What in the world is going on over at the Federal Reserve? Has it gotten to the point where the Federal Reserve is completely and totally out of control? There is increasing speculation in the financial community that the Federal Reserve is on the verge of unleashing another round of quantitative easing.
In fact, at their September meeting, Federal Reserve officials hinted very strongly that quantitative easing is very much on their minds when they stated that the Federal Open Market Committee "is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." You might want to reread that quote a couple of times just to let it sink in.
Do you see what the Fed is saying there? The Fed is actually saying that it has a mandate to maintain a certain level of inflation. Not that this is a secret to anyone that has seriously studied the Federal Reserve. Since 1913, inflation has constantly gone up, U.S. government debt has increased exponentially and the U.S. dollar has lost over 96 percent of its value. But for Federal Reserve officials to openly state that a certain amount of inflation is part of their mandate is absolutely stunning.
Even though the U.S. economy is still in pretty decent shape at this point (for the moment at least), the Federal Reserve still seems obsessed with trying to stimulate it. In the past, the Federal Reserve would just cut interest rates whenever the economy needed a bit of a boost, but at this point the Fed has cut rates to nearly zero. There just isn't any more room to cut rates. So what else can the Federal Reserve do?
Well, it can create money out of thin air and use it to buy U.S. Treasuries, mortgage-backed securities and other assets. This is known as quantitative easing, and many analysts fear that it is quickly becoming more than just an emergency measure.
Back in March 2009, the Federal Reserve announced that it would purchase $1.7 trillion worth of U.S. Treasuries and mortgage-backed securities over the next 6 to 9 months. That was the first round of quantitative easing and Fed officials believe that it helped the U.S. economy avoid an even worse downturn.
But now Federal Reserve officials are talking about making quantitative easing a regular thing. An article in the Wall Street Journal recently described the current thinking inside the Fed....
Rather than announce massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.
Quantitative easing that is open-ended? What kind of insanity is this? Is quantitative easing going to become a permanent part of our financial system? And what does "smaller-scale" actually mean?
Well, according to James Bullard, the president of the St. Louis Federal Reserve Bank, "small-scale" is actually pretty darn large. According to the Wall Street Journal, a "small-scale" quantitative easing program would be somewhere in the neighborhood of $100 billion a month....
Under a small-scale approach, Mr. Bullard says, the Fed might announce some still-undecided target for bond buying—say $100 billion or less per month. It would then make a judgment at each meeting whether continued action was needed.
If the Fed injected $100 billion a month into the economy through quantitative easing, that would mean that by the end of the year over 1 trillion dollars would have been created. That does not sound like "small-scale" to me.
In fact, if the Federal Reserve purchased $1 trillion in U.S. Treasuries next year that would be an amount nearly equal to the total amount of new debt that the U.S. government plans to issue during the year. Can anyone say Ponzi scheme?
When we get to the point where the Federal Reserve is "buying" a large percentage of new U.S. debt with money that is created out of thin air there is simply no denying the fact that the Fed is running a massive Ponzi scheme.
But the truth is that the U.S. government is in so much debt and the U.S. economy is in so much trouble that something must be done. It is really tempting to "inflate away" the debt and to pump up GDP figures with a flood of paper money, and Helicopter Ben Bernanke has certainly shown that he is not shy about pulling the trigger. Of course more debt, more paper money and more inflation will only make our long-term economic problems even worse.
But right now Federal Reserve officials appear to be absolutely obsessed with the short-term. And without a doubt world financial markets are certainly expecting a new round of quantitative easing to begin soon. CNBC recently polled 67 economists, strategists and fund managers about what they think is going to happen. The following is a summary of what CNBC found....
The Federal Reserve will boost its balance sheet by about half a trillion dollars over a six-month period beginning in November and keep it inflated for up to a year, according to a survey of leading markets participants by CNBC.
But many analysts believe that the Fed will take even more substantial action than that. According to the Wall Street Journal, economists at Goldman Sachs are projecting that the Federal Reserve will end up buying at least another $1 trillion in assets during this next round of quantitative easing.
Stephen Stanley of Pierpont Securities in convinced that it will be even worse than that. Stanley believes that the Fed will add another $3 trillion to its balance sheet by next August. The following is what he recently told CNBC...."If the Fed pulls the trigger, they will go big."
In an interview with the Economic Times of India, Marc Faber painted an even bleaker picture....
I believe that if the S&P in the US drops 15-20% to around 900-950, the Fed would come out not with this quantitative easing No. 2, but with quantitative easing No. 2, 3, 4, 5, 6, 7, 8, 9, 10 until the asset markets go up again. They are going to print and print and print.
It seems like almost everyone is anticipating that the Federal Reserve is going to fire up the printing presses. Now, even some of the Federal Reserve's staunchest defenders are now abandoning them. Ambrose Evans-Pritchard, perhaps the most respected financial columnist in the U.K., recently penned an article entitled "Shut Down the Fed (Part II)" in which he absolutely lambasted Bernanke and other Federal Reserve officials for considering another round of quantitative easing....
I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.
In fact, Ambrose Evans-Pritchard is now openly accusing the Federal Reserve of being out of control....
So all those hillsmen in Idaho, with their Colt 45s and boxes of krugerrands, who sent furious emails to the Telegraph accusing me of defending a hyperinflating establishment cabal were right all along. The Fed is indeed out of control.
On behalf of those who believe that the Federal Reserve is "a hyperinflating establishment cabal", I accept Ambrose Evans-Pritchard's apology. The truth is that the Federal Reserve is out of control.
The Federal Reserve system was designed to get the U.S. government into a perpetually expanding spiral of debt. Wealth is slowly but surely transferred from the American people to the U.S. government (when we pay taxes) and ultimately into the hands of those who own U.S. government debt. As long as the Federal Reserve system exists, U.S. government debt will keep going up, the value of the U.S. dollar will keep going down and wealth will be slowly transferred into the hands of the ultra-wealthy.
And why in the world would the American people allow an unelected, privately-owned central bank to run the U.S. economy, control the money supply, set interest rates and print all U.S. currency?
It simply does not make any sense. The Federal Reserve has not been shy about declaring that it is "not an agency" of the U.S. government and not directly accountable to the American people.
So why do the American people put up with this kind of nonsense? The truth is that the Federal Reserve has become far too powerful. U.S. Representative Ron Paul recently told MSNBC that he believes that the Federal Reserve is actually more powerful than Congress.....
The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress.
The truth is that the U.S. economy will never be fundamentally "fixed" simply by electing another "Bush" or another "Obama". Something needs to be done about the Federal Reserve system, but right now our politicians in Washington can't even muster enough support to pass a bill to audit the Fed.