Economic collapse still underway as Federal Reserve’s QE programs show diminished returns

Federal Reserve Chairman Ben Bernanke delivered his semiannual two-day testimony to the Congress this week. His prepared remarks and question and answer period with Congressional and Senate representatives confirmed what most of his critics knew all along: he is just prolonging the economic downturn with the same failing policies, as retired Texas Republican Congressman Ron Paul put it in a statement Wednesday.

Bernanke explained that the looming budget cuts would hurt the economic recovery, interest rates will remain low for quite some time and the unemployment number would stay above six percent for the next three years. Bernanke went as far as defending his quantitative easing policies by saying the Fed’s policies help the average American and not Wall Street, the big banks or the federal government.

As Economic Collapse News reported Tuesday, there doesn’t seem to be any retraction in aggressive inflationary Fed policies. The Fed Chair has confirmed that the $85 billion acquisitions each month of Treasury securities and mortgage-backed securities will stay for an indefinite period of time until the labor market improves.

Despite the Fed’s balance sheet receiving an additional $1 trillion this year – perhaps QE is an eternal policy and will add more to the central bank’s balance sheet – there doesn’t seem to be any substantial return to the markets, the average American’s pocket and in the overall economy.

An author at Zero Hedge made the observation that it is costing $85 billion a month just to keep the Dow Jones near the 14,000 mark and the S&P 500 close to 1,500 – the Dow has reached the 1,400 threshold three times since the year 2000. Indeed, as previous data has shown, the markets will just wane and may fall to new lows.

It is also costing $85 billion a month (at the Fed) to keep the unemployment rate at 7.9 percent (low-20s for other economists).

Since the Fed instituted the first round of QE, it received staunch criticism from various economists, think-tanks and pundits. Essentially, the argument was it’s the “wrong medicine for an ailing economy,” as the Heritage Foundation espoused late last year. Not only will QE cause inflation it is inflation because where is that $1 trillion coming from?

Furthermore, in the coming years, American consumers will realize at how QE and past and present Fed policies have been the cause of the rise in prices at the grocery store, at the gas pump and in the overall marketplace, warned Peter Schiff, president of Euro Pacific Capital. Meanwhile, savings accounts will be deteriorated because of the zero percent interest rates and the inflationary ramifications, a point that was made by Republican leaders in Washington this week as some grilled the Fed Chairman.

Not everyone thinks the Fed’s QE is a bad idea. An article in the London Telegraph pontificated the virtues of QE by claiming the first round saved the United States from a financial collapse, while the second and third installations have “prevented the global strategic order from unravelling.”

The article also suggested that globalization and savings have been the root cause of the global economic downturn, while “Mr Bernanke is not going to snatch the punch bowl away just as the US embarks on fiscal tightening this year of 2pc [two percent] of GDP, one of the most draconian budget squeezes in the last century. But he may have concluded that the Fed is sailing too close to the wind, and must take defensive action soon (sic).”

Many would refute each point. Some economists and organizations do not lay the blame on globalization and savings as the primary culprits for The Great Recession. Globalization, according to the Adam Smith Institute, has helped open up new markets and created even more opportunities for both the developed and developing world.

Over the past two decades, the U.S. hardly had any savings as it transitioned from a creditor nation to a debtor nation, according to various data. In order to pay for the vast domestic and foreign expenditures, Republicans and Democrats in Washington had initiated policies of borrowing, putting everything on the credit card and inflating.

Of course, it would be suffice to say that Bernanke is certainly not going to be cutting back any of the central bank’s extensive and expansionary policies, but to say that the $85 billion sequester is “draconian” is quite asinine. The U.S. maintains a budget of $3.54 trillion, while the budget deficit is $1.04 trillion and the national debt is more than $16.6 trillion. Calling it “draconian” may be a slight stretch; maybe “pittance” is a better word.

“I believe that the sequester is a pittance that does not cut enough. If the sequester were to take effect, our spending would only be cut by 2.3%. Let me repeat that — these “eviscerating” cuts will leave our country with 97.7% of our current spending, cutting a mere $85 billion from this year’s $3.6 trillion budget,” wrote Kentucky Republican Senator Rand Paul in an op-ed piece Thursday.

“The sequester barely begins to skim the surface of the problem. Since taking office, President Obama has increased federal domestic agencies’ budget by 17%. This 17% increase since 2008 will have to endure a 5% cut. Even with the sequester, the federal government will spend more in 2013 than it did in 2012 — or more than $15 billion.”

The Telegraph author quoted an author and reiterates his concept that the “winners” in the global economy will be those who run budget deficits and the “losers” will be countries that have budget surpluses – this may sound like former Vice President Dick Cheney when he said “deficits don’t matter.”

If that is the case then why doesn’t the government just spend $10 trillion a year when it takes in only $2 trillion? Using this logic, the government could go further: implement a $100 minimum wage, force all millionaires and billionaires to pay 100 percent in income taxes and inflate the money supply and give each American $1 million.

“It will be harder from now on if central banks conclude that their arsenal is spent,” the author concluded. But the question is: what arsenal did the central banks have in the first place besides inflation and instituting reckless (Keynesian) initiatives?

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