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Monday, November 08, 2010

Radical Difference Between Monetization 1 and QE2 | FINANCIAL SENSE

Interesting article here. He claims that this round of "quantitative easing" -which means that the fed is simply printing money- is radically different than anything we have seen thus far.

This time, the fed is intervening directly into the Treasury Bond market. In other words, the Fed will be creating an artificial Treasury bond market, where it uses an unlimited amount of newly created public money to buy from private investment banks. We are "borrowing from ourselves" by simply printing the money.

In evaluating why this so-called "QE2" is so different from the first rounds of quantitative easing, we need to understand that the use of the funds is quite different. In the autumn of 2008 the Federal Reserve used the original round of money to create artificial liabilities when there were no lenders, thereby keeping the highly leveraged banking system from collapsing. The money wasn't actually being spent on anything you could reach out and touch; this was more about balance sheets and accounting manipulations on a massive scale.

During 2009 and early 2010, for the true second round of quantitative easing (which involved rolling the new dollars over from the first round of bank loans and creating substantially more new dollars), the Federal Reserve created an artificial mortgage market, so that mortgage interest rates would be lower than what a free market would've allowed, and thereby would hopefully help slow down or avert a collapse in the housing market. The new money was used to acquire financial instruments (mortgage securities), but "sterilization" meant that the newly created money would not be allowed to escape from the Federal Reserve's and banks' balance sheets. So again, the new money wasn't being used to buy or create anything you could actually reach out and touch. The mortgage money had already been lent by the bank, so the newly created Fed money didn't go to the home purchasers.

What makes this current round night-and-day different is that the new money is being created to pay real people for real jobs and real tangible goods. The United States government budget deficit is not about market values of financial instruments, but rather about paying workers on a massive scale for "stimulus" projects. It's about massive road reconstruction projects and expensive high-speed rail lines – with the money being given to workers to go out and spend, in return for their labor. It's about paying a vast army of federal workers - who spend their paychecks. The federal budget deficit is about massive transfers and redistributions of wealth within the US, including Social Security and Medicare, low income housing and many other purposes. All of which require real money that really gets spent by real people.

This is huge, disastrous, and a precedent of monstrous proportions.

We have fools running our monetary policy, and we are going to suffer eye popping consequences for it.

There is simply no way out of this.

Radical Difference Between Monetization 1 and QE2 | FINANCIAL SENSE

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