Now that the convention circuses are finally over, the highly anticipated August jobs report was released yesterday with less than optimistic numbers. According to the Labor Department, nonfarm payrolls increased by only 96,000 in August, significantly lower than the 140,000 needed to put any dent in the unemployment rate.
These sluggish employment numbers were seized upon by Governor Romney and the Republicans to attack the president, but even more predictably, have been used to justify calls for more action by the Federal Reserve to help stimulate the economy. "The economy is crawling up the down escalator and today's report can only give ammunition to the activist members of the Fed board to loosen monetary policy further next week," said Patrick O'Keefe, head of economic research at J.H. Cohn in Roseland, New Jersey.
In other words, QE3. Especially in the midst of election season, a short-term boom from a Fed "monetary injection" is politically tempting and very likely as the economy continues to struggle. But another round of quantitative easing is the last thing that is needed for economic recovery and growth, and here are four consequences that would result from QE3.
1. Further Devaluation of the Dollar:First off, what the Federal Reserve calls quantitative easing is just newspeak for money printing. Whenever the Fed or mainstream economists talk about "pumping money into the economy" or urging the Fed to "do something," the Fed increases the amount of money and credit into circulation without the equivalent capital or economic production to back it up, decreasing the value of every dollar that is currently in the economy.
This devalues the purchasing power of the dollar as more of them now chase and compete for goods and services. Since 1971, when President Nixon essentially defaulted on the obligations owed by the U.S. government and cut all gold ties from the dollar, the value of the dollar has plummeted. Because of this, ordinary Americans have had to work harder and harder as wages stagnate and dollars begin to buy less and less. Savers too, like the elderly and those on fixed incomes, are hurt by the Fed's printing of money, as the interest earned is nowhere near the rise in prices that predictably occur from inflation. Given that QE and QE2 have already flooded the economy with trillions of new and artificial money, QE3 would only make things worse.
2. Masks Our Fiscal Problems:Money printing allows governments to conceal the true cost and reality of their financial obligations. Without a central bank to create the money needed for governments to limp along, interest rates would rise and send the correct signals to the economy.
But governments find it much easier and politically feasible to hide the costs of debt and deficits by inflating the money supply rather than cut back and/or increase direct taxation on the public. This is how, say, President Bush was able to cut taxes and send out stimulus checks while simultaneously spending trillions of dollars on multiple wars in the Middle East. Rising prices and a devalued dollar are much harder to understand and notice than a higher tax bill.
The U.S. government has a $16 trillion debt and faces, conservatively, $60 trillion worth of financial obligations. That's more than half a million dollars per household. The math is truly astonishing. Rather than face up to this reality, QE3 would allow politicians to continue masking the truth, at least until the next election.
3. Wall Street Will Do Just Fine:What is always interesting to note is that the Dow Jones and Nasdaq seem to do quite well, or at least not take a sharp dip, whenever the Fed creates money and injects into the economy. Even with the disappointing jobs numbers, Wall Street still did fine. This is generally seen as a sign that things are okay and recovery is really just around the corner, no need to panic.
But this couldn't be further from the truth. It should be fairly easy to see why Wall Street does fine with cheap credit and monetary stimulus. Not only are big banks and large corporations the first ones to use the new money and are thus largely shielded by the inflationary effects, Wall Street just happens to be where a huge majority of the bad debt and worthless paper that has been accumulated in the last decade resides. Of course they're going to be happy when these assets, securities, and bonds are propped up and the cost dumped on the taxpayer.
Historically, central banking tends to create a situation where wealth is funneled upward and centralized into fewer and fewer hands. This is why the middle class is shrinking, and more of this in the form of QE3 will only further this process along.
4. Further Delays Economic Recovery:A healthy recession is a process in which debt is liquidated, malinvestment is corrected, and the economy restructures to begin producing again. But Fed policy delays this process tremendously, thereby making the necessary and inevitable correction that much harder.
For the last decade at least, we have relied on overly low interest rates, borrowing, and consumer spending to drive the economy. Further QE allows this unhealthy process to continue and makes market corrections that much more difficult. Any increases in GDP or employment gains that may result actually compounds the problem since they are a result not of genuine economic growth but bubbles and artificial credit.
Unfortunately, QE3 will probably happen as a result of political expediency and the fact that all a central bank knows how to do is print money and create bubbles. And when QE3 creates even more of a mess, QE4, 5, 6, ad infinitum will be their only answers.
The real answer to economic recovery and growth is to stop printing and borrowing money, liquidate the debt, free up markets and prices, and have interest rates and a money supply that are a reflection of capital, savings, and production, not political whim. That pill will indeed be hard to swallow, but the more time it takes for this correction to come, the more difficult it will be.