Quantitative Easing Worked For The Weimar Republic For A Little While Too by smonebkyn


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									Quantitative Easing Worked For The Weimar
Republic For A Little While Too
Michael Snyder
Economic Collapse
September 23, 2013

There is a reason why every
fiat currency in the history
of the world has eventually
failed. At some point, those
issuing fiat currencies
always find themselves
giving in to the temptation to
wildly print more money.
Sometimes, the motivation
for doing this is good.
When an economy is really
struggling, those that have
been entrusted with the
management of that
economy can easily fall for
the lie that things would be
better if people just had
“more money”.
Today, the Federal Reserve finds itself faced with a scenario that is very similar to what the Weimar
Republic was facing nearly 100 years ago. Like the Weimar Republic, the U.S. economy is also
struggling and like the Weimar Republic, the U.S. government is absolutely drowning in debt.
Unfortunately, the Federal Reserve has decided to adopt the same solution that the Weimar Republic
chose. The Federal Reserve is recklessly printing money out of thin air, and in the short-term some
positive things have come out of it. But quantitative easing worked for the Weimar Republic for a little
while too. At first, more money caused economic activity to increase and unemployment was low. But
all of that money printing destroyed faith in German currency and in the German financial system and
ultimately Germany experienced an economic meltdown that the world is still talking about today.
This is the path that the Federal Reserve is taking America down, but most Americans have absolutely
no idea what is happening.
It is really easy to start printing money, but it is incredibly hard to stop. Like any addict, the Fed is
promising that they can quit at any time, but this month they refused to even start tapering their money
printing a little bit. The behavior of the Fed is so shameful that even CNBC is comparing it to a drug
addict at this point…
      The danger with addictions is they tend to become increasingly compulsive. That might be
      one moral of this week’s events.

      A few days ago, expectations were sky-high that the Federal Reserve was about to reduce
      its current $85 billion monthly bond
      purchases. But then the Fed blinked,
      partly because it is worried that
      markets have already over-reacted to
      the mere thought of a policy shift.

      Faced with a choice of curbing the
      addiction or providing more hits of
      the QE drug, in other words, it chose
      the latter.

So why won’t the Fed cut back on the
reckless money printing?
Well, as Peter Schiff recently noted, Fed
officials seem to be convinced that any “tapering” could result in the bursting of the massive financial
bubbles that they have created…
      The Fed understands, as the market seems not to, that the current “recovery” could not
      survive without continuation of massive monetary stimulus. Mainstream economists have
      mistaken the symptoms of the Fed’s monetary expansion, most notably rising stock and real
      estate prices, as signs of real and sustainable growth. But the current asset price bubbles
      have nothing to do with the real economy. To the contrary, they are setting up for a painful
      correction that will likely be worse than the one we experienced five years ago.

As I have written about previously, the Federal Reserve is usually very careful not to do anything
which will hurt the short-term interests of the financial markets and the big banks.
But at this point the Fed is caught in a trap. If it continues to pump, the financial bubbles that it has
created will get even worse. If it stops, those bubbles will burst. But as Doug Kass noted recently, it is
inevitable that these financial bubbles will burst at some point one way or another…
      “Getting in was easy. Getting out—not so much. The Fed is trapped and can’t end tapering
      or else the bond and stock markets will blow up. The longer this continues the bigger the
      inevitable burst.”

In essence, we can have disaster now or disaster later.
But most Americans don’t care much about what is happening on Wall Street. They just want
economic conditions to get better for them and for those around them. And to this day, the mainstream
media continues to sell quantitative easing to the American people as an “economic stimulus” program
by the Federal Reserve.
So has quantitative easing actually been good for the U.S. economy?
Not really.
For example, while the Fed has been recklessly printing money out of thin air, household incomes have
actually been going down for five years in a row…
What about employment?
Don’t more Americans have jobs now?
Actually, that is not the case at all. Posted below is a chart that shows how the percentage of working
age Americans with a job has changed since the year 2000. As you can see, the employment to
population ratio fell from about 63 percent before the last recession down to underneath 59 percent at
the end of 2009 and it has stayed there ever since…

So where is the “employment recovery”?
Can you point it out to me? Because I have been staring at this chart for a long time and I still can’t
find it.
So if quantitative easing has not been good for average Americans, who has it been good for?
The wealthy, of course.
Just check out what billionaire hedge fund manager Stanley Druckenmiller told CNBC about
quantitative easing the other day…
      “This is fantastic for every rich person,” he said Thursday, a day after the Fed’s stunning
      decision to delay tightening its monetary policy. “This is the biggest redistribution of
     wealth from the middle class and the poor to the rich ever.”

     “Who owns assets—the rich, the billionaires. You think Warren Buffett hates this stuff? You
     think I hate this stuff? I had a very good day yesterday.”

     Druckenmiller, whose net worth is estimated at more than $2 billion, said that the
     implication of the Fed’s policy is that the rich will spend their wealth and create jobs—
     essentially betting on “trickle-down economics.”

     “I mean, maybe this trickle-down monetary policy that gives money to billionaires and
     hopefully we go spend it is going to work,” he said. “But it hasn’t worked for five years.”

Sadly, Druckenmiller is exactly correct.
Since the end of the last recession, the Dow has been on an unprecedented tear…

Of course these stock prices have nothing to do with economic reality at this point, but for the moment
those that are making giant piles of cash on Wall Street don’t really care.
Sadly, what very few people seem to understand is that what the Fed is doing is going to absolutely
destroy confidence in our currency and in our financial system in the long-term. Yeah, many investors
have been raking in huge gobs of cash right now, but in the long run this is going to be bad for
We have now entered a money printing spiral from which there is no easy exit. According to Graham
Summers, the Fed has “crossed the Rubicon” and we are now “in the End Game”…
     If tapering even $10-15 billion per month from $85 billion month QE programs
     would damage the economy, then we’re all up you know what creek without a paddle.

     Put it this way… here we are, five years after 2008, and the Fed is stating point blank that
     the economy would absolutely collapse if it spent any less than $85 billion per month. This
     admission has proven just how long ago we crossed the Rubicon. We’re already in the End
     Game. Period.
Most Americans don’t really understand what quantitative easing is, and most don’t really try to
understand it because “quantitative easing” sounds very complicated.
But it really isn’t that complicated.
The Federal Reserve is creating gigantic mountains of money out of thin air every month, and the Fed
is using all of that newly created money to buy government debt and mortgage-backed securities. Over
the past several years, the value of the financial securities that the Fed has accumulated is greater than
the total amount of publicly held debt that the U.S. government accumulated from the presidency of
George Washington though the end of the presidency of Bill Clinton…
      The same day that the Federal Reserve’s Federal Open Market Committee announced last
      week that the Fed would continue to buy $40 billion in mortgage-backed securities (MBS)
      and $45 billion in U.S. Treasury securities per month, the Fed also released its latest weekly
      accounting sheet indicating that it had already accumulated more Treasuries and MBS than
      the total value of the publicly held U.S. government debt amassed by all U.S. presidents
      from George Washington though Bill Clinton.

To say that this is a desperate move by the Fed would be a massive understatement. We have never
seen anything like this before in U.S. history.
And look at what all of this wild money printing has done to our money supply…

In many ways, the chart above is reminiscent of what the Weimar Republic did during the early years
of their hyperinflationary spiral…
Just like the Weimar Republic, our money supply is beginning to grow at an exponential pace.
So far, complete and total disaster has not struck, so most people think that everything must be okay.
But it is not.
In a previous article, I included an outstanding illustration from Simon Black that I think would be
extremely helpful here as well…
      Let’s say you’re at a party in a small apartment that’s about 500 square feet in size. Then
      suddenly, at 11pm, a pipe bursts, starting a trickle into the living room.

      Aside from the petty annoyance, would you feel like you were in danger? Probably not.
      This is a linear problem– the rate at which the water is leaking is more or less constant, so
      the guests can keep partying through the night without worry.

      But let’s assume that it’s an exponential leak.

      At first, there’s just one drop of water. But each minute, the rate doubles. So by 11:01pm,
      there’s 2 drops. By 11:02, 4 drops. And so forth.
      By 11:27pm, there’s only six inches of standing water. Yet by 11:31pm, just four minutes
      later, the entire room is under nearly 8 feet of water. And the party’s over.

      For nearly half an hour, it all seemed safe and manageable. People had all the time in the
      world to leave, right up until the bitter end. 11:27, 11:28, 11:29. Then it all went from
      benign to deadly in a matter of minutes.

Are you starting to get the picture?
What the Federal Reserve is doing is systematically destroying the U.S. dollar, and the rest of the world
is starting to take notice.
Why should they continue to lend us trillions of dollars at super low interest rates when we are
exploding the size of our money supply?
It is simply not rational for other nations to continue to lend us money at less than 3 percent a year
when the real rate of inflation is somewhere around 8 to 10 percent and reckless money printing by the
Fed threatens to greatly accelerate the devaluation of our currency.
When QE first started, the added demand for U.S. government debt by the Federal Reserve helped
drive long-term interest rates down to record low levels.
But in the long-term, the only rational response by all other buyers of U.S. government debt will be to
demand a much higher rate of return because of the rapid devaluation of U.S. currency.
So QE drives down long-term interest rates in the short-term, but in the long-term the only rational
direction for long-term interest rates to go is much, much higher and in recent months we have already
started to see this.
The only way that the Fed can stop this is by increasing the amount of quantitative easing.
Right now, the Fed is buying roughly half a trillion dollars worth of U.S. Treasuries a year, but the U.S.
government issues close to a trillion dollars of new debt and must roll over about 3 trillion dollars of
existing debt each year.
If the Federal Reserve
eventually decides to
buy all of the debt, then
interest rates won’t be a
major problem. But if the
Fed goes that far our
financial system would be
regarded as a total joke by
the remainder of the globe
and we would reach
hyperinflation much more
If the Federal Reserve stops
buying debt completely, the
financial bubbles that they
have created will burst and
we will rapidly be facing a
financial crisis even worse
than what we experienced
back in 2008.
But almost whatever the Fed does at this point, the rest of the world will probably continue to start to
move away from the U.S. dollar as the de facto reserve currency of the planet. This move is just
beginning, but it is going to have major implications for us in the years ahead. This is a topic that I
will be addressing extensively in future articles.
Most of the debate about quantitative easing has focused on the impact that it will have on the U.S.
economy in the short-term.
That is a huge mistake.
Of much greatest importance is what quantitative easing means for the long-term.
The rest of the world is losing confidence in the U.S. dollar and in U.S. debt because of the reckless
money printing that the Fed has been doing.
But we desperately need the rest of the world to use “the petrodollar” and to lend us the money that we
need to pay our bills.
As the rest of the planet starts to reject the U.S. dollar and starts to demand a much higher rate of return
to lend us money, the U.S. economy is going to experience a tremendous amount of pain.
It is hard to put into words how foolish the Federal Reserve has been. The Fed is systematically
destroying what was once the strongest financial system in the world, and in the end we are all going to
pay the price.


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