The recent action by the fed caps a series of bad decisions that have had a demonstrably devastating effect on the middle-class in America. An Article by Martin Crutsinger of the Associate Press, appearing in U.S. News Weekly screams, “Fed unveils bold, open-ended steps to aid economy.” Another paper that reprinted this article’s sub-head says, ” Move to buy $40 billion a month in mortgage bonds hopes to spur home buying, consumer spending. While for many, this will look like it is a fantastic decision—the Federal Reserve is stepping up to once again to help “stimulate” the economy—the key question, that no one is asking, is will this actually help? The answer to the question, unfortunately, depends on who is asking the question. From the Government’s perspective, this is necessary. From the bank’s perspective this is desired. From Wall Street’s perspective this is euphoric. But for the citizens of the U.S., the outcome is mixed, as you will see below, depending on your position in the economic strata. And, from the rest of the world’s perspective, since most of the other nations are doing the same darn things, they don’t see much of a problem—if they see anything at all. The major exceptions on the international market front are the oil producing nations, China, and Russia, who realize, or very soon will realize, that they need to raise our prices!
Federal Government’s and Federal Reserve’s Rational
First, why is the Federal Reserve—by the way, not a federal institution and at this point not much of a reserve—doing this, and what is the point of this action? The federal government is once again about to run out of cash, also known as money, or currency. As has happened now repeatedly for the past few years, the federal treasury is almost out of the cash it will need to make future payments on its obligations. Obligations like the war costs, federal payroll, federal subsidies to states and industries, debt obligations, and entitlements will not be getting the needed checks very soon if we do not once again do something to increase the money supply to pay these bills. The Federal Reserve, controlled by its owners/members, i.e. big banks, know that if the federal government doesn’t pay its obligations much of the assets they have, that support their business models, fall apart and they will collapse like a house of cards. And if they collapse, we all collapse—or so the story goes.
How does Quantitative Easing Work?
So, the Federal Reserve intends to sell U.S. government bonds, some of which get purchased by other countries, but much of which will get purchased by the banks and their subsidiaries—investment banks (i.e. Wall Street)—so the banks can electronically create additional money to put in circulation, and give to the federal government in order to replenish the treasury so the Government will have the cash to pay its bills. It is also likely that the Federal Reserve will just create more money out of thin air to “loan” to the banks (at 0% interest forever) to further “quantitatively ease” the problems. The Fed has done this for years. The last disclosure required a Supreme Court ruling forcing the disclosure of the Federal Reserve Loans to banks during the financial crisis bailout in excess of $9 Trillion. (Interestingly this was not widely reported but you can see: Fed made $9 trillion in emergency overnight loans, by CNN News.)
All that sounds more or less reasonable don’t you think? After all, if you or I need money, and we have excess value in some asset, like our home, we can go get a loan from someone, like a bank, to get the cash we need to pay our bills. But this loan is predicated on our having enough extra value somewhere to use as collateral. We can also, go to an instant credit place and borrow against a future income like our paycheck, or our income tax return and get a loan. These lenders, like pawn shops, often get another form of collateral as well, like our home, car, jewelry or other assets well in excess of the borrowed amount. Even if they don’t get additional collateral, they are basing the loan on the fact that our net value will increase over time by the work we do and the compensation we get for this work relative to the U.S. economy. In effect, as we increase our value over time within the American economy by producing something, a product, or work, the lender is giving us money in anticipation of a future increased value, or our personal increased production, to provide the money to pay the loan back. If we don’t have a job, our home value is declining faster than we can pay the loan, or we might not work tomorrow, then our loan would be less likely to be able to be repaid by future earnings so the loan simply would deplete our savings, or net excess asset value, if we have any, and likely the lender would not give us the money. In fact, if we had the cash in the first place, rarely would we borrow, and unnecessarily increase our cost for the purchase of the product—unless there was no other choice.
The Core Problem is the Declining Real Purchasing Value of the U.S. Dollar
Let’s get this straight. The Federal Government, floated bonds, purchased mostly by the banks, to loan money to the banks to bail them out from under the toxic loans they had made based on the federal government stimulation (all created out of thin air by the Federal Reserve and the banks) and then the Federal Reserve loaned $9 trillion to the banks at no interest (again by creating the money out of thin air) so the banks could continue to survive. And within about a year the banks paid the government back for the money they received as loans for the bailout? And this makes sense how?
The problem with this solution starts with the difference in the mechanics and circumstances of government borrowing from how the mechanics work when we borrow. Unlike us, where individually we can produce more future value to either our fellow citizens of the rest of the world in a relative and tangible way. In this one world economy, our nation must provide more net value on a nation to nation basis or the relative and tangible negative value differential transfers from our treasury to their treasuries, and our dollar purchases less. This was the critical issue throughout the 1960s and 1970s, and it is why President Nixon eliminated the gold standard as the basic measure of our dollar’s value in 1972.
The U.S. is not producing more value, it continually produces less. We purchase significantly more goods from others than we sell to others and have been doing so for almost 75 years. The combined trade deficit is now almost $13 trillion, since 1972 when we eliminated the gold standard. Additionally, the government’s need for cash has increased exponentially in the last 75 years, due to increases in benefits like Medicare, Medicaid, various social and poverty programs, stimulus programs, wars, increased negative cash flow from Social Security, increased federal government employment and many other reasons. We have had many, many, undeclared quantitative easings since 1972, we just don;t know about them. In 1972, we had only $500 billion of total cash (currency) in circulation and today we have almost $17 trillion. And unlike the individual model we discussed above, the federal government has not had to back the increases in cash by a real increase in future asset value of the U.S. We have simply argued for an increase in value because our real estate prices have risen, payroll has risen, the stock market has risen, prices have risen, and therefore our economy has risen. But the amount of currency in circulation did not lag these mythical increases; the increases in currency preceded these increases in the economy. Our economy actually rose for the most part just because we printed more money and believed that it was based on real tangible value. No one can honestly state that the total asset value of the U.S. has increased by 35 times since 1972.
So here is the rub. We have increased the amount of cash, without a corresponding rise in real work product, or increase in real asset value. We have created more currency and simply divided the real value against the total amount of currency again, and again. In the long run, we have simply devalued the dollar to continue purchasing goods and services that we require from other countries in order for us to maintain our life styles. In other words, while we have had a lot more dollars in salaries, in home value, and in other wonderful things, the relative cost of most of these things has risen at least as fast, and in many cases faster, than the rate we have printed new dollars to share. The more we added in new dollars, the less the dollar has purchased. This loss of buying power has hurt much of the population forcing the government to spend more to cover the subsidies in order to keep certain groups whole, or more subsidies flowing to help us pay for domestically manufactured goods that we otherwise could not have afforded to buy. And, by the way, if we did not subsidize these industries, then the rest of the world would be buying less of our U.S. goods because they would be too expensive compared to what other countries could make them for. The less value the dollar had, the more people who fell into poverty, creating the need the more subsidies needed to provide for the poor. Truly, a vicious circle!
Why is the Middle-class Getting Screwed by Quantitative Easing?
When the government prints this new money, and floats bonds to justify the printing in this disastrous Ponzi scheme, the money gets inserted into the economy through two primary paths:
(As a short example – if there was only $100.00 in the world, and you borrowed the $100.00 with an agreement to pay me 10% interest—where do you get the cash to pay me the interest? Yep it has to be created out of thin air)
- The Federal Government takes the new cash and pays its payroll, social security, Medicare, Medicaid, all the related defense and stimulus expenses, as well as many others, and often adds new stimulus programs to justify putting the money back into people’s pockets and encouraging them to spend it. It is the spending, not savings, that the government encourages so it can keep recouping some of that money in the form of taxes in order to continue feeding the pump. Since the taxes, like mortgage interest, do not come innately from all the currency in circulation, the government has to have a mechanism to create more currency to have the cash to pay for these things so that enough money is there to pay for the taxes and of course the Federal Reserve and the banks are more than willing to oblige.
- The bonds, and the fact that new money is increasing the amount of dollars in the economy, stimulates borrowing which as we showed before increase the creation of new money in the form of interest, and these instruments primarily inject these proceeds through the stock and securities markets in the form of investments. The people, who can benefit from this, are people that have excess assets (money or borrowing) who can then invest in the market and capture a part of the new interest money. This is what we are now euphemistically calling the rich!
So on the one side, much of the new money goes to subsidize citizens in some way, typically the poor on the one side and the rich on the other. The way this process is now working is that overtime as the dollar devalues, and the poor can afford less, the government increases the programs for the poor, or increases the federal poverty level to cover more poor. In doing this, we are just printing more new money to pay for the cost. So in effect, we have developed an intrinsic system that covers the loss of buying power of the poor.
For the rich, they have enough extra assets (not needed for basic living) so they can invest their extra dollars and hedge against the loss of buying power by earning, dividends, and interest on the money they loan or invest in American business. And the government assures the success of America business by providing subsidies to offset the increasing uncompetitive cost structure imposed by the increasing wages, benefits, taxes and other fees. So now, neither the rich, nor the poor, are losing significant effective buying power. And, most of us can continue to purchase a percentage of actual American made goods and services to keep the appearance that the American economy is working.
Yes, the rich are getting richer, as in getting more money in their accounts. There is no question about that. No one would say the poor are getting richer, but the effect is that the poor are not getting significantly poorer, or at least they are not suffering an increasing lack of buying power. (Note: I know some will want to argue about this issue specifically, I am speaking generally, and in no way trying to say being poor is a good or acceptable condition!)
In the article, “The Fed steps in, and stocks soar: Dow climbs 206,” by Bernard Condon in the U.S. News Daily, also cited above, Condon quotes Gary Flam, of Bel Air Investment Advisors, who said, “…Ben Bernanke, Federal Reserve Chairman, and Mario Draghi, the head of the European Central Bank… both are propping up the market in the hope it will trickle down to the economy, but after several years of this we haven’t seen a sustainable impact.” By now, it should be clear that while the currency is really trickling down it is this method of currency creation that is killing the middle-class.
The Middle-Class Conundrum
Now, we can move on to discuss the middle-class problem. While on its face, it appears to the middle-class and to the rest of us that over the past 40 years they have been getting similar positive economic gains because their wages have risen, more middle-class have gotten jobs, up until recently more saw their home values rising, and they were able to then get government backed loans to buy bigger houses and take on more debt. After all, if you remember, buying more, including bigger homes, has been just what the government has been advocating we do for years. Looking back now, this was a false sense of what was actually happening. In reality, the middle-class were not capturing proportionately their share of this newly printed money. They were really getting stimulated to death. The more that goes into the economy, the higher the prices go, and since such a large part of that new money gets siphoned back to pay for the subsidies, entitlements and other expenses of the government, the new money is actually crushing their buying power. Not enough trickles down to offset the devaluation suffered by the uncontrolled deflation caused by adding these baseless additional dollars into the economy.
Now that we have about one-half of the country receiving some kind of subsidy from the federal government, with even more subsidies coming from various states, and we have about one-half actually paying taxes, we have likely slipped beyond a critical tipping point. Add to this, the fact that our accumulated debt is far more than our total output, and just printing money to have the cash to pay the $11 trillion in interest over the next ten years will deflate the dollar on average 14% per year. These are staggering figures to anyone, and as such most simply cannot believe they’re real—unfortunately for us they are!
So, this is why this QE3 will crush the middle-class, just as it has for the past 70 years. This is not a democratic problem; it is not a republican problem, conservative, or liberal problem. This is a problem of our collective leaders over many, many, years, seeking short sighted solutions to a known systemic problem. In essence, it is a problem of our own psyche! We have come to believe that since we are America, we have unlimited value. We believe this despite the fact that others will build the things we need and want for much, much, less than we are willing to do in America. They can build them cheaper because these other countries do not feel the same moral and ethical obligation to provide the same benefits to their people that we do. Their population is willing to work for much less and live with much less, so their costs are less. It can also be said that we believe it is because we are Americans that we deserve anything we want, and our government is in a position to supply it with no consequence to us all. We indirectly believe that we have in essence, an unlimited checkbook. By now it should be clear to all that we do not.
For more information see our other articles on this subject:
- Debunking The Clinton Budget Surplus Myth
- President Obama’s Critical Question
- President Obama’s Speech: Critical Question Continued
- President Obama describes his role for the middle class
- The Truth About Medicare/Medicaid and Social Security: Ok What Do We Do Now?
- 12 Year Old Victoria Grant explains Canada (and U.S.) economy problem!