“If the Fed then stops creating money and buying assets, the stock market will crash, consumption will contract, and the recession will resume with even greater intensity. So, the Fed won’t stop. It will have to create more money and repeat the process again and again, with the size of each round of QE larger than the one before.”
Latest QE threatens the world By Richard Duncan, author of “The Corruption of Capitalism: A Strategy to Rebalance the Global Economy and Restore Sustainable Growth”
The first round (of QE) was conducted not by the Fed, but by the Bank of Japan, the People’s Bank of China, the Central Bank of the Republic of China (Taiwan), the Bank of Korea and the central banks of numerous other countries with balance of payments surpluses.
Together, they created the equivalent of $5 trillion worth of their own currencies between 2000 and 2008, with the purpose being to support export-led economic development in those countries.
Their central banks printed their own currencies and used it to buy dollars, depressing those currencies’ values and perpetuating their trade advantages.
That policy was extraordinarily successful in raising growth rates for the countries involved, but the consequences extended far beyond their borders. These nations reinvested their dollars into Treasury bonds, Fannie Mae and Freddie Mac debt, other corporate bonds and equities, pushing up asset prices, driving down interest rates and resulting in a shocking misallocation of capital throughout the U.S.
Fed Chairman Bernanke recognized the destabilizing impact of those capital flows and attributed them to a “global savings glut.” About this, however, he was badly mistaken. It was not foreign savings, but massive money creation by U.S. trading partners that was to blame for blowing the United States economy into a bubble.