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Fed Audit Failure Lends Credence to QE Rumors

Interest-Rates / Quantitative Easing Jul 07, 2010 - 03:03 AM GMT

By: Dr_Jeff_Lewis


Just last week, Congress had a critical piece of legislation before it.  Congress, through House bill HR 1207, could pass the bill in its entirety with a simple majority vote, and it would be included in the Financial reform overhaul bill which is currently being pushed through Congress.  Should the audit bill have been added to the financial reform legislation, upon passage, the books at the Federal Reserve would be opened for audit by the GAO – at which point every citizen, politician, and investor would know within six months the extent of the actions taken by the Fed over the past 97 years of pure secrecy.

Failed Vote

The HR 1207 bill was perhaps the most popular bill running around in Congress.  Earning enough “co-sponsors” to pass the bill before ever leaving committee, it seemed as though for the first time in nearly a century, Congress would again get to control, or at least regulate, the money supply.  Its passage was nearly certain, but in last minute deal breaking and arm twisting, a number of democrats who were once supporters of the legislation voted against it.

What We Can Learn from the Failure

The fact that the single most supported legislation in 2009-2010 failed to earn enough votes to pass, even while having enough co-sponsors to pass it with nearly 75% of the vote, shows us that there will be many more expensive and secretive programs coming out of the Federal Reserve.  The bill gained momentum when the Fed started discussing its very own exit strategy, but as the Fed chairman Ben Bernanke again brings up easing, the support for the bill waned into failure.

Quantitative Easing

We can now expect with almost certainty that the Federal Reserve will again begin the dangerous, inflationary game of quantitative easing, whereby the Fed will purchase more Treasuries, mortgage-backed securities, and even corporate debt to reduce interest rates across the board and infuse even more high powered cash into the American economy. 

Since Fed operations happen at the reserve level, or the M0 level on the money supply, each dollar infused into the economy via quantitative easing can actually produce as much as 10 times more currency floating around in bank accounts and savings accounts. 

Therefore, while the Fed may inject only $1-2 trillion in the next round, it will open the door for an eventual $10-20 trillion of inflation after the money works its way through the fractional reserve banking system and multiplies exponentially.

Learn from History

Much of the Fed's success has to do with how well the Federal Reserve can exit the market and pull the fresh credit out of the monetary system.  As Bloomberg recently reported, most of the first quantitative easing purchases were in effect junk bonds – or those that typically sell at a discount to their face value.  At the Fed, however, these bonds were sold at whatever price the banks printed on them as part of new mark to market rules.  Therefore, the Fed essentially spent more than one trillion dollars to get less than one trillion dollars in assets.  Knowing this fact, how can we ever expect that the Fed can bring just as many dollars out of the system as it added to it?  You simply can't.  All you can do is get ready for inflation.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

Copyright © 2010 Dr. Jeff Lewis- 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.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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