The Crash Course - Chris Martenson [55]
Quantitative Easing
The prediction I began making in 2004 was that we’d enter a period of profound money printing by the Fed in order to try and “fix” things. Given the fact that the Federal Reserve and other central banks in Europe and Japan began an aggressive monetary printing program in 2008 that has continued through the time of this writing (2010), this “prediction” is now an observation. The printing has already started in earnest. These money-printing programs go by the fancy name of quantitative easing (QE), which simply refers to creating money out of thin air and then using it to buy various forms of debt, both governmental and nongovernmental. Between 2008 and 2010, the Fed’s balance sheet expanded from $800 billion to just over $2,250 billion, all of which represents money created out of thin air for the purpose of monetizing existing debt (Figure 12.1).
Figure 12.1 The Federal Reserve Balance Sheet
The slow and careful accumulation of assets (debts) turned sharply upward at the start of the credit crisis in 2008.
Source: Cleveland Federal Reserve.
How does this practice differ from the historical practice of clipping coins or printing money directly? Essentially, it doesn’t, except under the theory that the Federal Reserve can reverse the transactions as rapidly as they entered them, thereby unwinding them and hopefully “sterilizing” the inflationary impacts when they begin to surface. In theory, the kings that clipped their coins could also have recalled them all, melted them down, and reminted larger versions, but that never happened, so history suggests that the expansion of the Fed balance sheet will be permanent.
In reality, putting money into the system is far easier than taking it back out. When the Fed puts the money into the system, an institution delivers a (possibly flawed) debt instrument to the Fed and receives a large pile of cash in return. Reversing this process requires that an institution have a large and ready pile of cash on hand to give to the Fed in exchange for the (possibly flawed) debt. Cash is rarely left piled up at financial institutions; it is generally put to work quite rapidly when it’s received, so raising cash usually requires selling other things elsewhere. For this reason, putting cash out into the marketplace is a lot easier for the Fed than reeling it back in. If they don’t (or can’t) reverse these monetary injections, then there’s an incredibly high chance of destructive inflation emerging at some point in the future.
The point of raising the issue of QE here is simply to illustrate that money printing isn’t some future event for which we need to maintain some level of vigilance. It’s already happening. As Rogoff and Reinhardt have shown, printing is the first refuge of cornered officials, and those serving today have proven to be no different from those in the past. History may not necessarily repeat, but it does often rhyme.
This means that we can expect large quantities of money to be printed in an effort to forestall the inevitable pain of past decisions—decisions that revolved around not only taking on too much debt, but fashioning the bulk of our economy around its perpetual expansion. It means that if there are other structural reasons for why the economy is not growing as expected or intended, such as resource limitations, we can expect the Fed to deal with that predicament by applying the same ‘solution’ they’ve always used in the past: money printing. When all you have is a hammer, everything looks like a nail.
I want you to hold that idea in the back of your mind until we get to Chapter 15 (Energy and the Economy), where we’ll assess whether there are any additional dark spots on the horizon to further cloud up the story of endless economic growth.
1 On August 15, 1971, President Richard Nixon “slammed the gold window,” ending the Bretton Woods I agreement, which allowed foreign countries to convert their paper dollar holdings into U.S.-held gold at the fixed price of $35 per ounce. From that moment on, foreign exchange