For those of us who remember the collapse of the housing market and the resulting recession that began due to the collapse of the housing market in 2008, many of the memories may have faded. However, most of us remember the term Quantitative Easing. Many still give credit to the fast action of Ben Bernanke, the chairman of the Federal Reserve, for the quick thinking that saved the housing market.
Quantitative Easing Saved Our Economy – Or Did It?
Quantitative Easing (QE) is defined as a form of unconventional monetary policy. The Federal Reserve purchases longer-term securities from the open market to increase the money supply and encourage lending and investment. Buying these securities adds new money to the economy and lowers interest rates by bidding up fixed-income securities. It also expands the central bank’s balance sheet. (Investopedia) The bank creates the money out of thin air to pay for the inflated (bidded-up) securities. In effect, the bank offers to pay a lot more for securities the market has already valued much lower to justify new debt that they will then purchase at these inflated prices.
Readers should also keep in mind that these longer-term securities, like bonds and mortgages, at the time they were created caused the printing of new money. Every time a new debt is created in our current economy, the money to pay for it comes out of thin air. And to make matters more complicated, banks are fractional reserve lenders. Banks can create up to ten dollars of new money for every one dollar of new debt they take into their balance sheet. So when the Fed is buying these longer-term securities, they had already increased the money supply ten times when the bond or mortgage was created.
This year the current administration wants to print and spend a lot more Stimulus, and the Fed is doing about $150 billion new QE each month. As you now know, this new baseless money, about $5.8 trillion at this point (June 27, 2021), will likely come at a heck of a hit to your purchasing power. As you are likely aware, they want to add another $4 – 5 trillion if they can get the proposed bills passed. A lot more inflation is coming. If they go with what is on the books now, we will lose another 26% of the value of each dollar. That will mean that from before the pandemic to the end of 2022, we will have suffered a 43% reduction in purchasing power.
Source: St. Louis Federal Reserve FRED Database
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Summary
If you read the first part of this series, The Inflation Deception Explained in 5 Minutes, you see how both Federal stimulus and Federal Reserve Quantitative Easing cause massive loss of buying power of our money.
Economists have perfected the arguments as to how QE doesn’t cause inflation because the assets are not put in circulation. They think we are stupid! They do not expect us to understand that the original asset is taken out of circulation. Still, the 10’s of thousands of new money that have been created due to the current economic system remains in the system. This shell game is where the dilution, inflation, and loss of buying power remain. This is why, in the San Francisco Bay area, we pay $1.8 million for the same house that sold for about $18 thousand went it was built in 1957. Somehow, they have convinced us that the relative value of the house has increased, not the fact that the dollar has been diluted 10s of thousands of times.
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