Quantitative Easing and Inflation

Recently I was looking at inflation rates and reading what some progressives had to say on economics. I knew inflation rates were low and in part that was due to cheap imports. Imports alone couldn't account for $4 trillion in Quantitative Easing inflation dollars. For the past few days I've been looking for these answers and here are my conclusions.

The answer is far simpler than I imagined, and it also answers a question I had last year. Where are the missing $3 trillion Fed dollars? Today that question would, should be changed to—Where are the missing $4 trillion fed dollars? The answer is that it's stored at the Federal Reserve in the form of bonds, Treasuries. and Mortgage Backed Securities(MBS), or at least should be.

The US government has been attempting to practice Keynesian economics. The basic principle of John Keynes economics is that the government pumps money into the economy. That money can come from either borrowing or printing. In the age of computers that money can be created through digital information. In this case it seems the Federal Reserve has been borrowing the money. It's not important how the Fed got the money for QE. What's important is what happens to all that money.

Right now the Fed is sitting on $4 trillion in bonds, securities and treasuries accumulated over almost five years of Quantitative Easing. It's hard to determine what the value of those bonds will be at the time they are sold. The eventual problem will be how to inject that money back into the economy without causing hyper inflation. The Fed could simply hand over that money to the US Treasury and be placed into the general fund. The Fed banks could simply keep the money and pay the US government their 6% interest as determined by the Federal Reserve Act.

The Dollar Versus Gold and Oil Since 1974

Notice how the three tracked together until the 90′s when the dollar was being artificially inflated. If the Fed had been doing its job the dollar would have continued to track with oil and gold. Now that the dollar is being purposely devalued, the world is going to be forced to trade oil in some new currency or gold. Just follow the green line into the future and you can find the ruins of what was once the United States of America.

The Dollar, Gold and Oil Since 1974

Compares the movement in the real dollar index with gold and oil prices since 1974. The oil and gold series are adjusted for CPI inflation and all series are smoothed with a 12-month moving average. The real dollar index is adjusted for the relevant trading partners own currency inflation rates and shows a distinctly different picture than the nominal version of the index.

The Progressive Federal Reserve

The Fed was created to control the economy, which is a socialist mentality. They feel that they can take the ups and downs out of the normal economic cycle. Eventually the progressives got their opportunity to test their theory. In 1929 we began the great progressive Utopia. Roosevelt did what the progressives wanted; they almost eliminated the middle class. That left only the rich and the poor. FDR was hailed a hero because he provided the jobs in which he stole from the people to begin with. It was only death that kept FDR from becoming dictator.

It was only until the end of ww2 in which taxes were dramatically lowered that the country climb out of the depression created by the progressive’s Utopia, but the Fed remained. Enter 2007 and we watched, as the fed seemed to weekly lower the prime rates in an effort to maintain a strong economy, all the while the great housing bubble created by the progressives began to leak. In 2009 that bubble burst and the Fed dropped lending rates to near zero.