Wednesday, November 3, 2010

What Are the Effects of QE 2 and the Fed's Loose Monetary Policy?

Jim's Question Re QE2:  How much of our GDP growth is a reflection of the Fed pumping money? In other words, is the growth not really growth in output/resources/capital, but growth brought on by infusion of money (liquidity)? In other words. not growth at all.  I bet a whole big bunch, but I am unsure.--JJC

Answer: Jim, the American economy is entirely distorted by the printing of money. This is something that the Keynesian economists either do not get or pretend does not exist. Most of the real estate development in the past decade would not have occurred in a non-managed economy and it does not reflect underlying consumer demand. The economy is as a result extremely unstable and in order to function requires massive and increasing injections of counterfeit money. This results in ongoing reallocation of wealth to those receiving the new money, mainly commercial banks, Wall Street and other financial institutions (hedge funds) as well as other borrowers. Thus, the government, specifically the Obama and Bush administrations and Congress, is directly causing income inequality. This has been going on since the establishment of the Fed but it has intensified since 2000. Obama is intensifying Bush's intensification. In other words, to correct the misallocation of wealth in our society will require a cataclysm because virtually all assets are over-valued. Hopefully this won't occur in our lifetimes, but it could happen any time. There is no reason why Manhattan real estate should have gone up in value 20 to 40 fold since 1975.  The demand is a function of counterfeit money.

Both parties support the intoxicating Keynesian drug of counterfeit money because it benefits those who finance them--Wall Street, commercial banks, real estate interests, corporate interests and insurance companies. Those holding real estate have benefited at the expense of those not holding real estate. That is not because of the economic function of speculation but because of subsidies from the Fed. The Fed steals from the poor and productive and aids the rich and unproductive. Since no assets are valued at their true market value in our economy there is massive distortion of investment. This has caused jobs to leave, firms to invest overseas, excessive development of farmland, etc., etc.

No one knows what the specific effects are, but they are vast. We are not in a market economy. Rather, we are in a fantasy economy dreamed by Wall Street, the rich and politically powerful. Naturally, the ones doing the dreaming are the ones who benefit. The ones who do not play ball with them, blue collar males, are the ones who have been hurt. There will be a return to reality because economic actors do not want the products of Fed and banking policy--the McMansions and subprime real estate; the overvalued stocks and bonds.

The response of the Fed will be continued printing of money because it cannot withstand the political pressure from its Whig constituents.  This is not partisan because the United States is dominated by a single Whig Party that reflects financial interests.  The end result will be a collapse of the dollar.  The alternative, a stock market crash, is unacceptable to the people capable of grasping what I just wrote. In other words, the majority of Americans have lost the ability to think about this question, an ability that they had until World War I when they were not subjected to education.

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