Quantitative Easing and the Debt Bubble

Look at any headline, and you’ll be assured that the economy is thriving. The stock market is up, and unemployment is down. At a glance, there is a reason to rejoice. The numbers, as seen in the chart below, tell a good story in how the economy has recovered since the crash of 2008.

The story may prove to be a fairy tale if the wolf dressed up to look harmless is revealed. In this case, the wolf is a little-known thing called “quantitative easing,” and it has the power to bring the economy to its knees.

Quantitative easing is a policy whereby the Federal Reserve buys up government securities to lower interest rates artificially. Where does it get the money for these purchases? It’s very easy. The Federal Reserve simply prints all the money it needs. Then, the same Federal Reserve lends this money to banks at an easy rate, who, as a result, can flood the economy with easy loans.

Total US household debt is exceeding $13 trillion, while household income hasn’t come close to keeping up. Quantitative easing is proving to be wolf in sheep’s clothing.

Quantitative easing is a slight-of-hand manipulation of currency. Easy credit is supposed to encourage economic growth. In reality, it devaluates the dollar as consumer goods become more expensive. We are looking at inflation in the not-too-distant future. Prices will increase, but as the figures below indicate, salaries in the bottom 90 percent of wage earners has grown only 15 percent in the last 40 years, while the top 1 percent of earners have enjoyed an increase in income of 138 percent (2013): 

 

Unemployment is at a record low. That, too, however, can be deceiving. The highest increase in employment has been in low-level jobs, where wages haven’t been adjusted beyond the 2008 level and where there are few benefits. It’s survival living, at best, for people who have enjoyed little of the benefits of an economic recovery. These are the same people hardest hit by the 2008 crisis. The government’s response to the crisis was to toss fiat money at the problem, thereby inflating the value of stocks and housing of the top wage earners.

The government bailout was supposed to help a country in crisis mode. Eleven companies who made bad business decisions received $10 billion in government aid as a reward for mismanagement. The explanation, or excuse, was that lack of government intervention would lead to greater financial turmoil. When large companies know a paternal government will rescue them from poor choices, they lack incentive to make better management decisions. Instead of government intervention, it is natural market forces that reward competency and create greater wealth for all.

The 2008 financial crisis and subsequent bailout illustrated the danger of concentration of power in a few companies deemed “too big to fail.” Yet the accumulation of assets in the five largest financial institutions has only increased. This trend can lead to future problems for consumers and borrowers. While regulations have been put in place to control the growth of financial institutions, it’s the very people controlling the institutions that are controlling the new regulations.

The Federal Reserve’s use of quantitative easing to boost the economy has proven to be a failure as debts are reaching unprecedented levels without salaries keeping pace. If it continues, the anticipated inflation may be inevitable. The ensuing debt bubble could very well bring on a crisis that will make 2008 look easy by comparison.

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