The more things change the worse they get
October 31, 2012 4:36PM
Updated: December 2, 2012 6:55AM
Dear Mr. Berko: I don’t recall that you ever commented on the first two rounds of the Federal Reserve’s quantitative easing. What do you think of QE3, and will it do the job? If it doesn’t, what are the consequences?
— RP, Harrisburg, Pa.
Dear RP: Stupidity is defined as doing the same thing over and over again and expecting different results — sort of like voting.
Jean-Baptiste Alphonse Karr (1808-90), a prolific French author, coined the phrase, “The more things change the more they stay the same.” But my observation is, “The more things change the worse they get.” QE3, a bond-buying initiative that dumps $40 billion every month into the money supply, is a change so worrisome that former Fed-heads Paul Volcker and Alan Greenspan felt compelled to warn Congress of the Draconian consequences. We are on the periphery of an era of deliberate hyperinflation, the result of a massive increase of money in circulation that isn’t supported by a similar increase in goods and services produced by our economy.
Here’s a simple explanation of how this buries: Assume there are a dozen eggs in an economy and a dozen egg buyers, each with a $1 bill in his hands to buy an egg. Each egg will cost $1. Now assume everything remains the same except that the Fed gives each egg buyer a dime (QE1). So everyone now has $1.10. The cost of an egg increases to $1.10, and inflation is now 10 percent. Again assume everything remains the same, and the Fed gives the egg buyers another dime (QE2). So each now has $1.20. The cost of an egg increases to $1.20, and inflation is 20 percent. Again assume everything remains the same, and the Fed gives the egg buyers another dime (QE3). So each now has $1.30. The cost of an egg increases to $1.30, and inflation is 30 percent. The more things change the worse they get.
This initiative, to improve the housing market, is wrongheaded. This money is deposited in reluctant-to-lend banks, and consumers don’t have enough cash for a down payment and don’t have a job to qualify for a mortgage. And it’s wrongheaded to think that QE3 will succeed when the other QEs failed so ignominiously. New mortgage applications are at their lowest levels in 16 years. Wannabe homebuyers must compete with billion-dollar Wall Street corporations such as Treehouse, Colony Capital, Blackstone, Och-Ziff and Oaktree. These pros are buying tens of thousands of foreclosures around the nation and may become your landlord soon. Of course, these companies got their billions from the banks that won’t lend to the consumers. So far, the biggest beneficiary of the three QEs is a zooming stock market fueled by trillions of new dollars chasing the same stocks. Finally, Colony, Treehouse et al. will season their rentals for a year, take their new companies public via an initial public offering and walk away with billions. The more things change the worse they get.
Eventually, the chickens will come home to roost. As the Fed prints more dollars, it destroys the purchasing power of the dollars we earn in salaries and debases the money we hold in bonds and our retirement savings. However, it allows the government to use the new $1.30-per-egg money to pay off the old $1-per-egg debt. And as our incomes remain flat as pancakes, the costs of wheat, meat, carpet tacks and crackerjacks, union dues, and LeBron’s shoes double. The worst is yet to come. The government has made the economy dependent on the stimulus of quantitative easing, and it eventually will require a QE4, 5 and 6. And if government is ever able to stop the QEs, this economy will react like a heroin addict on withdrawal. The more things change the worse they get. And lots of very knowledgeable people are frightened about the future.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.