Quantitative Easing: What is this?
Quantitative Easing (QE) came into economic lexicon after the Year 2000. Text books on economics still avoid the subject. The Oxford dictionary defines it as follows: “A form of monetary policy that is sometimes used to stimulate the economy when interest rates have already been reduced.” That sounds succinct but it conceals more than it reveals. The reality of QE is that it is the creation of huge amounts of excess money, usually in great secrecy, by the Central Banks of the few countries that possess the internationally currencies, to overcome their otherwise irreversible economic problems resulting from mounting debts, huge budget deficits and sustained adverse balance of trade. The only Central Banks that can create money in this insidious form are the Federal Reserve Bank of the USA (which accounts for about 95% of the QE created), the Bank of England, the European Central Bank and the Bank of Japan.
There is a lot of obfuscation and the use of euphemisms to conceal the true nature of QE. Check this definition by Financial Times Lexicon: “When interest rates are close to zero there is another way of affecting the price of money: Quantitative Easing (QE). The aim is still to bring down interest rates faced by companies and households and the most important step in QE is that the central bank creates new money for use in an economy. Only a central bank can do this because its money is accepted as payment by everybody. Sometimes dubbed incorrectly “printing money” a central bank simply creates new money at the stroke of a computer key, in effect increasing the credit in its own bank account. It can then use this new money to buy whatever assets it likes: government bonds, equities, houses, corporate bonds or other assets from banks. With the central bank weighing in, the price of the assets it buys should rise and the yield, or interest rate, on that asset will fall. Companies for example with a willing central bank seeking to buy its bond, will be able to pay a lower interest rate when new bonds are issued or existing bonds come to the end of their life and need to be replaced.”
In the economics taught in schools, a Central Bank increases or decreases money supply by increasing or reducing interest rates. When interest rates are very low, people and businesses borrow more and thereby banks create new money. Consumers and businesses that can borrow at low interest will become more active and the economy supposedly improves. If the country needs more money it will sell bonds or treasury bills which are forms of borrowing, apart from resorting to obtaining loans from international
financial institutions. Borrowed funds have to be repaid. If a country simply creates new money to overcome its economic problems, there will be widespread inflation, as happened recently in Zimbabwe.
But there is this small club of the privileged few owning international currencies, overwhelming dominated by the USA, that can create new money to overcome systemic economic problems and still survive and prosper at the expense of the rest of the world. This iniquitous system was created at the United Nations Monetary & Financial Conference at Bretton Woods, USA, in July1944 when the “Allied nations” of 41 countries that were then winning World War 2 gathered to settle the economic structure of the world with a view to creating future prosperity and peace. Since all major economies had been devastated by the war while the USA prospered immensely from it by being the industrial goods supplier and lender to its European allies, the US GDP then represented 50% of the world GDP.
Bretton Woods made two major decisions for post-war reconstruction and future economic stability: 1) it set up the IBRD (The World Bank being its principal component), the IMF and GATT (now replaced by WTO); 2) it set up the Dollar Standard where the US dollar became the medium for international trade and settlements while the dollar itself would continue to be pegged to gold at $35/oz. The British pound sterling would continue to be used in the so-called Sterling Area comprising the Commonwealth and the British
colonies in a secondary role.
In vain the British representative, John Maynard Keynes, tried to introduce an international currency based on a basket of currencies managed by an international organisation. The USA rejected the idea and carried the day. But after a couple of decades it was apparent that the USA was creating excess money to fund its extensive wars in Korea and Vietnam and other regions. These could not be backed by gold and in 1968 President Charles De Gaulle of France called the US bluff by demanding gold for its dollar reserves. After a few adjustments, in 1971 the Nixon administration in the USA went off the gold standard. By this time, the dollar had been firmly established as the reserve currency of other nations and the currency of international trade. The Nixon administration, with the genius of Henry Kissinger, ensured this by getting the
OPEC to trade oil only in US dollars in return for US military protection for the
authoritarian Arab rulers. Oil is the largest traded commodity in the world.
Uniquely among Central Banks, the US Fed Bank (the Fed) is a private institution established by Congress in 1912 with links to the US administration. It comprises 12 regional Reserve Banks in which the private banks hold stock, the biggest institutions holding the most power. The Chairman and Vice-Chairman and the seven-member Board of Governors of the Fed are appointed by the US President and confirmed by the US Senate. The supervision and regulation of banks is done by the Reserve Banks, meaning banks are regulated by their own organisation. The Federal Reserve decides on monetary policy, sets interest rates and controls the US dollar money supply through its “open market operations”. The Fed creates new money by buying US government bonds and securities by writing a cheque against itself. It can then disburse this as money to the
other US banks and financial institutions as it pleases.
The Fed operates in a veil of secrecy even from Congress and the US public. Its open market operations had never been audited because it claimed that if these were made public the world financial system would be in jeopardy. Only its own internal balance sheet is audited. Senator Bernie Sanders, the only independent non-party member of the US Senate, managed to get through an amendment to legislation in mid-2011 to have the Fed’s operations audited by the US Government Accounting Office (GOA). He says the Chairman of the Federal Reserve Board had refused to answer his request for the names of the main beneficiaries of its recent QE operations. The results of the audit were a
revelation that shook many other nations but not the US public who is still in the dark as the US mass media largely ignored the GOA’s report. This description is taken from Senator Bernie Sanders’ official website.
The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great
Depression. An amendment by Sen. Bernie Sanders to the Wall Street reform law
passed one year ago this week directed the Government Accountability Office to conduct the study. “As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world,” said
Sanders. “This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else.”
While the Government Accounting Office report came out with the details, it dutifully
white-washed the activity with pithy statements like this: “Between late 2007 and early 2009, the Federal Reserve Board created more than a dozen new emergency programs to stabilize financial markets and provided financial assistance to avert the failures of a few individual institutions.”
The US$16 trillion secretly disbursed by the Fed to the key US financial institutions and
corporations in 2007-2009 did not avert the world financial crisis. The same financial institutions (whose leaders are also the key figures in the Fed) that caused the world financial crisis through reckless financial gambling in the housing market, stocks and derivatives were then bailed out to the tune of trillions of dollars, allowing the same irresponsible financial managers to award themselves billions of dollars in bonuses with these funds and continue their speculative activity.
The world economy was plunged into chaos because of the irresponsible speculative actions of the major US financial institutions. But since world finance is still built largely around the US dollar, the flood of US QE funds did enable a partial recovery. CCTV
news reported a few days ago that business in China is helped by the flood of finance coming from the USA. At this moment, according to the Chairman of the Fed, it is disbursing $85 billion as QE every month to stabilise markets.
All this assumes that the USA must continue as the monetary controller of the universe like the feudal overlord who owns the lands and obtains rent from the serfs. This is the basic structure of the present world financial system. But the core of the system is
unsound. The US is the world’s biggest debtor, with the debt standing now at $16.4 trillion, an amount it can never hope to repay except by creating more money and postponing final payment as the US GDP is only $15 trillion. The US prosperity is based on using its borrowed or creatively manufactured funds to buy the products of other countries as US corporations have outsourced most of its manufacturing and support operations to developing countries. The GDP, which is primarily the total of private and public consumption, is also misleading as it is disproportionately based both on consumer and public debt. So how can a financial structure based on QE and debt survive?
The unique dominating role of the US dollar still makes the USA the most powerful country not only financially, but militarily. Its access to such a flood of created or
borrowed money makes it the world’s most important market for other nations who
labour to produce goods and services for the US market to be paid for in dollars. The USA has fought hard to prevent the emergence of competitive international currencies. It fought hard but could not prevent the formation of the euro by the European Union. Two developing country leaders who tried to by-pass the US dollar, Saddam Hussein and Muammar Gaddafi, were killed and their nations wrecked. The British pound sterling is small potatoes in international trade. The once powerful euro is in decline. But the new opposition is coming from the BRICS nations that decided to launch their own international currency (see my article on the BRICS Summit of 2012) to protect themselves from the manipulations of the US dollar. But it will not be easy to challenge US dominance which also has the support of the powerful Western bloc of nations that do want to see non-European developing nations challenge Western hegemony.
In essence, QE is the source of power that governs the world and it is given only to the leader.
It is the fashion today to scoff at Marxism and the writings of the old Marxists. But it was the prescience of Lenin that predicted this new world order almost a century ago in his classic study on the evolution of imperialism.
“Imperialism, or the domination of finance capital, is the highest stage of capitalism in which this separation (i.e. of finance capital from actual production) reaches vast proportions. The supremacy of finance capital over all other forms of capital means the predominance of the rentier and of the financial oligarchy; it means the crystallization of a small number of financially “powerful” states among all the rest.”
V.I. Lenin, Imperialism, The Highest Stage of Capitalism, 1916
Kenneth Abeywickrama
20 May 2013