Quantitative easing drives down dollar value
In the aftermath of Tuesday’s election, many people will focus on who will be leading this country for the next four years. However, there is something that even the president has very little control over, yet poses a large threat to the future stability of the country.
That threat is the Federal Reserve. The Fed threatens our economic security because it injects money into the economy, and this action can lead to many unintended consequences. The Fed calls it quantitative easing, or QE, which means that the Fed is printing money, buying long-term assets from the banks and then allowing the banks to inject it into the economy. In September, the Fed began the third round of QE since 2008. The problem however is that QE has not really fixed the problem as we still have an 8 percent unemployment rate and a struggling economy.
One of the main problems with QE is it devalues the dollar. As more money goes into circulation, each dollar becomes worth less. Devaluing the dollar is very dangerous because it can lead to rapid inflation, especially when the economy starts to make a comeback. Also, commodity prices during inflation increase faster than wages, and this leaves people making less and less money in real terms. If you don’t think the dollar has devalued since 2008, just look at the price of gold. Gold has risen from $871.96 an ounce in 2008 to $1,571.52 an ounce in 2011. This is because people have less trust in U.S. currency due to the Fed’s QE.
The real danger with QE lies in what happens after the economy finally does recover. In order to pull this excess money out of the economy, the Fed will have to raise interest rates to very high levels. Higher interest rates make it harder to borrow, which in turn hurts homeowners, small business owners and anyone who wants to take out a loan. The consequence of all of this is that as the economy heads towards another recession, people will be unable to borrow money due to exorbitant interest rates.
Lastly, QE makes it harder for our government to borrow money. If our government cannot borrow money when it runs a deficit, where is that money to finance the deficit going to come from? The Fed may have to buy up the U.S. debt, paying the government in bills hot off the printing press. This could cause doubt around the world as to the real value of the dollar.
The Fed’s actions in enacting three rounds of QE are especially troublesome when you realize the Fed is its own entity, not subject to the will of the people or even the president. The Fed is a quasi-government agency, and it is threatening the stability of our country by using QE as a quick fix. Americans need to realize the only way out of this recession is hard work, not just pumping more money into the economy every time the going gets tough.
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