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

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. 

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From The Economic Collapse Blog:

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

Real Median Household Income

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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

Employment-Population Ratio 2013

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…

Dow Jones Industrial Average

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 everybody.

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…

M1 Money Supply


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In many ways, the chart above is reminiscent of what the Weimar Republic did during the early years of their hyperinflationary spiral…

Hyperinflation Weimar Republic

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 rapidly.

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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Comments

  1. Germans did not want to pay for the reparations they were charged as a result of World War 1.  They paid some of this money, but decided to default on much of it.  As a result, the French occupied the Ruhr region and began to extract the reparations directly,  through coal, timber, and other natural resources.  The “passive resistance” of the Germans led to the hyperinflation.  Sound monetary principles and economic discipline and the debt could have been paid off.  But they were unwilling to pay, and started creating the money out of thin air.   

    • As a descendant of Germans, I can say that it was far less a matter of the Germans deciding not to pay the reparations but that the reparations were so draconian that NO nation COULD pay them, even if they had a good economy, which war-torn Germany did not.  These reparations were not so much about money as about punishing the German people.  It did punish them and many thousands of Germans literally starved to death thanks to a combo of so much wealth being sucked out of the country in such a short time and the continuing allied blockade of Germany.  They needed to import food for their people and could not thanks to all this.  After a while, any country would tire of such treatment and take action to stop it.  With even a little better treatment, particularly from France and the UK, WW-II might never have happened.

  2. My step dad said something about 40 years ago that stuck with me.
      It was something from de Tocqueville, who said ‘The American Republic will endure until Congress finds it can bride the public with the public’s money.’   I think he also said that when the populace can vote themselves largesse from the treasury they will do so.  We are at the end game of both sayings. 
    Brainy sort, deToqueville; an astute observer of the American and human condition. 
    Half the US population gets something for nothing.  The other half pays for it.
    But everyone is embedded in the FIAT/DEBT PARADIGM. 
    There is no escaping it unless one lives a life with as little counterparty risk and as much in the way of quality assets outside this paradigm. 
    And they say silver and gold are expensive.  They are if you have no FIAT but they will be without peer when this whole escapade implodes.
    The 2008 debt crisis unfolded over a year, with Bear Sterns, Wamu, Wachovia, Merrill Lynch, Ginnie Mae, Fannie Mae, IMG/Lehman creashing in a sequence that spread over about 8 months. It took about 12 months from top to trough but really started in earnest about April of 2008.
    These big firms are not precipitating the next collapse. Now it’s entire nations going through paroxyms of failure.
    Japan with Abenomicss and Fukushima, Cyprus, Spain and its pension thefts, Poland and its pension bail-ins, the perennial Bernanke bail out/bail-in QE printings, Venezuela’s 40% overnight currency devaluation, India’s Rupee disaster, total gold movement to Asia, the Nat Gas/Petro Dollar flash point in Syria, Italian banks and the UK banking failures. These are growing in number and speed with tens of billions in fines and penalties against the international TBTF banking cabal, all found repeatedly guilty of high crimes, misdemeanors and treason.
    That we have not experienced the untimate flashpoint is a credit to the overwhelming flood of FIAT printing that has, to date, patched the growing cracks and holes in the dam. It is failing and soon there will be nothing to stop the World Wide Weimar event
    Germany will be lucky to escape the worst of this debacle but they still have to deal with D Bank and Buba.
    PS the 2007-2008 US stock market continued to climb even after the collapse started, much like an F16 jet will continue in an upward trajectory after the engine flames out. That collapse started late to the game but its fall was about 60% of the equity market value.

    • “Half the US population gets something for nothing.  The other half pays for it.”
       
      Indeed… and a lot of those who pay for this amazing system are getting damned tired of it.  Having some of our people work double shifts pulling the wagon so others can sit on their butts and ride for free is NOT a sustainable system.  It will end and it likely will end badly.
       
      “But everyone is embedded in the FIAT/DEBT PARADIGM.”
       
      Yes, many are but that does not include the PM community.  :-)
       
      “And they say silver and gold are expensive.  They are if you have no FIAT but they will be without peer when this whole escapade implodes.”
       
      Which it will, of course, because it IS not sustainable.
       
      “The 2008 debt crisis unfolded over a year, with Bear Sterns, Wamu, Wachovia, Merrill Lynch, Ginnie Mae, Fannie Mae, IMG/Lehman creashing in a sequence that spread over about 8 months. It took about 12 months from top to trough but really started in earnest about April of 2008.”
       
      Indeed so, plus our friends at GMC, AIG, Chrysler, et al.  The horrible part of all this is that none of the fixes applied to the economy fixed ANY structural problems at all, so these problems can and will recur.  The worst of all this is that when a problem is delayed instead of fixed, it only gets bigger and more difficult to resolve.  The crash of 2008 has not been fixed, it’s been papered over and delayed because our dear leaders don’t have the guts to face big nasty problems, get their hands dirty, and fix them when they can just throw money at them and put them off, hopefully until they are safely retired or dead.  Either one works for these wimps.
       
      “Germany will be lucky to escape the worst of this debacle but they still have to deal with D Bank and Buba.”
       
      Germany has a powerful economy and only needs to decide whether it really wants to continue with its financial conquest of Europe or not.  If they do, then, yes, it WILL cost them a lot… maybe even more than they can afford.  If not, they can throw the EU under the bus, return to the DM currency, ally themselves with the BRICS, and continue to have a powerful economy.
       
      “PS the 2007-2008 US stock market continued to climb even after the collapse started…”
       
      Indeed it did.  Just as there is physical momentum for bodies in motion, so too is there financial momentum for an economy in motion.
       

  3. Those unfortunate bastards out there with no silver or gold are fucked!

  4. So the punchline is… whatever happened in the past as example, and no matter how bullish the case for metals is.. We have no idea if and when they will rise.
     
    Righto..

    • They will rise, it is a matter of when only. The dollar is tanking and it will take the rest of the western banking system with it

    • Agreed, Mary.  Gold and silver are financial insurance against SHTF and all its economic woes.  In an economic collapse, real money will rule and fiat will be virtually useless because very few people, mostly those still in denial, will want it.  That’s the thing about a collapse.  Not only does the financial system itself collapse but so too do all of the concepts upon which the system is built… including the value of fiat currency.

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