Bernanke and China Jawbone For Printing Money

Federal Reserve Chairman Ben S. Bernanke jawboned for maintaining accommodation just after the minutes of Fed policy makers’ June meeting showed debates on whether to stop bond buying by the Fed in 2013.

Jawboning is the economic policy tool of using speech to affect economic conditions by managing public expectations. The stock market has responded positively to the prospect that money continues to be printed and interest rates will remain low to prop up real estate. As the real estate and stock markets increase consumers feel more wealthy and tend to increase spending.

Market gains based on inflated dollars instead of wealth creation is the definition of a bubble. Recently,  stimulus withdrawal fears have led to major pull backs in the stock market. Benanke's jawboning is likely an attempt to erase these market declines by reducing skeptical investors' fears.

Also of note, gold prices have plummeted during early 2013. Reports point to central banks selling off large amounts of paper gold. The banks are now reportedly purchased physical gold at reduced prices. Today, gold prices are rising rapidly as China also announced it will "introduce supportive measures."

presumably because of the inverse relationship between the price of Gold, and the market perception of the value of paper currencies. So expectations of more QE is probably what has pushed up the price of Gold.

Bloomberg has more details here.

The Fed chairman spoke just three hours after the central bank released minutes of the June 18-19 gathering showing that about half of the 19 participants in the Federal Open Market Committee (TREFTOTL) wanted to halt $85 billion in monthly bond purchases by year end. At the same time, the minutes showed many Fed officials wanted to see more signs employment is improving before backing a trim to bond purchases known as quantitative easing.

Additional Sources:

With few options, Fed turns to 'jawboning'

Redistribution of Wealth via Printing Money

I have been struggling to explain the extreme economic danger we face due to the Federal Reserve's Quantitative Easing 3 (QE3). The danger comes in three parts. We will end with a quick explanation of how printing money is redistribution of wealth.

First, European central bankers recently stated that they could print as much money as they wanted with no concern for inflation, just as our Federal Reserve (The Fed), because the money goes to banks.Banks hold the money for their required reserves or trade with other large financial institutions, but the money, supposedly, does not get into the general economy and cause inflation.

This is dangerously stupid, of course the money eventually trickles-down into the economy. Printing money is monetary trickle down economics. There is one key difference, instead of savers inventively using the money to invest in new ideas, banks are regulated in how they can distribute the money. It is regulatory picking of winners and losers.

Second, our Federal Reserve (The Fed) purchases government bonds in competition with the free market. This forces down the cost of selling bonds and keeps interest rates low.

If I need to borrow $100, you might lend it to me at 10% interest and collect $110. When the U.S. Government borrows money, The Fed steps in and loans the money at under 1%. This drives down the cost of U.S. Government borrowing which in-turn sets all interest rates low. You cannot loan me that money and earn $10, because the Fed crowded you out of the market. Other interest rates are linked to the U.S. Government's interest rate because it is considered the safest and thus the base interest rate.

Ask retirees on fixed incomes how this hurts them.

Because inflation is currently higher than interest rates, savers and retirees are forced into riskier assets in order to preserve wealth. If inflation is 2.5% and you only earn 1% on your savings, you are losing wealth. So, investors put their money into real estate, gold or the stock market to earn more than 2.5%, but at a higher risk level.

Also, investors run away from cash because the printing of money instills fear that dollars will lose value. America has suffered three credit rating downgrades since the Obama Administration's massive spending starting with the "shovel ready" stimulus in 2009. As people lose confidence in our government, they lose confidence in our currency.

Gold prices are inversely related to the value of money, as gold is purchased with money. Gold has not become more scarce, dollars have become less valuable.

Third, financial institutions and banks loan the newly printed money to people who want to buy homes. Congress, regulators, and disgraced lawyers like Barack Obama force banks into lending money even when it is not financially sound. The banks are given incentives and face penalties or take-over by the government if they do not comply. This has the net effect of inflating the price of housing.

Economically, this is justified by the belief that the inflated housing prices create paper equity which then increases the confidence people have in the economy (consumer confidence). Reported inflation has so far stayed low because housing prices have been going down while food, energy and other prices have increased. Housing prices are a large portion of the reported inflation statistics. As housing prices increase, inflation numbers will rise, which in-turn will force savers into investments with even greater risk. Further pushing investments in real estate and creating a new housing bubble, the very reason our economy exploded in the first place.

Redistribution of Wealth

ObamaCare includes many new taxes. One new tax is a 3.8% tax on the sale of real estate and other "investment income."

A 3.8% surtax on "investment income" when your adjusted gross income is more than $200,000 ($250,000 for joint-filers). What is "investment income?" Dividends, interest, rent, capital gains, annuities, house sales, partnerships, etc. Taxes on dividends will rise from 15% to 18.8%--if Congress extends the Bush tax cuts. If Congress does not extend the Bush tax cuts, taxes on dividends will rise from 15% to a shocking 43.8%.

As stated by Fox News:

The ObamaCare Surtax on Investment Income

Under current law, the capital gains tax rate for all Americans rises from 15 to 20 percent in 2013, while the top dividend rate rises from 15 to 39.6 percent. The new ObamaCare surtax takes the top capital gains rate to 23.8 percent and top dividend rate to 43.4 percent. The tax will take a minimum of $123 billion out of taxpayer pockets over the next ten years.

In other words, the plan is to inflate your assets and then tax those inflated assets at an increased rate. The additional taxes are largely targeted for the new entitlement program known as ObamaCare. Even if ObamaCare is repealed, some of the new taxes are tied to the Bush Tax cuts which end in 2013. The income will not be spent to reduce the debt, so it will simply be redistributed.

The increased risk of investing required to keep up with inflation and taxes will cause some people to lose their life savings. Americans who sell homes at inflated prices, the gains will be taxed away without regard to inflation. Americans will be pushed into higher income tax brackets and 31 million Americans may face the Alternative Minimum Tax. New ObamaCare taxes will further drain our bank accounts. Property taxes will rise.

The increased tax money will not pay down the debt. All of this additional income will be redistributed by politicians in order to purchase dependency voters. Now, is printing money worse than you thought?

Vote for Mitt and help fight Doo Doo Economics!

QE3 is Doo Doo Economics

The study of Economics is not genius. 

Macro economics is simply thinking about how a reasonable person would react to a particular economic policy in a free market. Thinking about this question leads to differences in opinion. Economics, the study of capitalism, is based upon reason and logic but tempered by insights into culture and human nature.

The Liberator Today has a nice summary as to why printing money, known as Quantitative Easing (QE) is Doo Doo Economics for America, just as it was in Japan during the 1990's. (italics ours):

• Low interest rates make it harder for retirement eligible to actually retire, they are getting little return for their money. (Less retirement leads to less hiring and fresh ideas.)

• Interest rates are a measure of the time value of money. By setting it at zero, there is no urgency about investment decisions.

• Because those who live on fixed savings, have less to spend, they spend less, harming the economic recovery.

• Investment isn't increasing at zero rates, because once rates fall below the rate of inflation, the only consideration is whether the principle can be paid back. If inflation is at 2.5%, then reducing interest rates from 2.5% to 1.5% or even zero percent will have no effect on investment, so there is no offset to the fact that savers have less to spend.

• Zero rates allow otherwise worthless loans to appear to be performing, as the borrower can make nominal payments. But it delays the necessary economic unwinding necessary for real economic recovery. (Bad investments are not reallocated.)

Lets add to this pile:

• Older Americans traditionally own homes, but because of low fixed incomes they are being forced into "reverse mortgages." These Americans are selling their biggest asset at the currently depressed market value. This is a net destruction of wealth on main street. Wall Street buys up the homes at cheap prices and further concentrates wealth. Banks and financial professionals who benefited from TARP and other bailouts leverage tax money to beat main street.
• The fear of the fiscal cliff, uncertainty about regulations and future costs associated with ObamaCare are not addressed by printing money. 
• The new money is injected into banks in the hope that these banks will use the money to spur economic growth. This is logical, but has not panned out. It is the basis for the charge that "trickle down does not work."  Trickle down works when wealth is kept by individuals because they efficiently use the additional money to create new wealth. Large banks are regulated to ensure that they protect wealth. 

We want to add one more insight because we have not seen it anywhere. If you have seen a better explanation, please let us know!

Monetary Policy is not suited to dealing with unemployment.

The Fed has been tasked with lowering unemployment. This is a new development during the Obama administration. Traditionally the target of Fed policy is low inflation. Monetary policy is not suited to reducing unemployment.

Reaganomics was the supply side answer to the problems caused by demand site Keynesian policy that dominated economic theory through the great depression and the 1970's. The goal was to end "stagflation,"  high inflation and high unemployment. However, the success of Reaganomics included monetary policy focused upon lowering inflation and eventually lowering interest rates.

Keynesians believe that unemployment and inflation exist as an inverse relationship, IE The Phillips Curve. This belief worked during the post WWII era of American economic dominance and mostly full employment and moderate inflation. However, this idea meant that stagflation was impossible, yet it happened and is possibly starting again today.

The Fed can control inflation, but reasonable people looking for employment take into account inflation when considering wages. There is no employment trade-off in raising the rate of inflation except in the short run. It does not reduce the cost of employees. This is the reason that Richmond Fed President Jeffrey Lacker dissented against this policy. The short run is over.

America has a shrinking labor force and high unemployment. A shrinking labor force puts pressure on employers to find qualified employees. Employees become more valuable and harder to replace. Employees become more scarce, unemployment should fall and wages should rise. We hear that there are over three million open jobs in America that lack qualified employees, so this holds during the Obama (Doo Doo) Economy.

However, the median income of Americans has fallen under President Obama, 1.5% just in 2011. 53% of college graduates are unemployed. Overall, 8% of Americans are unemployed and 17% are underemployed.

Workers take into account inflation when considering compensation. Government welfare programs act as an alternative to work and are adjusted for inflation. Crime is an increasingly viable alternative to work. When employment is high and interest rates are above inflation, additional money supplies can entice workers into participating to get a piece of the new wealth. When available workers cannot keep pace with inflation and fail to see wealth creation around themselves, there is no significant incentive.

It is my contention that because interest rates are below the level of inflation, there is a negative influence upon traditional asset investments, and worker's investment in their own skills. It is not reasonable to invest money in an asset that does not generating wealth. It is not reasonable to invest in an asset that is paid through welfare and cannot increase its generation of wealth. Money supply does not influence this.

Lets call this what it is, an excuse to devalue the dollar in order to deal with the massive Obama deficits. It is a hidden tax. It has little to do with employment, and Ben Bernanke knows it.

Give me liberty or give me debt.