Quantitative Easing

So the Federal Reserve is looking to increase the rate of inflation. They are looking to up the annual rate of inflation from 2% to 4%. While that might not seem like a huge number, that's not the whole story. There is talk right now of policy makers accepting inflation rates climbing above that 4% target. (MarketWatch)

This is a slippery slope. Since we became a fiat currency in 1971, the Fed has had complete control of our money supply. While there have been issues in the past, the ground work has been set for much greater deception in the future.

There are several terms used by the government and economists that help explain reasons for inflation and our national debt. However, what they are not telling you is these numbers are not what they used to be. Let me give you some examples.

The CPI, or Consumer Price Index, is a way to track over all consumer prices. Have you ever noticed the costs of certain goods are getting dramatically more expensive (going up faster than the rate of inflation)? You ever wonder why the CPI stays in check with the inflation rates, even though the prior seems to be so obvious? Well, in 1993 a bill was passed allowing the use of hedonic's in the CPI.(www.bls.com) What are hedonic's? Well, in relation to the CPI, the government can use hedonic's to keep an items "cost" in relation to the CPI lower then it "should" be. Let me give you an example. Let's say the price of a new Chevy Truck was $30,000 last year. However, this year the same truck now cost $33,000. You would think the government would have to equate for the new number in the CPI, right? WRONG! All Chevy needs to do is "prove" the vehicle is 10% safer or 10% more energy efficient or 10% more something else (you pick it) and the CPI says it doesn't cost anymore than it did last year. They also have changed how they calculate the CPI - giving a lower weighting to consumer goods rising in price and a higher weighting to goods lowering in price (NIA.org). Why do they do this? The CPI is one of the biggest factors in determining the national rate of inflation. How can our national inflation rate be accurate with adjustments in the CPI like this?

The M3 money supply is something most people have not heard of. It is used to be part of the equation in figuring out inflation. However, in 2006 they passed a bill making it so the M3 money supply no longer had to be published or made public. They now use the M2 money supply to help account for inflation, which is a much smaller number as it does not account for large deposits or other long term deposits by the government (wikipedia). This is a HUGE deal. This is how they are covering up all the money they are printing for the stimulus, deposits made by national banks (to increase their reserve funds) and deposits held by the government for corporate bailouts.

So, if you take those two aspects of how inflation is calculated now compared to 20 years ago, it is not a true indicator of inflation. The bottom line is that somewhere down the road - unfortunately, not too far down the road - a correction is going to need to be made. Sure, we can continue on this way with the Fed printing money at need for bailouts and international debt, but it won't last for long. There has NEVER been a successful government in the history of the world that has economically successful using quantitative easing. Add this up with a lot of the facts from my past blog entries and you will see there are a lot of reason this is such a scary thought.

The United States' economic system is way out of whack. Interest rates need to begin rising slowly, yet immediately to help bring in some of the 120% additional money supply our government has printed to "ease" its short term pains. Yes, in the short run it will be tougher, but things will be much worse if they try to push through another $847 billion stimulus (or maybe more next time) or spend billions on corporate bailouts sure to be needed. The larger our excess debt becomes, the more money we simply print, the more devalued our dollar becomes - meaning the more inflation we deal with.

The more devalued our dollar becomes, the more expensive imports from places like China, India, Japan and Taiwan cost. We also stand to lose our place as the worlds reserve currency as other countries' national banks are reducing the amount of money has have in US Treasuries. Granted, most countries have not pulled out of our Treasuries too much yet, but the more money we print, the weaker it makes their investment in us. We might be able to keep on this trend for another short period of time, but policies in our economy need to change sooner than later.

Quantitative easing of our financial troubles as a government and as a nation is not the solution. Unfortunately, a bubble of over-spending on consumption has put us in a rough place. We need to take our lumps, correct the system, increase the interest rates and get back to a solid currency before it is too late and my children's generation grow up in a much more impoverished nation.