Obama was fired by Congress, the Fed will not be tamed

While arms owners and opponents of government spending elected Republicans to Congress, Ben Bernanke, the head of the Fed (US central bank), confirmed the second wave of quantitative easing in $ 600 billion (approximately CZK 10 trillion). What carries more weight?

The building of the American Fed
The building of the American Fed

Contradiction in quantitative easing[1] and budgetary responsibility is obvious. Republicans want to curb state budget spending, keep taxes low and reverse health care reform, the flagship of Obama's policies.

Fed by buying government bonds, he wants to release another monstrous amount to the economy in the course of one year, which has the task of stirring up a "rigid" economy. Although the economy is rising and the recession has ended, according to official statistics and the mainstream economy, high unemployment remains in the economy.

The companies are probably not hiring new employees yet, but rather focus on liquidating inventories and increasing the workload of their current employees. They try to act carefully and wait for savings. The closest recipients of the first monetary expansion a TARPU[2] in addition, it holds funds in its balance sheets. The financial sector is therefore afraid to free up money and the manufacturing sector is not taking on capacity. But how does such a situation affect the market?

It is manifested primarily by rising prices[3] commodities and stocks, very unlikely to rise in food and consumer goods prices. Consumer price index (CPI)[4] It thus seems to be "slow." Inflation is thus reflected in the balance sheets of financial institutions in particular, as well as in the prices of gold, oil and others. Banks are simply trying on money printed ex nihile[5] earn and use them before the amount of money in the economy is reflected in the price level.

The astute reader will now say to himself: yes, voters basically voted "unnecessarily", because in order to really influence something, they would have to prevent the Fed from quantitative easing number 2 (QE2), which seemed to equal regressive inflation tax.

Why a regressive inflation tax?

First: Republicans will most likely not defend Congress because Obama will be able to mobilize his now silent majority in the presidential election, leaving the position of Congress and the presidency budget-irresponsible.

If you make a historical series, you will find that what looks like a divination from a crystal ball to me today is almost a law. The economy is not heading for a rocket recovery or falling unemployment. Confidence in the economy is not great, so in 2 years we will see further sobering up. If the economy recovers by then, Obama will use it as a result of his work. He will point to statistics that will suit him. He says that the situation would be worse without his stimuli and other actions.

In a more likely situation of slow growth, relatively high unemployment and inflation, Obama will be able to rely on Republicans that their reluctance to raise taxes and cooperate on reforms will have a negative effect on the Obama administration's plan, and he needs more time and space for his work. Republican Reagan 2 would have to emerge to work a miracle.

Second: The Fed enters the scene. Inflation and the depreciation of the dollar, which will result from quantitative easing, will be reflected in the middle-class wallets of those Republican voters more than in the pockets and coffers of the big banks that make money on the whole carousel.

First, the money gets to the banks, which use it before it is reflected in market prices, and only after the mallow do the others get it in their pockets. If the dollar weakens, almost everyone will lose it this time and pay part of the debt at higher prices. It's actually impossible to determine exactly who will lose, though it is very certain that the government will earn. At the same time, the government will not reduce the expenditure side of the budget under such pressure, as it will have additional revenue from the inflation tax.

Third: The inflation tax will probably be regressive, it is known that the propensity to consume decreases with increasing income.

Fourth: Although one might argue that budgetary responsibility means keeping taxes low, I must argue. By bringing more funds into the budget through taxes, you also create room for spending in the budget, reducing the pressure on budgetary responsibility.

The Fed was the first to fire. However, other central banks will run after him. Restrictions on wealth growth await us. Currency war protectionism.


[1] From the English quantitative easing, expressing the policy of large-scale monetary expansion through the purchase of government bonds. It can be described as printing money out of nothing. The government - already in debt - will issue bonds that the central bank will buy. Given that US bonds are in huge quantities, if they went on sale at once, their price would go to zero.

[2] The Troubled Assets Relief Program (TARP) was a rescue package to buy toxic assets from banks' balance sheets, which in essence also increased the money supply.

[3] In the economy, with the current slow recovery and thus low year-on-year GDP growth, the money supply is growing, not the amount of production. If there is roughly the same amount of goods in the economy, but the amount of money is growing disproportionately more, inflation must naturally come. This inflation can be curbed by the Fed through the subsequent withdrawal of money, monetary restrictions, but a similar dimension of restriction in monetary policy is still untested, the Fed is skating on thin ice here. It is far from clear how high inflation will be. It can be 4 but also 12 percent. What we have to realize in any case is the fact that we cannot just monitor the consumer price index, that is, the prices of the ordinary consumer basket. Quantitative easing is very likely to cause bubbles in asset, stock or commodity prices to inflate, as we have already mentioned. The Harvard economist M. Feldstein also expressed this idea.

[4] The Consumer Price Index (CPI) is a price index from the so-called consumer basket, which is determined and calculated by statistical offices.

[5] After the abolition of the gold standard, money is created without real commodity coverage. Central banks have a monopoly on issuing such money.

The article was originally published on author's blog.

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