Frederick Douglass

"Power concedes nothing without a demand. It never did, and it never will. Find out just what people will submit to, and you have found out the exact amount of injustice and wrong which will be imposed upon them..." Frederick Douglass

Saturday, October 23, 2010

Quantitative Easing, and What it Means for Wage-earners

The Fed recently announced a change in monetary policy. Citing the danger of deflation which high unemployment ( about ten percent ) and low inflation ( about one percent ) can create, Chair Paul Bernanke said he would pursue a course of "quantitative easing."

What it is that the Chair wishes to remedy is the illiquidity caused by the "credit crunch." Currently, there is a shortage of money in the economy which has caused the recession and is preventing a recovery. Hoarding enormous sums and identifying the effect of their monetary contraction policy as its cause, the big banks claim that the economy is so bad that it is too risky to make loans. They wont budge.

"Quantitative easing" is bankspeak for debasing the currency. Typically when the Fed wants to increase the amount of money in circulation it lowers interest rates. Since low rates make borrowing affordable, more loans requests are made and money flies out of the banks and into the economy. This is not a possibility now as interest rates have been near zero for several years. With low rates not furnishing the desired surge of funds, the Fed plans to create new money and spend it directly into the economy. It will do this by purchasing bonds.

This extra money in circulation will, Bernanke hopes, cause inflation to rise to two percent. [1] Deflation, the drop in prices which occurs when consumers have little money to spend, will thus be averted.

Good news, eh? The Fed comes a-charging to our rescue? Not quite. The first thing one needs to understand is that the Fed's stated motive for its new policy is rubbish. It's the same old anodyne propaganda we always get from the bankers who own our economy. It's designed to pacify, to make us believe that this redirection of policy is undertaken for our benefit. It isn't. Bernanke does not work for us, he works for the private interests which own the Fed. He doesn't care about us. If he did, he wouldn't hold the position he does. His job is to maintain and, if possible, increase his patrons' wealth and power. When policy changes, it is in response to their concerns, not ours.

Deflation is a threat to corporate profits, this is one of the reasons for the "easing." At least some of the bonds the Fed will buy will be issued by banks, no doubt the same banking houses which also own the Fed. More money for them. A rise in inflation devalues the currency, this will make it easier for U.S. exporters, currently losing the globalization war, to sell their goods in the international marketplace as the value of the currency of prospective buyers will rise as the dollar descends. The real target of this devaluation is China. It pegs its currency at a fraction to ours, meaning that it maintains its money at a fixed ratio to ours. When ours goes up, they raise theirs proportionally so that the ratio is preserved. They devalue proportionally when the dollar falls. This keeps Chinese exports cheaper than ours and they've been winning the international trade competition as a result. This has cut into the profits of the banking houses ( and their other business interests ) and is, I believe, the principal motive for the new quantitative easing policy. The Chinese central bank will reduce its currency in response, but the less the overall value of each is, the less the difference matters. And there is a limit to how far they can devalue their currency before it causes civil unrest, already a combustible problem in China. It is no accident that China will be the nation most adversely affected by Bernanke's new policy.

You will be adversely affected as well. With the U.S. and China weakening their respective currencies in order to garner a larger share of the globalization booty for their wealthiest corporate tycoons, the buying power of your paycheck will decline. Bernanke has made everybody who earns American dollars a little bit poorer. This will not matter to you if you own a bank or other business which will benefit from a weaker dollar. But if you work in a bank or for any other public or private employer, and you do not receive a yearly cost-of-living allowance ( COLA ), you just got a pay cut.

And if you think that two percent inflation is not enough to worry about, then please scroll down the blog and read "change We Can Believe in."

Two percent inflation is just the beginning. It's going to get worse, much worse. Once the banks begin to release the sequestered trillions of tax-payer TARP money from their vaults, we will encounter a glut of money entering the marketplace the likes of which we have never experienced before. In those countries where the banks have begun to lend, inflation is running about five percent. It will happen here too, it's not a question of whether but when. Five percent inflation will bankrupt most wage-earners in a matter of a few years.

If you do not have a COLA, get one. Insist! If you do have one, you must to retain it.