The announcement of the Fed’s third “pump priming” of the U.S. economy attempts to show the bank’s solicitude toward the labor market. Unemployment is high, and the Federal Reserve System is injecting new credit into the system to help solve the problem.
The benefits of QE3 — quantitative easing No. 3 — are putting people back to work by keeping interest rates artificially low. If credit is cheap, companies and people will increase borrowing. Cheap interest gives people confidence that they will be able to take on more debt without having to worry about much in the way of interest payments. Presumably, hiring will grow out of the new lending.
QE3 will “make borrowing cheaper for years to come,” the AP story in the Times Free Press assures us.
The Fed outlook for “growth” is 2 percent. Its projection for inflation is about 2 percent a year. (Hey, I wonder: Are economic growth and inflation the same thing in Fedspeak?)
What about local depositors?
Friends of local economy perhaps should take heed that this development will hurt their buying power if they maintain their positions in the national economy. Inflation at a mild 2 percent means that today’s paper dollar will be worth 98 cents one year from now, 96 cents in two years, 94 cents in three. The erosion of value comes partly because of QE3, which is at least F$40 billion of IOUs injected monthly into the money supply. I say at least because the Fed runs other credit-stimulation programs on the sly that affect buying power of its notes.
Investors in this system guarantee themselves a loss of buying power that has to be overcome by the strengths of their portfolio. That’s a pretty ugly burden to carry simply because the medium of exchange is central bank scrip and not a lawful system of coin and currency where the wording on bills and currency refer to actual money held on reserve and redeemable for the paper. Prior to 1964, paper notes were redeemable for real coins containing silver. A commitment to a national portfolio and the dollar will stall local economy’s tendency for liquidity and cash.
Friends of local economy take the news of such quantitative easings differently than run-of-the-mill newspaper readers. They realize that inflation creates its own frenzies that fixate the public on the Fed, Washington and the stock markets. Inflations bring frenzies of speculation where investors chase after credit-connected returns and dividends. These investments are purely financial, and do not help any company, industry or marketable idea. Many are hare-brained schemes floated off the drawing board and into the marketplace. Inflations also spark frenzies about the means of escaping the currency itself. These would include buying up real assets — foodstuffs, consumer goods, guns, land, autos — whose prices will only rise.
A near-zero interest rate gives depositors in banks and credit unions no return on their funds.‡ At some point these people will withdraw their funds from the banks, fleeing for better returns or for safety. A mass flight, as in 2008, would bring another meltdown, especially if people remember anything at all about the difference between money and currency.
The paper dollar is a currency. Money contains silver or gold. The market for money is so tiny that any significant public move toward it will send its price skyrocketing. A movement of 200 bags can shift the premium. ‡‡
The AP story in the local paper ignores inflation by referring to it as a threat and not the current reality. Republicans rap the Fed because cheap credit “could ignite inflation” and the lone Fed dissenter —Jeffrey Lacker — “worried about igniting inflation.” Well, 2 percent inflation IS inflation, IS loss of buying power.
Inflation will hurt local economy by fixing profit-seekers on speculative investments and piling on more debt. On the other hand, it will help local economy if people are chastened by their losses in buying power. These investors might shift toward hard assets, local startups and locally owned companies.
‡ The feds offer an inflation calculator on the labor department’s website that says $1 in 1913, when the Fed was founded, has the same buying power as F$23.27.
‡‡ This market for money, in case you are wondering, is the gold and silver market, where silver is sold in thousand-dollar bags. Source: The Moneychanger newsletter.