughable. Take the unemployment rate for example; the government only counts the unemployed based on claims. If you’re an unemployed accountant looking for a job, but needed to make ends meet because your benefits ran out, you take a temporary and more than likely part time job, but the DOL counts that as a new job created!
Also, why is the Fed so obsessed with inflation? Why is a 2% inflation rate a good thing or any inflation at all? When I wake up one morning, and find that everything cost me more, I should be so happy because…why? Since the Fed was founded in 1913, monetary inflation has been 2,499.5%, meaning what costs a dollar back then now costs nearly $26 today! Breaking out just the QE period, what costs a dollar then now costs 20% more.
Einstein once said that doing the same thing over and over again, but expecting a different result, is the definition of insanity; applied to the Fed’s policies it becomes economic suicide.