Quantitative Easing - $5.00 Bread and $5.00 Gas

The Federal Reserve System was set up in 1913 by the government in order to help quell a series of financial panics. It is quasi-independent, which means it is a creature of the United States government, but acts independently and without review of the government. Among its many purposes is to act as a central bank, regulate other banks, and establish the country’s monetary policy which, prior to 1913, was subject to the political whims of Congress.

How does it do it? It can raise and lower interest rates on loans from one bank to another. It can establish the amount of reserves banks must have to back up outstanding loans. It can put money into the economy, or take money out of the economy. All of these things are supposed to keep our financial system stable. How’s that working out for you?

Over this past week, you may have heard about the Fed doing “quantitative easing.” That means the Federal Reserve is pushing cash into the economy. They are literally printing money, and putting it into circulation. How do they do that? The United States government owes a lot of people a lot of money. They borrow the money by issuing bonds to folks like you and me, corporations, investors, and other countries. If the Fed wants to add money to the system, the Federal Reserve buys up those bonds that are being issued by the government, and pays for them with money that is literally printed up. In other words, the government buys back its own bonds.

In this second quantitative easing done over the past several months, the Fed is buying back $600 billion worth of bonds…or it is simply putting an extra $600 billion worth of currency into the world financial system. This “easy money” policy is directed at flooding the system with so much money, that the banks will start to lend money to businesses…which the banks can’t do because the FDIC, another arm of the government, has tightened the lending standards for the banks. Does it sound confusing? It is, and you wonder why things are FUBAR!!

The immediate effect of this much money pouring into the system is a devaluation of the currency…an old trick of debtor nations. That's us!!! Experts believe this quantitative easing will devalue the dollar by 20%. So the government will pay back a $100.00 debt with money that is only worth $80.00! Neat trick! But there’s a catch.

When the major currency of the world is being devalued, investors look for places to put money that will protect it from the devaluation…usually hard assets. You, as a consumer will get the double whammy. Let’s say you wanted to buy a pound of widgets for $100.00. But the currency is being devalued. Speculators start to buy up widgets driving the price up to $120.00. As the currency is devalued, your money is now worth less…only $80.00. So what would have cost you $100.00 last month, will now cost you $140.00 in devalued currency…the speculators drive up the price, and your money is worth less. That is called inflation.

And you are seeing it right now. There is already a rapid rise in all commodity based goods. That includes not only gold, silver and oil…but also food….including sugar, corn (at an all time high), wheat, coffee…you get the picture. There is a real possibility that you will be paying $5.00 for a loaf of bread...and just as much for a gallon of gas within a year.

But even as prices begin to skyrocket, the government will tell you there is no inflation, because it figures inflation by a formula that leaves all of these things out…seriously. The inflation figure will be “ex food and energy.” So there you have it. All is right with the world. Such are wages of government borrowing and spending. Quantitative easing is a way the government can tax you without taxing you. And it is only going to get worse.

This is what the Tea Party movement is all about; and why these folks are so upset.