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QE Forever and John Q. Public

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The Federal Reserve’s Open Market Committee (FOMC) has voted to launch a third round of quantitative easing (QE3), this time focused on purchasing as much as $40 billion a month in mortgage-backed securities. This decision to provide liquidity ad infinitum could add nearly half a trillion to the Fed’s balance sheet annually and hold the federal-funds rate near zero “at least until mid-2015.”

Whereas previous rounds of QE have been of limited time and scope, QE3 appears to be open-ended, leading many to dub it “QE Forever.”

The Fed also announced the continuation of “Operation Twist,” a program to swap short-term debt with longer-term securities to lengthen the average maturity on hundreds of billions of outstanding federal debt. Such a repositioning lowers interest payments for now but exposes the US Treasury to the risk of much higher payments in the future.

The stated goal of QE3 is to boost home and stock prices, thereby creating a “wealth effect.” The Fed hopes that, with everybody feeling richer, consumer spending will pick up, and the economy will be lifted out of its deflationary doldrums.

The problem with this plan is that it’s already been tried, and it failed. Recall that it was the Fed’s easy-money policies over the last 15 years that led to the booms and busts in tech stocks and real estate.

Moreover, the Fed has kept interest rates near 0 percent for four years and created $1.8 trillion out of thin air with QE1 and QE2, and it has already purchased billions of long-term Treasuries with Operation Twist.

All this money printing, or its electronic equivalent, has done nothing to revive the economy. In fact, it has prolonged and deepened the crisis, because it has deprived the economy of the deflationary correction it desperately needs. Ron Paul explains:

For all of its vaunted policy tools, the Fed now finds itself repeating the same basic action over and over in an attempt to prime the economy with more debt and credit. But this latest decision to provide more quantitative easing will only prolong our economic stagnation, corrupt market signals, and encourage even more misallocation and malinvestment of resources. Rather than stimulating a real recovery by focusing on a strong dollar and market interest rates, the Fed’s announcement today shows a disastrous detachment from reality on the part of our central bank. Any further quantitative easing from the Fed, in whatever form, will only make our next economic crash that much more serious.

Paul’s criticism is well taken. The notion that creating money out of thin air can lead to prosperity is absurd on its face. Economic growth comes from hard work, capital formation, and the production of goods and services with value added — not money printing.

If the definition of insanity is doing the same thing over and over again and expecting different results each time, then the Fed is clearly insane.

But while the Fed’s apologists claim the central bank’s actions are intended to stimulate the economy and reduce unemployment, QE3 continues to transfer wealth from the middle class to the financial and political elite.

QE3 will have the Fed using taxpayer money to purchase junk mortgage-backed securities from banks. Rather than being forced to sell these securities at a steep loss, certain banks will thus be able to sell them to the Fed at or near par, accumulating Treasuries in the process. This allows the banks to dump their losses onto the hapless public and props up the U.S. bond market, which enables Congress to continue running massive budget deficits.

It’s a great deal for all involved. Right?

Well, not all.

Of course, the odd man out in this inflationary scheme is the John Q. Public who gets saddled with crushing debt, higher taxes, higher consumer prices, and higher unemployment.

According to renowned investor Marc Faber, this is a regime of financial repression. He explains how the system works: “Asset prices will go up and the money will flow to the Mayfair Economy,” by which he means the “economy of the rich people whose assets prices go up and whose net worth increases” in disconnection from the real economy.

In short, the U.S. financial system is rigged to the detriment of the public at large. This has been the case since the Federal Reserve opened its doors for business in 1914. But the Fed’s economic slow burn only became a wildfire after 1971, when Nixon destroyed the last remnants of the gold standard. Since then, politicians and bankers have been free to spend and speculate with abandon, confident the central bank will bail them out with periodic rounds of inflation.

The most telling signs of this plunder have been the erosion in inflation-adjusted wages and the explosion of public debt since 1970. This debt is rolled over continuously by the central bank and the fractional-reserve banking system. As in any counterfeiting scheme, those who get the funny money first benefit most, because they get to spend it on real things before its purchasing power erodes.

The creation of the Federal Reserve and the abandonment of the gold standard in the last century have effectively given a cabal of banking interests control of our nation’s money supply. Their plunder is enabled by the Fed, which wraps its sordid dealings in all sorts of technical jargon about dual mandates, economic stimulus, price stability, and maximum employment. But the fact remains that the Fed is operating a counterfeiting racket for the benefit of a paper-money aristocracy.

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    Tim Kelly is a columnist and policy advisor at The Future of Freedom Foundation in Fairfax, Virginia, a correspondent for Radio America’s Special Investigator, and a political cartoonist.