Quantitative Easing

Like the character Ed Norton, the sewer worker from the old “Honeymooners” TV show calling himself a “Subterranean Sanitation Engineer”, the feds have come to call printing money “Quantitative Easing”. A Financial Account Executive is a person who executes accounts for a financial company, - because they hated to be called – “salesman”. The feds don’t have enough money, so in order to make the quantity of money easier for them to manage, they print more of it. Making the quantity available easier to manage – increasing it – printing money. Very simple – if you can speak ambiguousian.

We had the QE 1, in which about 700 billion dollars was printed, then QE 2 to print another almost trillion dollars. And there undoubtedly will have been a QE 3 or 4 by the time you read this. It would seem to be more appropriate not to name this for a luxury ocean liner, but instead for one that sank, coincidentally April 14 (day before taxes due) many years ago. (I am not the first to compare our financial outlook to that of the ill fated Titanic). I guess “Titanic 1” didn’t go over well at the monetary meetings in Washington, so they went with the “QE”.


A Big Local Problem Too

One of the reasons many states and towns are also in trouble is because pay their employees “defined benefit” pensions. “Defined” means that the amount of benefit is clearly “defined” in terms of guaranteed monthly / annual payments. For example many cities and states have employees including police, firemen, teachers, parks department, clerks, bus and train personal, trash collectors and weeders, ditch diggers who earn as much as 80% of their salaries, with health benefits when they retire. Often they are paid 80% of the average of their final three year’s wages – for the rest of their lives, and many retire in their fifties. So basically they can be paid for 50 or more years for 30 or so years of work. We all know some state or city employees who retired in their fifties with nearly full pay for life. Great job if you can get it, but we can’t afford it anymore – it is a contract and under the law we must honor it. They know that they must “quantitatively ease” the burden pensioners relying on these great government union benefit plans are placing upon the treasuries.

It isn’t bad enough that taxpayers are forced to fund this benefit worth anywhere between 1 million and 3 million dollars over a retirement life through taxes and fees, but whenever possible employees will inflate their last three year salary as much as legally allowable in order to maximize it. They may take a different job, or accept a “pre-retirement promotion”. I suppose anyone who has that opportunity to increase his benefit for himself and family certainly has an obligation to them to do so. I would – but it amounts to many government employees earning more per year in retirement than they averaged during their working years. Maybe we could afford this generosity when there wasn’t so much other waste – we certainly can’t now – but we are obligated to them by contract, it was agreed.

No wonder cities, towns, states and federal government are going broke and the heavily unionized companies like the UAW are so awash in red ink. Unlike the feds, states and localities can’t print their own money.

This is not to suggest that any of these contracts should be breached. Employees are not to be blamed, they enrolled in good faith. I support the sanctity of contract law. The point is that they are clearly too expensive, have been for a long while, and they must be reigned in for the future – just as well-managed corporations did years ago. Governments sign contracts agreeing to pay their employees from other people’s money. Corporations don’t do that because they know they can’t. Now these liabilities must somehow be paid. The negotiations necessary in the future to alter these back-breaking unsustainable employee contracts is another discussion for another time. We deal in the here and now.

Those of us in the private sector don’t have defined benefit plans. Companies can’t afford it and they realized this long ago. They were abandoned in favor of the 401(k). We have defined contribution plans instead. We contribute a defined amount each year and have whatever it accumulates to at retirement. Often the company will match some of our contribution, or even all of it - but that is the extent of the company’s obligation.


Can’t Afford to Pay Retirees

Lucky for us, the government union workers, big auto and the teachers unions can be fooled. They can receive their full pensions, and never realize that they were victimized by government policy (and they thought the government was on their side). I believe there is a plan to put it to government retirement personnel. (They don’t care about you any more than they do about us. – a hard lesson to learn)

Defined benefit pensioners are about to face the reality of saddling up to the wrong horse, hitching up to the wrong wagon, trusting the wrong side. Yes, they will receive their money, but it won’t have the same value when inflation heats up.

Although this is a worldwide problem, let’s start in the U.S.A. and analyze what is likely to happen if the Federal Reserve and the United States Congress acts as they usually do:

Taxes are only one way to raise more money to pay government liabilities. The Federal government could increase taxes on everyone who pays taxes – but that group is dwindling by the day as more and more people fall into the “no income tax” category. Only slightly more than half of American workers now pay income tax at all. So this option is limited.

Interesting stat often used by politicians who believe taxes must be raised on the wealthy: 47% of Americans polled believed that income taxes were fair or too low. 47% believed they were not fair or too high. The other 6% did not have an opinion, we will assume they split evenly too. Since half believe they are too low and the other half too high, this must be proof then that taxes must be exactly fair. They must be just about perfect. Right?

The pollster failed to mention that 47% of Americans pay no income tax at all, many of whom receive additional benefits from those who do. Could it be a large portion of these parasites believe taxes were fair or too low? If taxes were higher, wouldn’t they then be “entitled” to receive more goodies? Just wondering. You see – I do all the math – at least I try to.

Why not just keep raising taxes?

Government has three ways to acquire the money: increase tax, borrow money, or print money.

1 – Tax More

Problem is we have a president who has promised not to raise taxes on anyone earning less than $250,000. Of course he could forget that promise as most politicians do, or go through the back door with a VAT tax or something similar to further cripple the economy, but let’s assume he won’t. He has already pushed through a heavy sin tax on cigarettes which clearly targets lower income groups as they are primarily the ones who smoke. So who really knows?

Let’s say they just tax the rich much more and hope that they continue to earn at a high rate and pay the tax. Unfortunately (Or fortunately depending on your point of view) many of those earning more have the ability to earn less if they choose, still live luxuriously and avoid the tax. The wealthy will just not accept it. If for some unknown reason the wealthy did accept this assault upon themselves, even if the government seized every cent they earned, it still wouldn’t be close to enough to pay for our exorbitant spending ways.

 So opportunities for tax increases are limited.

2 – Borrow (Sales of Treasury Securities) 

Many individual investors and foreign nations are more leery of buying these securities because of our massive debt. Like a corporation, governments are rated on their ability to pay. They fear inflation, and the resulting devaluing of their dollars in the future. Our rating has already been downgraded once, so our bonds are not as secure or as attractive to foreign investors. If we can borrow, it only means we have to pay it back later anyway with higher taxes or increased inflated dollars.

Borrowing is becoming more limited.

3 – Print Money

Always an option. You and I can’t go into the garage and print some money when we are a little short, but our government can. Printing money is just a matter of firing up the presses to pay their bills by increasing the money supply. When we as individuals don’t have enough money for what we want, if we overspend, we are expected to earn more or to spend less. When governments overspend, no limits.

What happens when the printing presses work overtime? Assume that the USA has $1,000 expenses but only expects to receive $500 in tax revenue to pay them. If they can’t tax because we are taxed out, can’t borrow our credit won’t allow it, but they can print another $500 to pay for government programs and pensioners. Now there are more dollars in the market chasing the same goods and services. They could easily print the money needed and few would be the wiser – at first we might not even notice.

What is wrong with that?

The pensioner would get his check, the bills would be paid, everyone should be happy shouldn’t they? But something begins to go wrong. Soon, and it would seem like all of a sudden everything begins to cost more dollars.

Why? - Every asset is worth what a buyer is willing to pay for it. Generally speaking we will pay a percentage of the cash we have to obtain the object of our desire, whether it is the newest high tech computerized gadgetry or a pet rock. We decide if we can afford it and if it is worth it to us to part with a certain amount of our money.

The increase in the money supply drives down the value of the money in circulation because more dollars chase the same amount of goods and services. The drop in value forces the government to print even more money to meet its expenses, because they now have risen. In exceptional circumstances such as wartime or some special strain on the economy – like failed bailouts …this method results in an uncontrollable flood of currency and the country is trapped in a swiftly spinning spiral of hyper-inflation. Seems like we are now in serious danger. A terrorist threat or attack and a major national financial crisis occurs nearly every week. - The Perfect Storm.

What to do

Cash has always been the safety valve. Certainly every portfolio needs cash to balance the risk of time equity assets need - that won’t change. What if holding cash becomes the riskiest element of your portfolio? It could be if we have hyper-inflation. Whether you hold a dollar or a share of stock, fluctuating value is always a risk. Cash fluctuates in values too.


You like to drink Pensacola. If your bottle of cool refreshing Pensacola goes from $1.00 to $3.00 in the store, you will need more cash to buy your soft drink. Where does the additional $2.00 go? To all of those involved in bringing Pensa to your neighborhood grocer’s shelf. Their expenses increased, so the cost of your thirst-quenching bottle of Pensacola rises.

Pensaco stock (which includes other affected brand labels like Free-doe Cay and Greator Aid) increases in value from $15 per share to maybe $33 per share because company income increases. Stock value is largely tied to earnings. Earnings increase, value generally increases with it. The value of your stock goes up because it takes more dollars to buy it.

The resulting increase in stock price will not triple because the price on the shelf may increase three fold. Not as many people will be able to afford as much Pensa as they want. The price will increase to some degree because of inflation; that is a virtual certainty.

Your bank account will be paying interest too, but how much? Here is betting not nearly enough to keep pace with your next frosty can of Pensacola. Investing in stocks and stock mutual funds may be the most conservative measure to combat inflation in the not too distant future. Precious metals are generally a particularly good bet in inflationary environments.

This has all been made possible because of the elimination of the gold standard in 1933. The dollar has no real worth. Its only value is what it can be traded for when others are in agreement of its meaning. Money has no intrinsic value of its own. A dollar is just a piece of paper.

We must make some meaningful changes (which we will get into soon), the cowards that lead us will simply inflate the economy and hope we’re too stupid to catch on. Since many were educated in public schools, they may be right about that. This would enable us to pay our debts with cheaper and cheaper dollars resulting from inflation, and most of us won’t understand what that means. This way government can manipulate payments to pensioners and welfare recipients limiting their cost of living increases, without them realizing what happened. Don’t forget, this won’t be the first time inflation is used as a tool; it has been so since the Federal Reserve was born in 1913. Better still, they can use the press to report the rising costs which makes it harder for them to live “on fixed incomes” and demonize the evil corporations for raising prices. And so, the resulting inflationary trend will lead to the necessity of increased entitlement payments, higher pensions, government cost and a “Social Security Bailout Bill”.

Next: Social Security Bailout Bill