Tuesday, September 25, 2012

QE3, easy money brings a hard future.

At the request of a fellow liberty activist I was asked to make a comment or two on QE3 (Quantitative Easing 3) that has just happened within the last few weeks. I will spare this post from being a completely technical post because 1)I'm not an expert in the field and most importantly 2)The experts have already tackled this from the technical standpoint. Murray Rothbard has destroyed the quantitative easing policy and a good article can be found here which will go more in depth than this post.

What exactly is Quantitative Easing and why is this one labeled 3?

In the case of the most recent QE policy for the U.S is the buying of assets, mortgage backed securities, from private banks by the printing of dollars to the tune of 40$ billion a month.1 It's labeled 3 because this has been the "3rd" QE since I believe 2008.

What is the intended purpose of QE3?

The Federal Reserve, the private company that has a monopoly on our money supply, believes that this easy money policy can be used to stimulate an economy that is in need of a little boost. By injecting money into the system their is more of an incentive to spend money now as consumers because we see lower interest rates than that which naturally occur in the free market. The Fed believes by doing this we can avoid dipping into recessions and have an ever growing economy.

What is the unintended consequences of QE3?

I like to give the Fed the benefit of the doubt and say they are truly trying to help people but just don't see the fallacy in their economic policy. How true this is I can't say because there's a big incentive for quantitative easing in the realm of purely making money for the politically connected.

As the Fed trots along claiming to be helping the middle class and the poor by using QE3 to create jobs it doesn't realize that the exact opposite occurs; the Fed is destroying the middle class.

Two implications of QE3 can be seen very easily. The first is that the Fed buys these securities from private companies like Goldman Sachs. The second is that the money supply of our dollars is obviously increased.

It then becomes more obvious what is happening. Only those private companies that are politically connected like Goldman Sachs get money while others do not. This is because government in general cannot allocate resources with any objective measure and can only do so arbitrarily, so usually only those that have friends get the help.

On the other hand the other easy implication to see is that using basic supply and demand economics as the supply of our dollar has risen the value of each dollar has to drop holding all other things equal. This can be seen as the inflation of our dollar which is NOT a naturally occurring phenomena in a free market; actually the exact opposite typically happens we see the value of our money steadily increase as prices drop.

But what does this all really mean to people and the economy?

Well to really understand what happens we must first take a look into what happens in a free market economy where no central banking system exists.

When the Fed decides to "stimulate" the economy with QE the response is for a lower interest rate than the actual market interest rate.

When, in a free market, the interest rate begins to drop this is a result of an individuals time preference to spending. Instead of spending at the present they wish to save money to spend at a future time. As a result banks wanting people to start spending see this saving of money and the market response is to lower interest rates. This becomes a signal to businesses and entrepreneurs that an increase of savings has occurred. As the interest rates drop these businesses see prior unprofitable ventures to become profitable and decide to invest in capital. Since actual savings have occurred these business will make profits by best serving consumers with previous capital investments and it's a win win for all involved. But this is only possible with the actual savings people have done.

When a central banking system, like the Fed, gets involved and artificially lowers interest rates what happens? Well businesses see the same signals as they do when saving occurs so they begin their investment in capital.

The problem should be obvious now. No savings has actually occurred to purchase whatever the investment was used for. As a direct result of this monetary policy resources have been allocated incorrectly and both the businesses and customer loses. When this starts happening companies start going under because no one is purchasing the goods they made with the false signals and a recession begins.

What should be even more emphasized besides the fact that easy money leads to hard future by the means of a recession is the fact of who actually wins with this policy. The ones that win are those that FIRST get the money, Goldman Sachs, because the value of that money has not been reflected in the market as a drop yet. So when they spend that money it has a higher value than when it gets to the middle class and the lower class who has to deal with a highly inflated piece of paper. This policy enriches the super rich at the expense of destroying the middle class through inflation.

1Big Wall Street Banks already complaining QE3 is not enough

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