Quantitative Easing is Merely a Euphemism for the Printing of Money

The recent record price for gold on November 8, 2010 was a reaction by world financial markets to the decision by the United States Federal Reserve a few days earlier to inject an extra $600 billion into its banking system. This erroneous and unwise decision by Ben Bernanke and the U.S. Federal Reserve is a desperate and flawed effort to boost a fragile economic recovery-taking place in America. Although US leaders like Timothy Geithner describe the action as Quantitative Easing , injecting $ 600 billion dollars into the U.S. money supply by the U.S. Federal Reserve is merely a euphemism for the printing of money.

To understand the gravity of the situation, a definition of Quantitative Easing will put the issue in context.

Quantitative easing (QE) is a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system, generally through buying of the central government's own bonds to stabilize or raise their prices and thereby lower long-term interest rates. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.

While the recent Federal Reserve decision prompted criticism from a number of countries at the time, most notably China and Germany who are afraid that Washington's latest move to print more money could lead to a new round of currency wars and even global economic collapse, the decision by the United States reflects a world power in decline and a country unable to make the politically difficult austerity measures to get its financial house in order.

As reported in a recent New York Times article,

Shin Min-yong, an economist at LG Economic Research Institute, said the Fed’s actions did not match American rhetoric. “To come up with this monetary easing at such a sensitive time appears to the rest of the world to be at odds with what the United States has said about holding hands to fix the world economy together,” he said.

“Yen, yuan, won — if one currency goes down, the other nations will react in kind, and with even more extreme measures,” Cho Gyeong-lyeob, an economist at the Korean Economic Research Institute, a private market research firm, said. “It would lead to a breakdown of the cooperative mechanism that we have all been aspiring to maintain.”

Just as the 2008 rise in oil was a direct result of a weak U.S. dollar and oil exporting countries like Saudi Arabia wanting to maintain the value of its commodity, the recent rise in gold prices also reflects how global investors are increasingly using commodity markets to offset the international currency market.

Instead of closing foreign military outposts, which cost at estimated $ 120 billion to maintain every year or ending the military operations in Iraq and Afghanistan, political leaders in Washington are instead looking to reduce annual cost of living increases for Social Security recipients.