Does anyone really believe that money creation can really put money in peoples pockets? Since late August the Federal reserve has promised quantitative easing part 2. This is the same as the sequel to Jaws 2, or Airplane 2 for that matter. The sequel is never as good as the first film. In fact, the sequel will often dilute the movie and give less credibility to the original film. That is what is happening with the Federal Reserve Bank. These guys have promised so much easy money that they have to deliver next month or risk a severe stock market decline. Unlike the movie industry this film called QE2 is real life and effects almost every person alive.
Every person in the United States is now paying more money for gasoline, heating fuel, and anything that is oil based which is an enormous amount of products. Food products such as wheat, corn, sugar, coffee, soybeans, and other commodities will and have also increased in price. These are the effects of a weak U.S. Dollar. Let us not forget what the buyers of U.S. Treasuries are thinking right now also. Please remember that U.S. Treasuries are denominated in U.S. Dollar’s. While the race to create inflation is undoubtedly on by the Federal Reserve(central bank to the U.S.) how is this a positive for the U.S. consumer. Anyone that is living in the United States has seen prices increase in most of the necessity items that are needed for survival.
The only positive for the United States government is that they will have to pay less interest on their ballooning outstanding debt as yields decline. As long as the debt levels continue to grow the country will ultimately be in worst shape. Countries such as China, Japan, and Brazil will not want to finance the United States at some point. Currently these countries need the United States because their economies are predominantly export based. However, if these countries become consumer based and self sufficient on their own people they will no longer fund the U.S. Debt. This is a dangerous game that Federal Reserve Bank Chairman Ben Bernanke is playing. Can an economy inflate itself back to health without any negative repercussions?
Former Federal Reserve Bank Chairman Alan Greenspan can single handedly be blamed for the credit and mortgage crisis simply because he lowered the Fed funds rate(overnight lending rate to the major banks) to 1.0 percent in 2002. This time around Chairman Bernanke has lowered the Fed funds rate down to zero percent since December 2008 and continues to buy mortgage backed securities and U.S. Treasuries to keep yields artificially low. In essence, this is just more money printing and creation. When the central bank does this the U.S. Dollar Index gets diluted and inflation is created.
Well it has been nearly two years of low interest rates now and the housing markets continue to decline. In some places in the U.S. houses cannot be sold for $10,000 dollars. Homes continue to decline despite all of this money creation, and free money that is lent to the banks. The banks are not making loans and the demand for loans is declining everyday. More people are walking away from their homes after they have lived in them for two years without paying their mortgage. The problems are simply mounting by the minute despite the stock market rally that started in late August. This is simply another deck of cards that is being stacked up and will not last.
What is the solution all these problems? The answer is very simple. The answer is failure. Simply stop propping everything up and let it fall where it may. Once that happens simple supply and demand will take over and the markets can build a solid foundation once again. If this artificial inflation continues this could end in disaster. Failure will happen either way. America already has 1 out of every 7 people in the country on public assistance. By inflating the markets artificially we are just living in the land of make believe and the sequel to this movie will be worst than the original.
