Currently our National Debt stands at over $14 Trillion. That debt if broken down to taxpayers means that each tax payer across the United States is liable for just under $128,000.00. Meanwhile congress is trying to decide if we should raise the debt ceiling again for the 10th year in a row. Apparently they feel that $14 Trillion is not enough. It is time to balance the budget and try to figure out how we are going to pay these debts. In addition the United States has more than $112 Trillion in unfunded liabilities. That averages out to over $1 million per tax payer. (http://www.usdebtclock.org/)
Now the Fed Chairman Ben Bernanke is considering another round of Quantitative Easing. Apparently Mr. Bernanke thinks that simply printing more money will lower borrowing costs. Of course this is ludicrous and nobody who is educated in the field of finance could possibly come to that conclusion. You see simply printing more money causes inflation, which doesn’t reduce interest rates it raises interest rates.
The reason that starting the printing press (metaphorically of course. In today’s day and age we electronically add money to the system) causes inflation is fairly simple to explain. For the example let us presume that we have a generic currency. We will call it G’s. This currency is backed by gold. Each G is backed by 1 ounce of gold. In order to back your currency 100% with gold you would need to have 1 ounce of gold stored for every G issued, so that at any time a person could trade their G’s in for gold. This of course creates very high confidence in your currency. As long as your gold standard is enforced your currency won’t experience inflation or deflation. The G’s are very stable because the gold standard is at 100%. Your society is very prosperous but you find yourselves in a protracted and expensive war. Money is running in short supply and interest rates are up because the government is borrowing in order to pay for the war. So the Fed, with its utter lack of wisdom, decides to do a round of Quantitative Easing. In other words, they are going to print more money. Let us say you had 10 Million ounces of gold, and therefore you had G10 Million in circulation. So the Fed Prints another G10 million. Now you have a circulation of 20 Million G’s but you still have only 10 million ounces of gold. Your money is now backed by only 1/2 ounce of gold for every G. In other words your money is now worth only 1/2 of what it used to be worth. Of course because you are still on the gold standard, your money is still stable and even though confidence has dropped due to the introduction of 10 million G’s it is still pretty high.
So let’s talk about what just happened, economically. Where does the value of the new money come from? Well it comes from the fact that there is all of this gold backing up your G’s. The part that should be closely examined is that the government, by introducing more money into the system, has taken value away from your G’s (they were worth 1 oz, now only worth 1/2 ounce) and applied that value to the freshly printed G’s. Who has possession of those G’s? Well the government of course. In essence they have taken value from you, devalued the currency, decreased stability, and decreased confidence. So how does that create inflation? Well easy. If you were charging 1G for a gallon of gas, you now have to charge 2 G’s to get the same value. Now imagine if your currency is not backed by gold, like the US Dollar. Imagine if confidence and stability are already low, like the US Dollar. Is Quantitative Easing in the best interest of the United States?
World War I was a very long and expensive war. Sometimes we don’t know just how costly because the US didn’t enter the war until the last year. During the war many countries used quantitative easing to help fund the war effort, but no country did as much of it as Germany. In 1914, at the start of the war the German Mark stood at 4.2 to the dollar making it worth around $0.24. The inflationary spending (quantitative easing) during the war caused the German Mark to drop in value to $0.015 or about 65 Marks to the Dollar. At the end of the war Germany was ordered to pay war reparations to the allies. Germany didn’t have the money so… they printed it. By August of 1923, one US Dollar could buy 620,000 German Marks. By November, a mere three months later, that figure rose to 630 Billion.*
The only thing Quantitative Easing does is devalue your currency. Never in history has this strategy ever produced positive results.
*from “LORDS OF FINANCE” by Liaquat Ahamed
Below is a hilarious you tube video about Quantitative Easing. Enjoy.
The Conservative Answer 