As a consequence of loose monetary policy with a fiat currency, the United States is rapidly descending into an economic reality of Modern Monetary Theory, or MMT. While MMT (also known as Chartalism) is typically associated with its Keynesian predecessor and the policies of the Left, new developments reveal that both parties are responsible for the slip into a brave new economic world.
Essentially, there are four preconditions in Modern Monetary Theory:
1) Money enters the economy through government spending, as the total amount of money is constrained not by gold but by the total output of the national economy;
2) Government spending is speculative as it prints as much money as it needs to control production and, as a byproduct, employment, and spending beyond productive capacity leads to inflation;
3) Taxes do not pay for expenditures but are instead a way to throttle private sector demand; and
4) The government is the issuer of the currency, sovereign governments that issue their own currency are never insolvent, so debts essentially don’t matter.
Merely two weeks after Ben Bernanke announced one more round of quantitative easing (QE3), the results are already becoming apparent. And once again, it shows how the culture of “too big to fail” is both immoral and economically devastating.
The immorality of QE3 can be summarized by this quote, from Businessweek: “It’s very good to be a mortgage originator right now,”
Gosh, I wonder why? Is it perhaps because QE3 is benefiting banks/bankers…to the detriment of everyone else? But I thought our president wanted the top 1% to “pay their fair share”! So how do bankers and loan originators end up cashing in on yet another bailout? Yes, I realize I shouldn’t be shocked by a politician saying one thing…and doing the opposite. But I am.
Since images often speak louder than words, here’s an illustration of why it’s “…very good to be a mortgage originator right now”.
This is what Bernanke imagines QE3 is doing:
And here is what is ACTUALLY happening:
I rest my case.
Federal Reserve Chairman Ben Bernanke just announced Operation Twist, a new combat operation that will supposedly fix our market woes. Supposedly. (Hey, pass the vodka, will you? I need a drink before I listen to this guy.)
I am not a financial markets expert, and I have not heard that much on the actual details of Operation Twist, but, courtesy of CNN, here’s a brief explanation:
NEW YORK (CNNMoney) — The Federal Reserve announced “Operation Twist” Wednesday, a widely expected stimulus move reviving a policy from the 1960s.
The policy involves selling $400 billion in short-term Treasuries in exchange for the same amount of longer-term bonds, starting in October and ending in June 2012.
While the move does not mean the Fed will pump additional money into the economy, it is designed to lower yields on long-term bonds, while keeping short-term rates little changed.
The intent is to thereby push down interest rates on everything from mortgages to business loans, giving consumers and companies an additional incentive to borrow and spend money.
So basically, they’re selling bonds and buying bonds. Nothing exactly Earth shattering here. And definitely not anything that will get us out of this rut.
Interestingly, some members of the FOMC agree with my assessment, and one of them had a speech about it. Mr. Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, had this to say about recent monetary policy, using a Nordic weather station as a metaphor:
This weekend, MoveOn.org pushed a petition written by economic policy expert actor Danny Glover asking President Barack Obama to appoint Paul Krugman to serve as the next Treasury Secretary. The petition, which has garnered nearly 200,000 signatures, states, “Press speculation has centered on candidates likely to support the Wall Street agenda of cuts to Social Security and Medicare benefits and other domestic spending rather than government policies to create jobs.”
“We want President Obama to nominate Nobel prize-winning economist Paul Krugman, who opposes austerity and wants the government to focus on creating jobs.”
While one may not put it past Obama to make such an appointment, there is next to no chance that Krugman would win confirmation from the Senate. If you though Timothy Geither has been worthless in his role as Treasury Secretary, Krugman would be a disaster, based on things he’s said since President Obama has been in office.
Here’s a sample of The Crazy™ from Krugman:
With apologies to Ian Fleming, American Crossroads released a new web-ad today about President Barack Obama, economic supervillain:
Since the Federal Reserve announced its third-round of quantitative easing (QE3), a monetary policy move which essentially involves the central bank buying up debt, Americans are beginning to wondering what impact it will have on them.
The goal of QE3 is ultimately to bring down the unemployment by one-percent, but it would also raise commodity prices and may even have some affect on housing market, though that impact may be marginal.
Questions remain whether the launching the program was wise, especially when one considers that the two previous rounds of quantitative easing and Operation Twist, have done little to ease the slow growth the economy has experienced.
The Federal Reserve, which has printed money and loaned trillions to national and foreign banks, has been under increased scrutiny since the 2008 financial crisis. Over the last four years, Rep. Ron Paul (R-TX) has led the push in Congress to audit the United States’ central bank. As George Will recently said, the Federal Reserve has become the fourth branch of government, taking questionable steps with little oversight. Others wonder if the United States even needs the Fed since its creating more problems than anything else.
In a new video from Learn Liberty, Lawrence White, a professor at George Mason University, explains that the United States could indeed survive and prosper without the Federal Reserve, which, as he notes, has frequently become impediment to economic growth:
The Federal Reserve announced a third-round of quantitative easing (QE3), during which the central bank will purchase $600 billion bonds in hopes that the debt monetization will stimulate the economy and thus bring down the unemployment rate by one-percentage point.
The move has already been met with derision by GOP vice presidential nominee Paul Ryan (R-WI), who called the Fed’s actions “insidious” during a speech in Florida on Saturday. Before the Federal Reserve announced its decision last week, the Wall Street Journal reported that many economists expressed doubt that another round of quantitative easing would do anything to stimulate the economy. And if they do manage to do anything, it could be as, Neil Cavuto explains, “substituting bubbles”:
The risk with forcibly keeping interest rates low is you create another bubble, which is odd because we’re in the fix we’re in because we burst out of a real bad financial bubble.
My fear is that we’re substituting bubbles.
We’re encouraging the very reckless hedging and leveraging that brought on the last financial meltdown.
I’m not saying that happens again. But you don’t have to be Nostradamus to see where this kind of stuff goes. It’s inflationary, for one thing, and likely prompts a continued run-up in commodity prices that had stalled for a while.
The Cato Institute, in partnership with the Fraser Institute in Canada, has released the annual report, Economic Freedom of the World. The report shows where each nation across the globe ranks on various economic factors, such as the size of government, the legal system, respect for private property rights, sound money, free trade, and regulation.
Here is a brief summary of the report from Cato:
Global economic freedom bounced back slightly in this year’s report. After falling for two consecutive years following a long trend of increases, the average score rose from 6.79 in 2009 to 6.83 in 2010, the most recent year for which data is available. In this year’s index, Hong Kong retains the highest rating for economic freedom, 8.90 out of 10 (down slightly from 9.01 last year). The rest of this year’s top scores are Singapore, 8.69; New Zealand, 8.36; Switzerland, 8.24; Australia, 7.97; Canada, 7.97; Bahrain, 7.94; Mauritius, 7.90. Finland, 7.88; and Chile, 7.84. Bahrain and Finland are new to the top 10 — replacing, notably, the United Kingdom (fell to 12th) and the United States (a sizable drop to 18th).
The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a substantial decline in economic freedom during the past decade. From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980 to 2000, the chain linked EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010. The chain-linked ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 and 19th in 2010 (unadjusted ranking of 18th).
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” - F.A. Hayek
After another poor jobs report, it seems that the Federal Reserve may launch a third round of quantitative easing, perhaps as early as this week, in hopes that it will bring a boost to the economy:
“QE3 is a done deal,” says Dan Greenhaus, chief global strategist at BTIG. “After today’s report, this debate is moot.”
Economists from Goldman Sachs share similar sentiment. They expect the Fed to launch a new bond-buying program next week, rather than in December or early 2013 as previously predicted.
A consensus is building in the bond market that a third bond-buying program, known as quantitative easing measures, will be a combination of longer-dated Treasury bonds and mortgage-backed securities, which would boost the value of
the targeted assets.
Goldman’s Jan Hatzius says QE3 will likely consist of an open-ended asset purchase program of around $50 billion per month. He doesn’t anticipate an end date given in advance. Instead it would likely be formulated based on the pace of the economic recovery.
Michelle Meyer, senior U.S. economist at Bank of America BAC. Merrill Lynch, is also in the camp that expects more Fed easing.
“The Fed will not stand idle in the face of subpar growth,” she says. “We expect additional balance sheet expansion before year-end, with a growing probability of an open-ended QE program tied to healing in the economy.”