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Quantitative Easing Watch 2: More distortion of the markets

The Federal Reserve

The Federal Reserve

This week, the Fed announced policies based on the U.S. unemployment rate, the first time a large central bank has ever tied its interest rates to an economy.  The goal is a jobless rate of 6.5%.

Of interest to precious metals investors is that the Fed has beefed up QE3 to $85 billion a month.  Until recently, new injections of cash had been a net $40 billion, as $45 billion had been “sterilized.”  The sterilization had come about as the Fed sold short term bonds and used the proceeds to buy long term bonds, resulting in a reshuffling of Fed assets but no increase in the money supply.

Now, the Fed is out of short-term Treasuries and can no longer “sterilize” $40 billion, which means the $85 billion in new monthly money will be freshly created.  The Financial Times called it “an all-out effort to revive the stuttering economy recovery.”  Forty-five billion will be spent on long-term Treasuries and $40 billion on mortgage bonds.  Fed assets, which are now $2.9 trillion, will swell to nearly $4 trillion by the end of 2013.

Ben Bernanke

Ben Bernanke

Immediately, Keynesian indoctrinated economists rushed to praise the Fed’s actions.  The Establishment has been so successful at selling Keynesianism that only Austrian economists question the wisdom of any efforts to manipulate the economy.  It used to be that Keynesians talked about “fine tuning” the economy.  But, nowadays, with so many flaws in Keynesianism having been exposed in recent decades, they more often speak of “jump starting the economy.”

The Fed’s linking its policies to unemployment rates may be one of the more bizarre moves ever to come out of the Fed.  Unemployment rates, as measured by the Department of Labor, are simply bogus.

For example, in November the DoL’s unemployment rate dropped from 7.9% to 7.7% not because of the 146,000 who found jobs but because 542,000 quit looking.  According to the DoL’s reasoning, if you’re not looking for a job you’re not unemployed.  Such reckoning boggles the mind, but it keeps the official unemployment rate from skyrocketing.

Peter Morici, writing for Yahoo Finance, says this is weakest recovery since the Great Depression and that if the adult labor force participation were the same as in October 2009 when the rate was 10%, today’s unemployment rate would be 9.7%. He further notes that if the 8 million part-time workers who cannot find work were added to the rolls of the unemployed, the rate would be 14%, where it rose to in the wake of the financial crisis.

Cynically, Morici notes, “Convincing millions of Americans they don’t want a job or compelling desperate workers to settle for part-time work has been the Obama Administration’s most effective jobs program.”

King World NewsI fear, as I’ve noted on past’s, our government—along with other governments around the world—will stumble from one flawed program to another in futile attempts to get economies going.  Their efforts will fail because no person or committee is capable of knowing the desires, wants and needs of individuals that prompt business to work to fill those desires, wants and needs.

Government actions, such as suppressing interest rates, only distort the marketplace and send false signals, making it difficult for businesses to operate profitably.

To get the economy going, all our government has to do is remove the hurdles to opening businesses and to lower tax rates.  What the economy needs are conditions where entrepreneurs are encouraged to risk their capital and work 80-hour weeks.  That would jump start the economy, not another program to manipulate interest rates.

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