Saturday, November 13, 2010

QE2 and Debt Deflation

This video has been making the rounds on the blogs.  There’s a small flaw in the facts, but I don’t think it’s obvious to most people.  Watch the video and understand that this flaw is the real reason for QE2:

The flaw in the video is their failure to recognize the root cause for the expansion of the money supply.  Federal Reserve Chairman Ben Bernanke recognizes that there is deflation going on, but not in any product you or I are concerned about.  There is a massive debt deflation going on right now in the United States Economy.  So far, the banks have been inflated their assets and foreclosing on as many houses as they can so that no one will notice.

But the banks are the true customers of the Federal Reserve.  And debt deflation is bad for their business so the Federal Reserve is helping secure their clientele.  And thus, the Federal Reserve is engaged in printing more money so that they can stave off more severe debt deflation.  You see, with more people defaulting because they haven’t the money to pay their debts, the banks will lose more and more money.  By printing more and inflating the money supply, the Federal Reserve is hoping to stave off the coming crash just long enough so that the banks can straighten out their collective asse(t)s and not take as big a hit.

Let me know if I’m wrong on this perspective.  I’m no economist, but this is how things appear to happening from my perspective.

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