Last week the Fed announced that it will buy $600 billion dollars in U.S. bond in a move dubbed Quantitative Easing 2 or QE2. Of course left out from the mainstream media’s reporting of this is the fact that the money for these bond purchases will simply be created by a bookkeeping entry. This is pure theft and dilutes the value of the dollar just as if a counterfeiter flooded the market with $600 billion in phony Federal Reserve Notes. Commodities continued their trek higher last week in response with gold leading the move higher to a new all time high.
The pretense for the massive bond purchases by the Fed is that it must do this to revitalize the economy and increase GDP. Unfortunately for the Fed, the data shows that quantitative easing does not increase GDP because there is a coincident slowing of monetary velocity at the same time.
This is explained by John Hussman in his column two weeks ago: “The belief that an increase in the money supply will result in an increase in GDP relies on the assumption that velocity will not decline in proportion to the increase in money. Unfortunately for the proponents of ‘quantitative easing,’ this assumption fails spectacularly in the data.” Link here:
Not only is quantitative easing unable to create GDP growth after factoring in inflation, but it doesn’t even grow GDP in nominal terms. If quantitative easing does nothing to boost GDP, might there be other reasons the Fed is engaging in it?
Most certainly there are. For starters, the Fed wants to print money to buy bonds to replace the waning demand from our foreign creditors. $600 billion in bonds purchased by the Fed is $600 billion less that needs to be purchased by market participants.
However, the main reason the Fed is engaging in QE2 is to shore up its own balance sheet. In 2008, it bailed out its banker friends by exchanging Treasury Bonds for toxic bad mortgage debt at par. The Fed does not like having a boatload of bad debts on its balance sheet. It likes having Treasury Bonds instead. Low and behold quantitative easing is a perfect way to make this happen.
The Fed can buy a few billion dollars of bonds from time to time without anyone making a stink, but $600 billion worth requires a fancy phrase like quantitative easing and a make believe assertion that the money printing necessary for these purchases will create positive GDP growth.
The Fed bailed out the big Wall Street banks by swapping them Treasury bonds for their losing assets. Now the Fed is making itself whole by getting Treasury Bonds back with money it creates out of nothing.
The bank bailouts, QE1 and now QE2 are a roaring success at what they were intended to accomplish. Unfortunately for us that is not to help the economy, but rather to protect and enrich the cartel of the banking elite.