Saturday, September 22, 2012

QE3 Ain't a Boat

Ok, let's start from the beginning. What is QE exactly? QE or "quantitative easing" is the term the Obama administration and Ben Bernanke use to describe the printing of currency (you'll notice I didn't say money). You see the money supply (all the American dollars in circulation throughout the world at any given moment) is very important. The dollar is not tied to any tangible good like gold or silver, or for that matter Hershey bars or jelly beans (Reagan's favorite). Back in the day the dollar was tied to the price of gold. For every dollar in circulation the Fed had a dollar's worth of gold on deposit at places like Fort Knox (you did see Goldfinger didn't you?). This served a few purposes not the least of which it kept politicians from fiddling with the dollar's value. Nixon took us off the gold standard and henceforth the dollar has been backed by the "full faith and credit" of the United States government of the Federal Reserve or some damned body, the point is it's just a promise to pay. So why is quanative easing bad? Simply, if there are X dollars in circulation that have a value of Y, then X2 dollars will by definition have a value of Y/2 if again the dollar is not tied to a known value. Omama and Bernanke are devaluing our currency to the extent they are printing more currency. They are in fact stealing our buying potential without ever going near it like they would with taxation etc.

Ok, let's talk about this in practical terms. Take somebody like me. I have a mortgage at less than 4%. This is ridiculously low in historic terms. One of the consequences of an increase in the money supply is inflation. It cannot be otherwise. Increase the money supply and real goods that have a real value (houses, oranges, hookers in Vegas) will inevitably increase in price. So if I borrow 50 grand at a low interest rate and the value of the money goes down, then over the course of the mortgage I will be paying the loan back in dollars that are worth significantly less than the value of the dollars that I initially borrowed. I will make out like a bandit, but who loses? The bank of course. They stand to lose thousands in real value. Expand this out over the thousands upon thousands of mortgages and it doesn't take a genius to realize the lender is getting hosed. And when you factor in the hard economic fact that when inflation is occurring interest rates must rise to account for the inflation plus a reasonable profit, well it's apparent we have a phony economy (as bad as it is) propped up by phony interest rates. 

The market is, and the market will out. Nobody, not the communists, not the fascists, not Pol Pot, Mao or Kim Jung Il are protected from market forces. If a lid is put on the market it is much like a pressure cooker and woe is the country that keeps the lid on too long. There will be a price to pay for the foolishness of our leaders, and it ain't going to be pretty! Get ready. If Obama is re-elected we will experience an economic Armageddon that could dwarf the Great Depression (and for almost identical reasons). If Romney is elected we can count on four or five years of pain, and I'm not at all sure the American people are smart enough to even understand that this could have been avoided. Regardless who wins the election, in the end Obama may very well win.

No comments:

Newer Post Older Post Home