Best of the Week
Most Popular
1.Spain Ignores Scotland Lesson as Catalan Independence Referendum Could Spark Civil War - Nadeem_Walayat
2.Used Car Buying From UK Dealer Top Tips, CarMotion.co.uk Real Customer Experience - N_Walayat
3.Spanish New Civil War Begins as Madrid Regime Storm Troopers Quell Catalan Independence Rebellion - Nadeem_Walayat
4.Virgin Media Broadband Down, Catastrophic UK Wide Failure! - Nadeem_Walayat
5.Are the US Markets setting up for an Early October Surprise? - Chris_Vermeulen
6.The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It -John_Mauldin
7.Stock Market Crash 2018; Will it Prove to be Another Buying Opportunity - Sol_Palha
8.The Profoundly Personal Impact Of The National Debt On Our Retirements - Dan_Amerman
9.Stock Market as Good as it Gets; Like 2000 With a Twist -Gary_Tanashian
10.1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - Nadeem_Walayat
Last 7 days
Bitcoin Hits $6,000, $100 Billion Market Cap As Helicopter Ben and Jamie Demon Warn The End Is Near! - 22nd Oct 17
Time for Caution in Gold Miners - 22nd Oct 17
“Great Rotation” Ahead; Will it Be Inflationary or Deflationary? - 21st Oct 17
The Trigger for Volatility, Rates and the Next Crisis - 21st Oct 17
Perks to Consider an Agent for Auto Insurance - 21st Oct 17
Emerging Megatrends Hurting Consumers - 21st Oct 17
A Catalyst of the Stock Market Bubble Bust - 21st Oct 17
Silver Stocks Comatose - 21st Oct 17
Stock Investors Ignore What May Be The Biggest Policy Error In History - 20th Oct 17
Gold Up 74% Since Last Stock Market Peak 10 Years Ago - 20th Oct 17
Labour Sheffield City Council Employs Army of Spy's to Track Down Tree Campaigners / Felling's Watchers - 20th Oct 17
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Quantitative Easing Aka Counterfeiting Money

Interest-Rates / Quantitative Easing May 11, 2009 - 04:38 AM GMT

By: LewRockwell

Interest-Rates

Best Financial Markets Analysis ArticleMichael S. Rozeff writes: I begin by describing quantitative easing in technical terms. I go on to describe what it means when a central bank and its government engage in quantitative easing. What is quantitative easing? It is a central bank’s "purchase" of government securities (bills, notes, bonds) directly from the government.


The term "purchase" does not capture the essence of the actual transaction. The government issues a Treasury bill, say. This is a liability of the government. The central bank takes this bill and holds it as its asset. It provides the government with its own official and legal State money or notes (or a checking account for such). The central bank accounts for this note issue as its liability. It is an IOU transferred to the government (or State). In the usual setup, these notes cannot be redeemed for anything. That is, if the government brought these notes to the central bank, it would get nothing in return for them. Hence, the money issue is not really a liability of the central bank. The government accounts for the receipt of these central bank notes as an asset.

The net result of the transaction is that the government succeeds in transforming a liability (its issue of Treasury bills) into a new asset (its holding of central bank notes). If a person issues a debt and receives an asset from someone else in return, there is no new asset involved. If a baker issues an IOU and gets an oven in return, the oven is not an increment to the stock of ovens in the world. But when the government issues its IOU (the Treasury bill), it gets an entirely new asset, the central bank money. In the U.S., the government pays interest to the FED that holds the bill, but the FED returns this interest to the Treasury. Hence, the Treasury bill held by the FED is really no liability to the government. The net result of the transaction is that the government has a new asset that it can spend, namely, the FED’s Federal Reserve notes.

There will be further effects on the banking system and the economy when the government circulates the notes. These occur through the fractional-reserve banking system, but it is not my aim here to discuss these as plenty of other sources have done this already.

The main technical point is that the government has a new asset that is made an asset by coercion, since the money has, by the power of law, been made legal tender. If we had t-accounts for the government and FED and the government issued $1,000 in t-bills, we’d see the following:

  • The government debits its asset: $1,000, Federal Reserve notes.
  • The government credits its liability: $1,000, Treasury bill outstanding.
  • The central bank debits its asset: $1,000, Treasury bill.
  • The central bank credits its liability: $1,000, Federal Reserve notes.

When we consolidate the accounts, we end up with the Treasury bill disappearing. The combined entity has Federal Reserve notes (money) as an asset and as a liability. Since it is a phantom liability that can be exchanged for nothing, the government has a new asset with no real liability connected to it. This completes the technical description of quantitative easing.

The term "quantitative easing" has propaganda value. The implied proposition is that "something" is being eased that is currently "tight" or "restricted." This makes it sound as if something positive and good is being accomplished. What is actually going on, however, is a form of seizure or taxation. It is also called inflation, when the focus is on the additional means of spending that has been created.

The Congress lifts the debt limit of the government. Suppose the government then gets money via quantitative easing. All currency in the U.S. and other states is typically forced currency that is made to pass as means of payment by law. Since this currency is imposed by force on the society, the government spending that uses these notes is tantamount to using force to extract goods and services from society. Hence, quantitative easing is seizure and taxation. It is not direct seizure from citizens using soldiers and weapons, nor is it direct taxation by means of tax rates and payments made by citizens. Instead the government takes what it wants by spending its new asset – the newly-manufactured money. This reduces what is available for everyone else to spend on. The reduction in available goods in the private sector is the tax. One result is that society finds that the prices it pays for everything else rise (albeit unevenly). The government’s absorption of goods and services measures the seizure.

Whoever participates in the consumption or receipt of those goods and services is the beneficiary of the seizure. If the government gives money to some farmers, they benefit. If it gives the money to Blackwater, it benefits. If it pays off Afghan warlords or Sunni soldiers, they benefit.

The government rationales for its seizure and taxation by quantitative easing are all false. They vary according to the situation and what appeal sounds most appealing to a population that does not understand what is actually going on. There are usually some simple slogans that have a marked appeal, because of their simplicity and superficiality. Disposing of them takes more argument than the public is ordinarily used to or wants to hear. For example, the rationale may be that government spending is needed to get the economy moving. This is a total deception, since all that is happening is that goods and services are being shifted from one set of hands to another. When there is excess capacity, such as in the automobile industry at present, the government can buy new autos and stimulate auto demand for a time. But since the private society has already shown that it does not want these autos, a collective purchase by the government adds less to social welfare than it subtracts by the seizure of the goods and services that is necessary to build the autos.

Discussing all this in depth is also beyond my limited purpose here. The main point to be made is that when a government resorts to quantitative easing, it shows that it has run out of other means to finance its endeavors. It has reached the end of the line. A government finances itself by taxes. Borrowing is a hidden form of taxation; it defers the taxes to the future. Taxes are more or less visible to the population. They are voted on by Congress or a similar body. They are coercive, but they have at least the partially redeeming feature of being somewhat in the open and somewhat controllable by the citizens who vote for their representatives. Inflationary seizure or coercion via quantitative easing means that the government wants to spend more than it can raise by taxation and borrowing. Its ambition exceeds its grasp. "Ordinary" coercive means of finance no longer suffice. The government resorts to the printing press.

Quantitative easing is a resort to the money printing press. It means seizure and coercion of goods and services from the inhabitants of a country. But it also means either a government that is spending beyond its means, or one whose economy is not strong enough to generate financing by the usual means, or both.

Suppose that a company could no longer issue debt to finance its purchases of assets. The capital market (investors) would be vetoing any further corporate expansion. This happens when a company is badly run or has problems that must be addressed or has run out of good investment projects. The governments that resort to quantitative easing are analogous to such companies, except that they can force the society to finance their spending.

The term "quantitative easing" is a relatively new term. It is one of those modern euphemisms that disguises the use of brute force. Even the term "inflation," which is what quantitative easing is, fails to capture the human impact of such government acts that invade life, liberty, and property.

All such money manipulations, which, of course, are accepted widely by economists as the norm, are the antithesis of a free market. The results cannot be good if society sets up a body with power to inject purchasing power if, when, and as it pleases and to whom it pleases. This is too much power without control over the consequences. This power simply augments government, giving it an uncontrollable option to seize the society’s goods and services. This cannot be a good idea. The supposed benefits of central banking are all illusory and impossible. Standing beside those imagined good effects are the inevitable bad consequences for many, many people, such as the now millions of unemployed whose trades and occupations are now found to be not in demand and who will now be years making the adjustments to find new work and incomes.

May 11, 2009

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

    http://www.lewrockwell.com

    © 2009 Copyright LewRockwell.com - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife