Quantitative Easing: Our Tiger by the Tail

March 15, 2011 04:56

Money creation is never proper economic policy. It does not improve or create wealth. Its purpose is to fool citizens. As such, it is a fraud employed by governments to deceive and steal. If high enough, QE results in societal disruption. At worst, it produces hyperinflation, violence and government overthrow.

By Monty Pelerin at American Thinker


Quantitative Easing is a euphemism for money creation. Money creation is, by definition, inflation. Eventually inflation produces higher commodity and other prices.

According to Chairman of the Federal Reserve Ben Bernanke, we are in phase 2 (QE2) of “money printing.” Those knowledgeable of history find this characterization amusing, because the Fed has engaged in almost continuous money creation from its founding in 1913. Since then, 96% of the dollar’s purchasing power has disappeared with much of the loss occurring subsequent to the mid-1970s.

Keynes also was aware of the more devastating aspects of inflation:

The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

Economic stimulus via monetary expansion has a limited life because inflation, in order to provide stimulus, must continuously accelerate. As described by Milton Friedman:

Inflation is like a drug. Its stimulating effect is temporary. Only larger and larger doses can sustain the stimulus, before the chaos of hyperinflation removes all the gains.

Friedman’s “larger and larger doses” are necessary, but not sufficient. These increases must also “fool” or thwart the expectations of economic decision makers. As Hayek expressed it:

Inflation thus can never be more than a temporary fillip, and even this beneficial effect can last only as long as somebody continues to be cheated and the expectation of some people unnecessarily disappointed.  Its stimulus is due to the errors which it produces. It is particularly dangerous because the harmful after-effects of even small doses of inflation can be staved off only by larger doses of inflation.

If QE no longer provides economic stimulus, then why continue it? Quite simply, stopping QE would potentially cause markets to collapse and the economy to enter a depression. Stopping it also would risk bankrupting the Federal government.

In short, our economy is in a shambles despite what the propaganda machine spews. Harry Schultz, famed investment advisor and newsletter author, wrote at the age of 86 in his final newsletter:
Roughly speaking, the mess we are in is the worst since the 17th century financial collapse. Comparisons with the 1930’s are ludicrous. We have gone far beyond that. And, alas, the courage & political will to recognize the mess & act wisely to reverse gears, is absent in the U.S. leadership, where the problems were hatched & where the rot is by far the deepest.

Mr. Schultz has seen a lot in his lifetime. His description, unfortunately, is correct. We are on the brink of a massive collapse — economically and politically. There are only two choices left for our political class. They were laid out by Ludwig von Mises long ago:

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

Their choice seems obvious. QE will continue until total catastrophe occurs in the form of a hyperinflationary depression.

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