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Quantitative Easing (QE) for Dummies. Really.

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Twitter: @rodgermitchell; Search #monetarysovereignty
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Mitchell’s laws:
●The more federal budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor,
which ultimately leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
●The penalty for ignorance is slavery.
●Everything in economics devolves to motive.

Here is how Quantitative Easing is described and justified by the popular media and mainstream economists — and by Fed Chairman Bernanke.

What exactly is quantitative easing?
Tim Mullaney, USA TODAY, September 18, 2013

[Quantitative Easing (QE) is] the technical term for the Federal Reserve’s policy of buying bonds and other assets in order to pump money into the economy.

The most recent strategy, called QE3, had the Fed buying $85 billion of bonds every month.

Does bond buying really pump money into the economy? Imagine your neighbor owns a Treasury bond. You buy it from him. Have you pumped money into the economy?

When your neighbor bought that T-bond, two of his accounts changed: His bank checking account was debited and his T-bond account, at the Federal Reserve Bank (FRB), was credited. A T-bond account is very much like a bank savings account.

In essence, when your neighbor bought that T-bond, all he did was transfer dollars from his checking account to his savings account. Did the amount of money in the economy change? Clearly, not.

Then, when you bought his T-bond, four accounts changed:

1. His checking account was credited
2. Your checking account was debited
3. His T-bond account was debited
4. Your T-bond account was credited.

All four accounts changed by the same amount. Did the amount of money in the economy change? Again, clearly not.

Now visualize that instead of you buying your neighbor’s bond, the Fed buys your neighbor’s bond.

Your neighbor’s checking account is credited and his T-bond (i.e. savings) account is debited — for the same amount. Did the amount of money in the economy change? Again, it did not.

Summary: Contrary to popular myth, promulgated by Bernanke, the media, the politicians and the mainstream economists, QE absolutely, positively does not “pump money into the economy.”

. . . and nurture the recovery.

The irony is that pumping money into the economy is widely known to “nurture the recovery.” Yet, the President, Congress, the popular media and the mainstream economists agree that federal deficit spending, which does pump money into the economy, should be reduced. Huh?

Anyway, because QE does not pump money into the economy, it does not “nurture the recovery.”

But wait. Many of the T-bonds are being bought from banks. Presumably, this provides the banks with more reserves, allowing them to lend more money, which would “nurture the recovery.”

Wrong, for three reasons:

1. As we have seen, the seller of T-bonds merely transfers dollars from one of his accounts to another. No new dollars are created. The (bank) seller does not obtain dollars he didn’t already have.

2. T-bonds themselves function as bank reserves, so the bank gains zero reserves

3. Despite the misleading term “fractional reserve” lending, bank lending is not constrained by reserves, which are available in unlimited amounts from the public, other banks and from the Fed itself. Instead, bank lending is constrained only by bank capital.

Summary: QE does not stimulate bank lending to “nurture the recovery.”

But wait, again. What about interest rates?

The Fed hoped to . . . drive down long-term interest rates so more people would buy and build homes and invest in businesses.

With short-term interest rates already near zero, the central bank’s traditional tool of lowering rates couldn’t be pushed any farther.

Fed bond buying increases the overall demand for T-bonds. Because the price of any commodity is based on supply and demand, Fed bond buying increases the price of T-bonds.

Bond prices and interest rates move inversely. When prices rise, rates fall. QE does indeed reduce long-term interest rates.

But is the reduction in interest rates economically stimulative? Does it cause more people to “buy and build homes and invest in businesses”?

Fifty years ago, when I bought my first house, I paid 5% for a 30-year mortgage. Houses were selling like the proverbial hotcakes. Subsequently, mortgage rates rose — as did house sales:

Later, interest rates were raised in the late 1970′s, to cure inflation. Housing starts did decline, because of the recession. Then, for the next 10 years, while interest rates fell, housing starts rose, then fell.

Overall, and especially from 1991, there has been zero relationship between interest rates and housing starts.

Beginning in 1991, housing starts rose dramatically, while interest rates fell, but not reaching 5% until late in the Great Depression.

For 40 years, 30-year mortgage rates were above 5%, and housing starts were dramatically higher than today. More recently, the Fed has used QE1, QE2 and QE3 to reduce long term mortgage rates, which now stand at about 4% — and currently are rising, while housing starts have leveled off.

Meanwhile, the Fed talks about ending its latest QE, as though it were a powerful weapon against recession, that no longer will be needed.

And there is one more problem with QE: It reduces the amount of interest (on T-securities) the federal government pays into the economy.

Rather than adding dollars to the economy, QE reduces the supply of dollars.

The facts: QE is a fraud. It is not a powerful weapon against recession. It is not a weapon at all. If anything, QE has a negative influence on the economy.

Today, economic growth is so slow as to be borderline recession. If QE could stimulate the economy, it would have worked by now and the Fed would use it well into the future, if not, forever.

The Fed’s mere threat to discontinue QE, has caused what seems to be an ironic panic in the stock markets.

Why does the stock market like a process that is anti-stimulative? Why does the Fed engage in this fraud?

(The Fed long has claimed that reduced interest rates are stimulative. If you want to know why that is false, read “Low interest rates — a sneak tax on you.”)

You’ll see that low rates widen the gap, between the rich and the rest. Business profits and the stock market love the cheap, desperate labor gap-widening provides.

Further, low rates do not increase the federal deficit or the federal debt, and they give the appearance the Fed is doing “something” about the economy, by adding a phony $85 billion a month.

1. The people are led to believe the Fed is struggling heroically to stimulate the economy.
2. The wrongly maligned deficit is not affected.
3. And of course, the gap between the rich and the rest is widened.

For the President, the Congress, the media and the mainstream economists, all bought-and-paid-for by the upper 1% income group, it’s the perfect ploy.

QE is, indeed, for dummies.

Rodger Malcolm Mitchell
Monetary Sovereignty

Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D plus long term nursing care — for everyone (Click here)
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Free education (including post-grad) for everyone. Click here
5. Salary for attending school (Click here)
6. Eliminate corporate taxes (Click here)
7. Increase the standard income tax deduction annually
8. Increase federal spending on the myriad initiatives that benefit America’s 99% (Click here)
9. Federal ownership of all banks (Click here)

10 Steps to Economic Misery: (Click here:)
1. Maintain or increase the FICA tax..
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
Two key equations in economics:
1. Federal Deficits – Net Imports = Net Private Savings
2. Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports


As the federal deficit growth lines drop, we approach recession, which will be cured only when the lines rise.



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