INFLATION AND QUANTITATIVE EASING

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In 1910, the bankers who devised the Fed, agreed an important function of the central bank was to protect against bank runs in the event of an economic crash. Because banks are required to keep only 10% of their customers’ deposits, a mass of people rushing to close their bank accounts would quickly deplete a bank’s reserves. This is where the idea of government protected insurance came in. Why not let taxpayers protect bank customers? And thus the FDIC (Federal Depositor Insurance Company) was born.

In the aftermath of the 2008 economic crash, in effort to keep banks solvent, the Fed (unbeknown to anyone at the time) injected $1.65 trillion into the banking system. This was Quantitative Easing 1 (QE1) which lasted from November 2008 - March 2010. It was a huge success. The banks got lots of cheap money and no big bank ran out.

            But the economy wasn’t growing very well, and the country stood on the brink of recession, and to get banks lending and money circulating, the Fed implemented QE2, and injected $600 billion into the economy. That lasted from November 2010 until June 2011.

 Now, with the economy still sluggish, and banks still not lending to the public, the Fed is embarking on QE3, and planning to inject $40 billion a month into circulation.

            Where is it getting this money? It is printing it. As readers of the last post know, printing money dilutes the value of money already in circulation. The banks get free money, and the value of the dollar for everyone else is worth less. Quantitative Easing is a great boon to the banks. Not so great for the people.

             Why isn’t there inflation with all this money added to the circulation? Because it has been given to the banks and they’re holding on to it. They’re not lending it out to people, they’re playing the stock market. The general population hasn’t been the beneficiary of any Fed money. It was the big banks. As Senator Dick Durban knows, money is power. In 2009, he said, "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."

INFLATION: CAUSE AND EFFECT

 “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.  The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” John Maynard Keynes

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In economic terms, ‘inflation is the persistent substantial rise in prices related to an increasing volume of money.’ Put in simple terms, things cost more because money is worth less. How does this happen? Well, printed money backed by nothing has no value. It’s like putting Monopoly money into circulation and calling it real. Say you have $100 and add $100 of Monopoly money. Now you have $200, but half of it is fake. Sellers know this, so they double their prices. The increase cost of goods is directly proportional to the amount of fake money added to the money supply. This is inflation. This is what happens when the Fed ‘makes’ money.

            Since the creation of the Fed in 1913, the value of the dollar has been reduced by 95%. Today, what you buy for $1.00 you used to be able to get for a nickel. If you have $30,000 in your bank account today, with inflation at 3.5 %, in ten years you would have $20,550. With inflation at 5.5%, in ten years your $30,000 would be worth $16,500. Inflation decreases your buying power. Even if you don’t spend your money, you become poorer over time.

            Inflation is an invisible tax. The Fed prints money for the government, diluting its value for everyone. If the government gave this money to everyone, doling it out equally, then everyone would suffer the same from the reduced value of the dollar. But that’s not what happens. The government spends the printed money on ‘special projects’. It gives away money to ‘special friends.’ A few benefit from the printed (free) money, while the rest of the population gets nothing but a dollar that is worth less. Forget about taxes, this is the way wealth is really redistributed.

FOR BANKS, MONEY DOES GROW ON TREES

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            Another way banks ‘make’ money is through the fractional reserve. This is a percentage set by the Fed which determines how much of a deposit banks must hold in ‘reserve.’ Right now the reserve is 10 %. This means that if you deposit $100 in your account, the bank must hold on to $10. It can do what it wants with the remaining $90, like bet it on the stock market, or lend it to someone else at interest.

             Through the factional reserve, money is multiplied. It works like this. Say you deposit $100 in your account and your bank decides to lend $90 to Ann. When she deposits the $90 in her bank, that bank must keep $9, and can lend $81 to Mary.  Now, Mary has $81, Ann has $90, and you have $100. In this manner, your initial deposit can be multiplied ten-fold ($100+$91+72.90 … = $1000).  This is how money is created out of thin air and how banks have become so profitable.