QE4-Just Around the Corner

QE4

JUST AROUND THE CORNER

The Federal Reserve just announced what their latest attempt will be to help rescue the American economy.  It is being called QE3, for Quantitative Easing 3.  Quantitative Easing refers to the policy of creating more money and injecting it into the economy in hopes that the additional dollars will stimulate the economy and cause a growth in employment. 

QE1 began four years ago, right at the time of the last presidential election (11/2008).  By the time QE1 ended in 3/2010, the Fed (Federal Reserve) had purchased $1.25 trillion in mortgage backed securities (MBS) and another $175 billion in government debt.

When this failed to solve the problem, they tried it again with QE2.  This round began in 11/2010 and ended in 6/2011.  During this time, the Fed purchased $600 billion in treasury bonds.  The US Treasury Department is responsible for the funds needed to run our government.  They raise additional money by selling Treasury Bonds, which amounts to an IOU from the government to the buyer of the bonds (national debt).

We are talking about “real money” here as the Fed has injected approximately $2.3 trillion into the U.S. economy since 2008. 

The latest announcement (9/2012) by the Fed is that they are beginning QE3.  The first two attempts did not solve the problems in the national economy, so they want to try again, expecting different results.

QE3 will have the Fed buying $40 billion in MBS each month going forward until they decide the employment situation has improved to an acceptable level of stability.  In other words, the Fed is beginning an open-ended, monthly injection of $40,000,000,000 into the money supply.  At that rate, another half trillion dollars will be added each year until they decide to stop.

Investors.com just published an article by Sen. Jim DeMint, where he discusses QE3 and what it means.  He refers to this policy as QE4-ever as it is an open-ended, monthly event.  But, that is not why this article is named QE4.

QE3 will do what most of QE1 did, buy MBS.  These mortgage backed securities amount to bundles of real estate mortgages.  The Fed will gain ownership of $40 billion of additional mortgages each month, on top of the inventory they already own.  These purchases are adding hard assets to the balance sheet of the Fed.  The Fed has also been busy buying gold over the past few years, which is another hard asset.

So, where does the Fed get so much money to do all of these purchases?  They must be very rich.  Well, they are, but that is getting the cart before the horse.  They are not doing all of these purchases with their accumulated wealth.  (Remember, the Fed is not a government agency or department.  It is a private corporation.)  The Fed has been charged with the duty of printing U.S. dollars.  Since dollars are no longer backed by gold or silver, or anything else for that matter, the Fed is in a position to just print money as they feel the need to do so.

It is this freshly printed (or electronically generated) money that is used to make the purchases of these bonds and hard assets (gold and MBS).  Just in case you have not pieced this together in your mind, the Fed makes up new money and then uses that money to buy hard assets and to lend money to the Treasury (at interest, of course).  Over the past couple years the Fed has become the largest buyer of Treasury Bonds and now is the largest holder of U.S. debt.  So, yes, the owners of the Fed are rich.  They transform paper and ink into money which they use to enrich themselves by us paying them interest or by becoming the owners of hard assets.

It is sort of like the position a counterfeiter would hold as he printed money and used that money to buy goods or make investments.  Well, there is one difference; where it is a crime for the counterfeiter, it is legal for the Federal Reserve.

You may be asking yourself, “Why does this concern me?”  The continual playing with the supply of money has a direct and very real effect on every person living in this country and many people elsewhere.  It relates to “supply and demand” and has to do with the supply of dollars in the system.  As the supply increases (through the printing of more dollars), the price of the item in demand changes.  This concept is called “inflation”.  A greater supply of money causes higher prices for goods and services.  Every time the Fed adds more dollars to the economy, the value (purchasing power) of your dollar diminishes.  It now takes more dollars to buy the same products than it did a few years ago. 

Since 2008, the Fed has and will continue to pump approximately a half trillion dollars into the economy on an annual basis.  This policy cannot help but cause additional inflation.  The goods and services you require in the future will cost more than they do now.

But, what is QE4?  It is my speculation that there is additional quantitative easing taking place on an unannounced basis by the Fed.  The policy for QE3 has to do with the purchase of MBS, not Treasury Bonds.  As mentioned above, the Fed has become the largest buyer of U.S. debt (bonds).  Do they plan on going cold-turkey with the bond purchases?  I do not believe they will or can stop, at all.  So, where will the dollars come from for future bond purchases?  I believe the Fed will magically generate more dollars for the bond buying, just as they will for the MBS buying.  The Treasury Department needs the Fed to buy the bonds.  This helps keep the interest rates lower for those bonds.  If the Fed stopped buying, the Treasury would have to offer the bonds at a higher rate in order to attract other investors.

So, as the Fed launches QE3, they will continue to buy bonds with a quiet QE4.  The money supply will take a double hit as trillions more dollars will be added to the supply over the next couple years.  You don’t like paying $7 for a hamburger now.  Just wait; it will be $10 pretty soon.  Oh, and by the way, you probably will not be getting a raise to make up the higher costs you will incur.