QE3- The QE Infinite Path Off the Cliff

Last week, The Fed announced the third round of quantitative easing, the so-called QE3.  Quantitative Easing, in theory, is supposed to stimulate the economy because the Fed both prints more money and puts it into “circulation”, but also keeps interest rates low.  This is basic Keynesian Economics. So let’s take a look at how this has really been working out.

QE1 came in late 2008 under President G.W. Bush.  The Fed initiated purchases of $500 Billion of mortgage backed securities.  Remember, the bundles of bad mortgages that the banks were stuck with after the housing crash? You must remember also, this was in addition to the so-called $700 Billion bailout.

Also, in late 2008, the Fed cut the key interest rate to near zero.  By the summer of 2010, it was obvious that other than enriching the banks, QE1 had not spurred any growth in the economy.

So QE2 came in November of 2010 and lasted until June 2011.  The Fed went to buying $600 Billion in US Treasury Bills to “spur” the economy.  QE2 did NOT create any economic growth.  What QE2 DID DO was to bailout a bunch of foreign banks.  During the period of QE2, cash reserves of foreign banks went from $308 Billion to $940 Billion.  Hmmm,  ahhhh, about $600 Billion. Imagine that!

QE3 is essentially no different in the apparent approach is again to purchase mortgage backed securities, which we already know just enriches the banksters, and just tries to hide the elephant called debt.  WHAT is different about QE3 is that for the first time there is NO LIMIT to how long QE3 will go on!

Fed Chair, Ben Bernanke announced the Fed would purchase $40 Billion A MONTH in mortgage backed securities INDEFINITELY!  In addition, the Fed will keep interest rates at near zero until 2015! Truly QE Infinite!

Given that QE1 and QE2 did nothing except enrich banksters and hide debt, QE3 or QE Infinite only means that the Fed has put us on a course that only increases the size of the cliff and only slightly delays the inevitable crash of the dollar with the super-imposed hyperinflation that will flare.

Given the dollar of today only has 4 cents of the purchasing power of the dollar in 1913 when the Fed “took control” of the US monetary policy. The collapse of the dollar is real potential reality.  Already China and Russia have agreed to trade in Rubles and Yuan, instead of dollars.  India will soon follow.

There are several oil producing countries that now require dollars be converted to British Pounds or Euros, however, even this option is weakening meaning the demise of the dollar as the “petro-dollar” could be a reality in the near future.  This event alone would trigger the collapse of the dollar. This would trigger hyperinflation.

In countries experiencing hyperinflation, the central bank often prints money in larger and larger denominations as the smaller denomination notes become worthless. This can result in the production of some interesting banknotes, including those denominated in amounts of 1,000,000,000 or more.  Once it starts it can happen very quickly.  The Weimar Republic of Germany in 1923 is a very good example, as are a few others.

  • By late 1923, the Weimar Republic of Germany was issuing two-trillion Mark banknotes and postage stamps with a face value of fifty billion Mark. The highest value banknote issued by the Weimar government’s Reichsbank had a face value of 100 trillion Mark (100,000,000,000,000; 100 million million).  At the height of the inflation, one US dollar was worth 4 trillion German marks. One of the firms printing these notes submitted an invoice for the work to the Reichsbank for 32,776,899,763,734,490,417.05 (3.28 × 1019, or 33 quintillion) Marks.

  •  The largest denomination banknote ever officially issued for circulation was in 1946 by the Hungarian National Bank for the amount of 100 quintillion pengő (100,000,000,000,000,000,000, or 1020; 100 million million million) image. (There was even a banknote worth 10 times more, i.e. 1021 pengő, printed, but not issued image.) The banknotes however did not depict the numbers, “hundred million b.-pengő” (“hundred million trillion pengő”) and “one milliard b.-pengő” were spelled out instead.
  • This makes the 100,000,000,000,000 Zimbabwean dollar banknotes the note with the greatest number of zeros shown.
  • The Post-World War II hyperinflation of Hungary held the record for the most extreme monthly inflation rate ever — 41,900,000,000,000,000% (4.19 × 1016% or 41.9 quadrillion percent) for July 1946, amounting to prices doubling every 15.3 hours. By comparison, recent figures (as of 14 November 2008) estimate Zimbabwe’s annual inflation rate at 89.7 sextillion (1021) percent., which corresponds to a monthly rate of 5473%, and a doubling time of about five days. In figures, that is 89,700,000,000,000,000,000,000%.

There are those that say that that kind of event could not happen in the US.  The demand of our economy is just too large.  However, the real logic is that regardless the size of the economy, zero value is zero value, so therefore if the largest, most solid currency crashes, the global impacts are catastrophic.

So let’s rethink QE3 and let’s say the Fed will fund Education, Infrastructure in the US, and properly adjust minimum wages and social security benefits to reflect a livable wage and retirement at the rate of $40 billion a month.  I can absolutely guarantee the Fed that this would absolutely stimulate growth because it is a fact that people, both surviving on a minimum wage and those living on social security, SPEND 100% of their disposable income.  This is the direct IV line to the economy.  Just a thought.