Say NO! to QE

Janet Yellen took office right after a time where her new job is tremendously public. The chair position has always been public to a degree, but Congress and the Executive Branch have demanded more transparency and explanations for those wizardly ways. Yellen has not shied away from aggressively embracing this transparency and has made the news quite a bit in three months. I remember when she was testifying before Congress and she let slip an answer that convicted Congress for many of the problems we currently face. She pointed out that Congress has shirked its part of the bargain for helping bring employment to the American people and, in doing so,  unintentionally spooked the short term markets with her admission that interest rates and cheap money are only one piece of the total treatment package necessary to fix America's ailing economy. It IS probably upsetting to have a mandate to deal with unemployment when you can't actually hire people. She hoped her statement would lead to an epiphany by Congress that it should begin a works program so the money the Fed is providing so cheaply gets to the people who need work and would also become consumers in the economy. We're still waiting.

Here's irony for you: QE 1 was $100billion/month. QE 2 was $75 billion/month; QE 3 began at $40billion/month and when combined with Operation Twist was $85billion/month. Averaging them all together, the Fed has pumped an average of $83.75 billion per month into the economy. For the same cost, they could have employed 19.7 million people at $4250/month, the American median income. There are about 116 million full time workers in America, and it wouldn't take 19 million more for the economy to hit a huge boom cycle. Hire three million people at $3000/month to build things. The payroll is $108 billion a year. Unskilled or “wrong-skilled” workers get new training in construction and also spend money in their localities which further stimulates the economy.

Businesses need customers. Customers need money. Money comes from jobs. Yellen was making the obvious point that with the amount the Fed has “invested” in the American economy, Congress could have done much more easily with a works program. Three million new workers would be a huge new government program. But it's cheaper than what we're doing; it's transparent stimulus, and it puts money in the hands of average American people rather than private corporations and banks. Even if we also spent $400 billion a year on real estate and materials, we would be spending half of what we're spending now.

The catch is that Fed stimulus doesn't look like spending. I could become a conspiracy theorist and make up stories that this stimulus was the deal with the demon (Dimon?) back in 2008 when Chase stepped in with a whole lot of cash to prop up the GM and therefore the financial system. But I digress. At any rate, the Fed has already done what it's done – the money is printed. We can only hope that it makes its way back into the American economy.We can't unprint that money, so we have to figure out where to go from there.

A brief analogy with concrete, which is a large part of my day job. You make a concrete mix, and it will have a certain strength. Rock, sand, cement, and water mixed in the right proportions become strong enough to support 100,000lb vehicles. Once it's in the mixer though, there's only one thing you can do – add water. You add the water to buy yourself time to get the concrete placed, to keep the mix from setting up before you need it to. But you can't subtract water, and the water weakens the concrete's strength. You buy yourself a little bit of time but you lose strength. Lose enough strength and that concrete will no longer support the loads you need it to, and it will structurally fail. If an engineer comes and tests the concrete's strength and it isn't the strength specified, it will have to be ripped out and begun again.

The Fed has been adding water now for five years. They bought us time to get people employed; time for businesses to regain customers. As that money makes its way into the economy (and QE truly is “trickle down,” supply-side economics), the money will lose value. Eventually, that new money will be spread around to millions of people, and it will become less valuable.

A catch 22. You are supposed to help employment, so you first lower rates to zero. That doesn't work fast enough, so you start to actually print money to put into the economy. This, with the expected eventual inflation, pushes effective interest rates below 0. Still, jobs are created but at a slow pace.

Let's face it:QEwhatevernumberyouwanttoadd is becoming liquidation for American businesses and real estate on foreign markets. We are just BEGGING foreign countries to come in and buy our stuff. But what happens when they actually own it all?! We are going to become indentured servants to foreign investors. What's more, since many of those investors represent sovereign wealth funds, we could end up with a significant number of Americans actually working for foreign countries' governments.

It is imperative that our government and the Federal Reserve Board get a hold of this situation and fast. The government has many weaknesses, but one thing it does have is transparency and public information requirements. Trillions of dollars out on the private market right now do not, and we have no way to know where all of that money is going.

One more even dirtier analogy. QE is an upper for the economy – think crack cocaine. It creates an instant high that immediately begins to taper down. The only thing that gets that high again is more crack. And, far more dangerous than some other drugs, crack is both physically and mentally addictive. Not only does the mind desire the feeling of the high, the body becomes dependent on the chemical. The American economy used to be addicted to the drug of consumer spending. To replace it, we started taking QE. Somehow, some way, we have to get into rehab before the normal course of action for drug addicts takes place for the entire American economy.