All discussions about the legality of “monetizing America’s debt” or holding to congressionally imposed “debt ceiling limits” were extinguished long ago. Politicians simply agreed to let the Fed run rampant with QE activities (read: digital money printing) to finance deficit spending without the need to cut federal programs.
Nobody ever asks why they’d need to collect taxes at all, let alone keep raising them, if unlimited money creation was not extremely harmful.
The Fed’s consistent generation of trillions of dollars out of thin air is no different than if you or I were able to make perfect counterfeit banknotes, which we then spent as if they were real. If we were caught doing that, we’d be put in jail, except perhaps if we sported the last name "Clinton."
The government has been doing exactly the same thing, though, while calling itself a hero. Central bank actions here and overseas would qualify as "tyranny" in the eyes of our third president and founding father, Thomas Jefferson.
Why is QE bad for America? Understanding the reason is easy to envision for equity investors. Simply compare money printing to stock dividends issued by corporations. Assume XYZ company had 100,000 total shares outstanding and that you owned 1,000 shares, or 1% of the firm.
If XYZ declared a 5% stock dividend your 1,000 shares would become 1,050, but the total number of shares would also go up, to 105,000. Your percentage ownership of the whole company would remain unchanged at 1%.
You would be neither better nor worse off than before XYZ’s “mini-split.”
Now let’s look at the percentage increase in the amount of U.S. currency in circulation over the past year. In the period ended July 6, currency in circulation was $1.466 trillion, up from $1.459 trillion last week and up from $1.367 trillion a year ago. This was a seven-day change of 0.51% and 7.27% higher than just a year ago [data source: YCharts].
Picture the last year’s expansion in U.S. dollars in circulation as the equivalent of a stock dividend but with one very major exception. The U.S.’s old shareholders (also known as savers) did not receive any of the newly minted cash. Every old dollar was stealthily devalued by 7.27% with no compensation (in the form of new, lower-valued dollars) in return.
You would not stand for that if a company did it, and you should be equally up in arms about being fiscally abused by the Federal Reserve Bank. The pace of printing accelerated dramatically since the Crisis of 2008.
Over the longer term the damage from expansion of money has been almost unimaginable. Data on this topic was first measured in January of 1984, when money in circulation totaled 172.09 billion (with a 'B'). As of January, 2016, that figure had exploded to a stunning $1.466 trillion (with a 'T').
Exponential expansion of money over time is why the Fed’s own accounting showed an almost 96% decline in the dollar's consumer purchasing power from 1913, when the Fed started operations, through January of 2016.
The national debt is well above $19 trillion and growing like a weed. QE is never going to end voluntarily. Don’t hold your breath waiting for higher coupons on bonds, better money market rates or increased interest on bank CDs. Old-fashioned, market-set, “normalized” interest rates are unlikely to return until after America’s financial system has melted down.
All con games require “the mark” to have confidence in the people or organizations that ultimately screws them financially. Bernie Madoff’s customers loved him right up until he admitted to the fraud. He then morphed into the most hated man in New York.
One day in the future, Fed Chiefs Bernanke and Yellen may be joining Madoff in that same reputational category.
Quantitative easing (QE) is far from a victimless crime.
Start a free seven-day trial of Premium Membership to GuruFocus.
