There’s stupid, there’s really stupid, and then there’s trying to dig oneself out of a hole when you’re both in it and the only place for the dirt is in that very same hole.
In other words you simply deplete food and water (which you need to survive) but cannot possibly do anything useful. And that’s what The Fed’s Rosengren says there is a “strong case” for:
Federal Reserve Bank of Boston President Eric Rosengren said he sees a “strong case” for the central bank to buy bonds at the current monthly pace of $85 billion after its Operation Twist program expires.
“Given the tepid economic recovery, high unemployment, and subdued inflation — and the uncertainty around fiscal policy –I believe an accommodative monetary policy is quite appropriate,” Rosengren said today in the text of remarks for a speech in New York. “We want to see continued improvement in labor markets in the near term, and monetary policy should encourage faster economic growth to achieve that objective.”
Let’s do the arithmetic.
We have a ~$15,000 billion economy ($15 trillion, more or less.)
The Fed proposes to “continue” to buy $85 billion/month of Treasuries. This represents $1,020 billion a year, or about 6.8% of GDP.
Let us remember that for every dollar of GDP one dollar of currency or credit, net-net, must change hands. That is, for every buyer there is a seller.
So what does creating $1,020 billion in new “money” actually do, and is this “money printing”?
The latter half is easier to answer than the first — “yes and no.”
What this “program” actually does is balance the deficit spending of the Federal Government, which is running beyond that number — but not ridiculously so. In other words The Fed is enabling the deficit spending of Congress and the White House.
Without The Fed doing so the market would determine whether or not the deficit spending was sustainable through its decision to purchase (or not) the issued Treasuries at a given interest rate. The market would thus regulate said deficits and as it became more skeptical that the deficits were appropriate and sustainable the price of the Treasuries issued would fall and the demanded coupon — that is, the interest demanded — would rise.
This is the same thing that happens when you, as a consumer, borrow too much. As your credit rating deteriorates you are charged more and more until you either cut that out or default.
But what if, instead, you had “a Fed” that would simply issue new credit to insure that the market couldn’t price your credit as it decided to?
Well then increase in the amount of credit and currency in the system would replace actual economic activity and produce bothfalse demand for goods and services but also a false belief that the deficits are sustainable!
That sounds like a free lunch.
Remember that the base equality we claim exists is this:
(Money & Credit) = GDP
$15,000 billion = $15,000 billion
Why? That’s simple — every alleged unit of GDP has to be bought with something. That “something” is either credit or currency.
Now we propose to do:
$15,000 + 1,020 = $15,000
But that’s not possible because that equality is false.
Here’s where the problem comes from – we denominated GDP not in an invariant such as a fixed measure of output but rather in dollars, which are not fixed in size or scope!
In other words GDP is a ratio, not what it is represented as, which is a level.
So what happens when we “emit” that new 6.8% of GDP into the system through The Fed’s “bond buying”?
That’s easy – the value of each unit of currency and credit falls by 6.8%.
Now each unit of GDP does not uniformly increase in cost (in dollar terms) by the same amount.
But this is not what we’ve observed.
Remember that The Fed has been doing this “QE” game since it began with QE1, and yet price inflation as measured in the CPI has not moved much.
How is this possible?
It’s possible because net actual economic demand as measured by earned and spent money and credit is contracting at a rate approximately equal to that in which is being “stimulated” and thus the net change is approximately zero!
So what has been the REAL change in GDP over the last few years? That’s simple:
Government deficit spending must be subtracted out from GDP because it represents a raw claim of being able to pay tomorrowwithout any backing whatsoever, other than the willingness of the people to pay taxes in the future. In other words it does not represent actual demand for services and goods predicated on someone producing something and thus having economic surplus to expend; it is entirely “on the come.”
And for this reason deficit spending in any amount is extremely dangerous because like all compounded functions it becomes more damaging and harder to stop the longer it is continued.
Nonetheless whether you have your real standard of living decrease because the price of everything goes up or because the amount of money you earn goes down the net result to you as a person in the economy is exactly the same.
The only difference is that by playing this game Politicians can get away with lying and claim that the economy has “recovered”, when in fact it has not.