Guest blog – the insanity of QE3

So, we may just have averted a new eurozone-related financial crisis. I’m referring here to the German constitutional court’s decision to dismiss attempts to block the creation of the eurozone’s 500 billion bail-out fund – the European Stability Mechanism  (ESM). 

The ECB is seen by many in Germany, including the president of the Bundesbank – and a big chunk of the German electorate – as a blank cheque to bail out every southern European country that comes running with a begging bowl.The court laid down only two conditions for ratification of the ESM, both of which seem eminently reasonable. 

The first was that Germany’s liability should be capped at €190 billion. The second was that any increase must be sanctioned by the Bundestag. This result was pretty much as expected. Nevertheless, there was general relief in the financial markets at the news. 

Now, let’s turn to the second decision that has been made this week and one that is catastrophic for America. As I write, the Federal Reserve chairman Ben Bernanke has just set the levers on his money-printing machine to hyperdrive. He has launched the next round of “quantitative easing”: QE3. 

This has a direct bearing on what I have touched upon before – the potential economic calamity that will begin at one second past midnight on 1 January Eastern Standard Time, when America is likely to plunge over the “fiscal cliff” and into the economic abyss of recession. There’s little more than 100 days to go. I said that I’d explore this further with you. One of the questions I posed was: Is the US economy strong enough to withstand the huge government cuts and tax increases that will come into automatic effect  on January 1? The answer is NO!

Growth is already stalling. Year-on-year growth was 4.1% in Q4 2011, 2.1% in Q1 2012 and 1.7% in Q2 2012. There is, in fact, no genuine growth in the US economy at all. It has all been done by the federal government and the Federal Reserve pumping in ridiculous amounts of artificial stimulus. Since 2008, we’ve had the banking bail-out known as TARP ($475 billion); Obama’s American Recovery & Investment Act ($840 billion); the Fed’s QE1 ($1.7 trillion) and QE2 ($600 billion). Total: $3.6 trillion… wasted. 

And now Mr Bernanke and his Fed colleagues are going through the whole futile exercise. Again. He’s going to print $40 billion a month… a massive $480 billion a year. And he says he’s going to go on doing it until unemployment comes down. Why? The first $3.6 trillion achieved nothing? What makes him think that another $480 billion a year will do the trick? 

It’s the very definition of insanity, when you know that something doesn’t work but you go on doing it anyway. 

Forget about the S&P 500’s index rising to a new post-financial crisis high today. America is bust. If it were a major corporation, it would have gone bankrupt years ago.

The people are broke too.

• Nearly one third of American homeowners are in negative equity.
• A record 43.6 million Americans are living in poverty.
• Nearly one fifth of all US household income now comes from government assistance of some kind, such as social security hand-outs. 
• A record 1 in 7 Americans is living on food stamps.
• In 2002, only around 39% of all Americans were without healthcare insurance. Noiw the figure is nearly 50% – as the income of the middle classes falls, so healthcare has become an unaffordable luxury.
• After adjusting for inflation, median family income is now down to where it was in 1967 – 45 year ago!

And still Bernanke claims that, thanks to the Fed printing $2 trillion, the huddled masses are better off as a result of the Fed’s actions. Oh really?

The official US national debt has just topped $16 trillion. That’s an astronomical number – yet it’s a tiny, tiny fraction of the true national debt. How so? Because the official national debt includes only expenditure in the official federal budget. It doesn’t include unbudgeted, open-ended commitments, such as military and federal employees pensions, social security, Medicare and Medicaid. 

According to economist Laurence Kotlikoff, Washington’s total debts and obligations come to a staggering $222 trillion  or $2.8 million for every family of four in America.  

The only reason America hasn’t gone broke, as a bank or other corporation would have done, is because America has a weapon available to it that corporations haven’t: it can continue to pay its debts by printing its own money. That’s what Bernanke and his cronies have been doing with gay abandon, apparently oblivious of the fact that it destroys the value of every other dollar in existence. 

Bernanke seems not to understand that you can’t go on doing this without there being serious consequences. Ultimately, it will result in huge inflation. But for now, it’s creating an economy that’s completely reliant on money printing, like a desperately sick patient being reliant on blood transfusions. When the money printing stops (as it has for the past few months) the economy declines… until the money presses start up afresh. 

He claims that QE1 and QE2 made the economy a lot better than it would been had he not fired up the printing presses. After dumping $2 trillion dollars into the economy, he claims to have raised America’s output by 3% and created 2 million jobs. Is he right? I doubt it. 

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