‘Quantitative Easing’ and Inflation

The United States Federal Reserve announced on Thursday that it is embarking on a third round of ‘quantitative easing,’ buying up forty billion dollars of securities each month in an effort to boost the economy. ‘Quantitative easing’ is the preferred Fed euphemism for printing money and ‘injecting’ it into the American economic system. These buys will continue until the “outlook for the labor market . . . [improves] substantially,” and will be increased if necessary. Some analysts expect that the Fed may end up adding a whopping $1.7 trillion to its balance sheet over the next several years as part of QE3, in addition to the $1.75 trillion it added in QE1 and the 600 billion dollars in QE2.

So what is the purpose of these QE money-printing schemes? Well, the idea is that by making more money available to banks for loans, that will then make it easier for companies to expand and grow. This ‘easy money’ will hopefully allow businesses to increase their hiring, which will reduce the unemployment rate—the end goal. The International Monetary Fund (IMF) says that QE1 and QE2 contributed to restoration of market confidence and reduced systemic economic risks, but former Fed Chairman Alan Greenspan calculates that they had virtually no impact whatsoever. Whoever is right, unemployment remains well above eight percent. The Fed is clearly dissatisfied with the results of its QE programs, or else it wouldn’t need to try a third round. Of course, I tend to think that when a policy fails you ought to try a different policy, rather than doubling-down on the one that didn’t work.

When more money is put in circulation, it tends to reduce the value of that currency—in other words, it causes inflation. Inflation has been hovering in the five-to-ten percent range since 2008, meaning that each year the cost of living is getting significantly higher. The Fed and other government agencies have reduced the impact of this inflation by lying about it; according to the official cost of living values, inflation is at record lows below two percent. Federal agencies and most companies index their cost of living wage increases against these official numbers, which are achieved by arbitrarily excluding food and fuel costs (among others) from the calculations. So, although actual cost of living is increasing, wages have stayed-put. This has allowed companies to avoid broad layoffs and, more importantly, to keep their prices from skyrocketing . . . but it has also meant that most workers in the United States have taken a hidden pay cut, and their savings aren’t worth what they should be.

Credit where credit is due, the government’s policy of lying about inflation—distasteful as it is—is pretty clever. If the Fed had printed their trillions of dollars, and told the truth about the impact it was having on the cost of living, employers across the country would have had to give their employees matching five-to-ten percent raises. To cover the increased labor costs, they would have had to raise their prices. Raising their prices would have contributed to raising the inflation rate even more. Truthful numbers could have led to a poisonous feedback loop, eventually creating a hyper-inflationary cycle that could destroy the dollar. But if telling the truth about your policies would lead to that kind of destruction, it doesn’t mean you should lie instead . . . it means you should change your policy.

The Fed’s goal of improving the employment situation is laudable, but debasing the dollar isn’t the way to do it. The Federal Reserve was established by Congress with three objectives: low unemployment, stable prices, and moderate interest rates. It can’t ignore one of those objectives in the name of achieving another. It has to try to balance all three—although, admittedly, that is easier said than done. Inflation is a pernicious thing. It is good for debtors, but bad for savers. If you owe somebody a thousand dollars, you’re glad when the real value of that debt decreases. If you have a thousand dollars in a savings account, however, its value reduction is a reduction in your actual net worth. In other words, inflationary policy rewards the irresponsible person carrying huge debts, while punishing the responsible person who has a lot of money in savings.

Hiding inflation from view blunts the impact, and helps keep it from getting worse, but it doesn’t change the underlying fact that it’s here and it’s having a negative effect on people. Those of us who live within our means are being punished, having some of our net worth whittled away, and for what? For reducing the debt load of people who have overreached and mismanaged their finances? For a nominal, possibly non-existent reduction in the unemployment rate?

Fed Chairman Ben Bernanke, who was originally appointed by President George W. Bush (R) and then re-appointed by President Barack Obama (D), admits that inflation may get pushed above his target of two percent (presumably using the fictional numbers, not the real numbers). “If inflation goes above the target level . . . we take a balanced approach. We bring inflation back to the target over time but we do it in a way that takes into account the deviations of both of our objectives from their targets.” It’s nice to see Bernanke at least acknowledge that QE programs drive inflation; the first step to solving a problem is admitting that you have one.

Scott Bradford is a writer and technologist who has been putting his opinions online since 1995. He believes in three inviolable human rights: life, liberty, and property. He is a Catholic Christian who worships the trinitarian God described in the Nicene Creed. Scott is a husband, nerd, pet lover, and AMC/Jeep enthusiast with a B.S. degree in public administration from George Mason University.