The Federal Reserve is easing America into a recession that could become a depression. Easing is a nice way to refer to the Feds use of an economic stimulus tool, also known as quantitative easing (QE).
QE is described by some as printing more money. The Fed argues that it is pumping liquidity into the economy by buying bonds held by banks. Since the economic downturn, Fed Chairman Ben Bernanke has acquired about $2.3 trillion in bonds from banks by simply printing more money.
The question is not will QE be a problem in the long run, because it clearly will be. The question is how long can the Fed continue with QE before we ease into a recession or perhaps a depression. There is some tipping point that the experts can’t predict with any certainty. But at some point, QE will weaken the dollar and stimulate rampant inflation. This tipping point probably will occur soon because of the Fed’s policy of keeping interest rates near zero. High interest rates can moderate inflation. Low interest rates will stoke up inflationary fires.
QE may be a short-term solution that helps politicians get elected, but at some point the law of supply and demand will take over. At the tipping point, our debt will become so large that the market will demand higher interest rates since America will have become a larger credit risk.
If the United States is paying artificially low interest rates, only the Fed will purchase our debt. And this is where it gets interesting. How long can we keep funding ourselves by printing more money? At some point, inflation will consume us and the value of the dollar will collapse. Either of these events are bad, but the two together would create a synergy that might dump us into a deep depression.
But don’t worry. It won’t happen for another year or two.