The Fed Makes Money

"Quantitative easing," don't you love it? It's the latest business-economics euphemism designed to mislead. I do not know who they think they're fooling: it's like doctors calling excruciating pain "discomfort."

Quantitative easing is the government's way of saying it is printing money. The Federal Reserve Board is printing the money, incalculably large amounts of it, to drive interest rates down to the zero range and ramp up business activity.

The New York Times summed up what that crew of economists, professors and Wall Street operators in Washington are undertaking: "the Fed bluntly announced that it would print as much money as necessary to revive the frozen credit markets and fight what is shaping up as the nation's worst economic downturn since World War II.

"In effect, the Fed is stepping in as a substitute for banks and other lenders and acting more like a bank itself. 'The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth,' it said. Those tools include buying 'large quantities' of mortgage-related bonds, longer-term Treasury bonds, corporate debt

The money for buying these billions or trillions of loans, mortgages, bonds and every other sort of debt does not come out of your pocket now, although it may come out of your hide later on. These are not tax dollars; they are not borrowed dollars; they are not dollars generated by anyone's earnings. They represent no ratio to anything of value. You cannot even say that they have been created out of whole cloth, which would mean that they derive from some kind of antecedent of value. These are dollars plucked from nowhere.

The rationale for the alchemic generation of money out of the thinnest of air is that the economy is starving for greenbacks but is like a sick person who cannot take nourishment by mouth. It must be injected à la an intravenous line into a body with a collapsed circulatory system. What we do not know is if this procedure is akin to pumping blood into a corpse or if the patient will sit up and start feeling better.

Either way, the United States of America's currency is being depreciated. This will not be the first time and, if history is any guide, do not expect miracles. It was tried in the early 1930s in hopes that it would ignite an inflationary surge in prices and, by making American goods selling for depreciated dollars cheaper, our exports would perk up. Neither happened.

But other things did. Other trading nations depreciated their money so that their export goods would be cheaper and, as did the United States, raised tariff barriers to keep other nation's exports out. You cannot find a better example of a zero-sum game.

It looks like we are seeing at least a partial repeat of seventy-five years ago. Washington, instead of raising tariffs on imports, is taking to subsidizing at least one major American industry threatened by foreign competition, the automobile industry. They are doing the same in Russia, where the natives in Vladivostok were so upset at the prospect of prohibitive tariff increases on imported foreign cars that they rioted. Japan and China, for much the same reasons as here, are dropping their interest rates.

As of now the EU is less enamored with lowering interest rates. Apparently somebody on the continent has figured out that individuals and businesses without jobs or customers are not going to borrow money at any interest rate, regardless of how low it might be.

Even before the Fed announced it was going in for quantitative easing, the value of the dollar plunged. People, businesses and nations buy US government bonds because they believe such bonds keep their money safe and earn a modest amount of interest. If American money is no longer going to be safe because it is being devalued and US bonds are going to be paying close to zero interest, foreigners will stop buying them. Since we have been living off borrowed money to pay for our gasoline, our cars and our clothes, quantitative easing, instead of getting business going again, may be the shovel we do not need to dig ourselves into a deeper hole.

If the dollar is debased past a certain point, foreign investors will panic, sell their dollar-denominated bonds at any price they can get, bolt for the doors and leave us with a godawful depression and an inflation such as you won't believe until you go to the supermarket and pay $100 for a quart of milk. Something of this sort happened in Argentina a few years ago, literally pauperizing that nation's middle class.

Cheapening the dollar runs risks and poses serious problems in every direction. The dollar as the international reserve currency, the money that is accepted everywhere as the preferred means of payment, is the foundation of American power and influence around the world. We will be presenting ourselves with a major national security problem if we continue to undermine our own currency.

• Get The Nation at home (and online!) for 68 cents a week!
• If you like this article, consider making a donation to The Nation.
• Reprint this article. Click here for rights and information.