Wednesday, December 29, 2010

2010 In Review 3: the lie of Quantitative Easing

We have heard the decrees repeatedly over the last 25 months: we have to take these measures now or watch America go up in flames.

The most recent round of this prevarication has been QE2 (the second round of so-called quantitative easing), called-for by U.S. Federal Reserve Chairman Ben Bernanke. We must have QE2, we were told, to stave-off deflation. Deflation, the experts insisted, will lead to greater difficulty in making our payments on the national debt and simultaneously cause the value of our goods to decline – thus further imperiling our economy.

There are several outright frauds contained within Bernanke’s justifications and the Obama Administration’s sales pitch for arbitrarily injecting an additional $600 billion of currency into circulation. The first talking point to debunk is the premise that deflation automatically equates to economic distress.

“Inflation” and “deflation” refer to the country’s overall price index for goods and services. Economic analysts attempt to take into account the rate of change in pricing for as many of the most common purchases made on as recurrent of a basis as possible.

Inflation is an indicator of the rate at which prices are going up. Conversely, deflation means prices are generally going down.

(Which leads me to an elongated side note: in my opinion, the present use of the terms “inflation” and “deflation” constitutes a deliberately deceptive oxymoron. Prices in all industries and economic sectors are perpetually in some state of adjustment. Rarely do they remain static anymore.
All one needs to do is contrast the price trends between automobiles and personal computers since 1980. Around that time, the average family car and the average PC sold for approximately $6,000. In the ensuing 30 years, most automobile model types which sold in that price range then now run almost $25,000 while the typical desktop PC sells for as little as $300.
Cars, for the most part, have inflated more than 400% while PCs have deflated to around 5% of their comparative market levels over the same span. This doesn’t even factor-in the differences in how both products have advanced in performance and quality during the same period.
A more accurate use of the two price index terms ought to be for indicating changes in the value of the U.S. dollar. Public dissemination of average, overall prices in America centers on a concept that is so abstract and misleading, the average person watching or reading the news usually gives little thought to the subject’s broader impact on their lives. What the average person has little difficulty grasping is the rise or fall in the value of something.
People may rarely devote significant energy toward contemplating fluctuations in prices, but when they hear the money in their wallets and bank accounts is losing value, that they will understand: followed by widespread calls for more sensible monetary and spending policies!)

So in the present context, the alleged concern is that prices in general are falling and thus creating additional difficulty for businesses of all sizes to meet their obligations (labor, supplies, other overhead expenses, etc.).

What Bernanke and other Keynesian disciples in Washington are deliberately leaving out of their discussions is the simple fact that in a free and open market costs will adjust in response to any deflation: when prices deflate, the result is we need less money to buy the same goods and services. It is the net result of the cost of living going down instead of up.

It is a ripple effect process that does require some time and patience while it cycles through the economy. But, a steady deflationary cycle in the U.S. economy would lead to an easing of financial stresses for the bulk of our working population and small business owners while proving to be a mixed bag of results for Wall Street.

This leads us to the next fraud being sold to the public. Actual deflation of the cost of living in our country would have to come from a robust, actively growing, and internationally dominant U.S. economy.

An official unemployment rate stagnating at just under 10% while banks are closing by the hundreds every month and the number of independent businesses nationwide continues to shrink demonstrate otherwise. Not that I needed to list those conditions: we just need constant reminding of the truth, if you ask me.

But, our capitol braintrust insists the truth should not impede their efforts to promote the false notion of widespread deflation. In fact, all the leading price indicators that reflect either the immediate or near-future costs for consumers have shown over the last two months quite the opposite taking shape.

Light, sweet crude oil is now over $92 per barrel – driving up the national average price for unleaded gas well in excess of $3 per gallon. Textile prices also are on the rise, especially for cotton products: this will inevitably balloon the cost of new clothing across the board. And, food also has been steadily rising as of late.

The trillion-dollar question inevitably arises: what is deflating in price in America? After all, if deflation is an actual problem then something must be dropping in price in our country. And, how many sectors of our economy are being affected?

The answer to that is “one.” And, it is real estate.

I cannot help but bristle just trying to type this next part but not enough of us are shedding light on it. Obviously, deflation concentrated in a single market sector where people typically invest will create financial hardship for a lot of folks. As a consequence, equally as vulnerable to such market forces are the banks issuing the mortgages and the larger firms which typically back them up. It is a trickle-up process that deteriorated into an upward-flowing deluge in 2008.

And this pierces right to the heart of why congressional Democrats and this White House have been so adamant in their support of QE2.

Guess who owns or guarantees well over 90% of mortgages in the U.S.: Fannie Mae and Freddie Mac. Guess who – in December 2009 under the auspices of a Democrat-controlled White House and Congress (at the behest of Rep. Barney Frank and Sen. Christopher Dodd) – got their $400 billion line of credit at taxpayers’ expense extended into a no-limit credit lifeline: Fannie Mae and Freddie Mac.

If real estate continues to deflate at its current pace, the already-microscopically-slim possibility of Fannie & Freddie ever getting out of the red will blow away in the breeze very soon without some artificial means of inflating prices.

This is not about economic recovery. It never has been. This is about staving-off a fiscal meltdown and its political consequences long enough to be able to shift the blame for swelling an already ungodly mess to near-catastrophic proportions.

The other motivation – and one our so-called leadership has not been shy about admitting – is that with all the trillions of dollars in debt we owe to foreign nations, printing money and devaluing our currency (in theory, mind you) will make it easier to buy back our treasury bonds down the road if their worth can be lessened enough in the short term. This crap-shoot strategy requires our economy to come roaring back to life quickly enough and at just the right time to spur a large-enough surge in tax revenue that would allow a spree of Treasury Note buy-backs before their value rises again in the international currency exchange.

In short, the plan to lower our national debt rests on ripping-off our creditors. What could possibly go wrong?

The miserable part is it doesn’t end there.

In the meantime, the entire remainder of the American populace is forced to live with the other consequences of devaluing our currency. There is the resultant inflation everywhere else as detailed above. Adding to it, however, is the fact crude oil prices will be driven even higher than they already have (and, as a result, gasoline prices).

This is due to the fact in the international market light, sweet crude oil is bought and sold strictly in U.S. dollars. That also plays a large role in why our dollar continues to be the international reserve currency.

Thus, as the value of the dollar goes, so goes the price of oil – but in the opposite direction. In essence, QE2 is driving gasoline into a self-feeding loop of inflation.

And as we saw in 2008, when the price of gas skyrockets every corner of our economy takes a beating.

For some reason, very few at the top of our society’s food chain seem alarmed by all this.

To think, the current administration was supposedly going to steer us away from the failed policies of the previous one. Conversely, all this gang has done is decorate them a little differently and inject them full of steroids.

No comments:

Post a Comment