Discussions about the legality of “monetizing America’s debt” or holding to congressionally imposed “debt ceiling limits” stopped long ago. Politicians simply agreed to let the Fed run rampant with QE activities [read: digital money printing] to finance deficit spending without the need to cut Federal programs.
We hardly ever hear anyone ask the politicians why they need to collect taxes, let alone raise them, if unlimited money creation is a viable solution to the government's need for money.
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Why is QE bad for America? Understanding the reason is easy for equity investors. Simply compare money printing to stock dividends issued by corporations. Assume XYZ company had 100,000 total shares outstanding and that you owned 1,000 shares, or 1% of the firm.
If XYZ declared a 5% stock dividend your 1,000 shares would become 1,050 but the total number of shares would also go up, to 105,000. Your percentage ownership of the whole company would remain unchanged, at 1%.
You would be neither better, nor worse off, than before XYZ’s “mini-split”.
Now let’s look at the percentage increase in the amount of US currency in circulation over the past one and five years. YCharts’ research indicates it had risen by 7.27% in the 52-weeks ended July 6, 2016.
Picture the last year’s expansion in US dollars in circulation as the equivalent of a stock dividend but with one very major exception. The $US’s old shareholders (also known as savers) did not receive any of the newly minted cash. Every old dollar was stealthily devalued by 7.27% with no compensation (in the form of new, smaller valued dollars) in return.
You would not stand for that if a company did it.
The pace of printing has accelerated dramatically since the Crisis of 2008.
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The national debt is well above $19 trillion and growing like a weed. QE is never going to end voluntarily. Don’t hold your breath waiting for higher coupons on bonds, better money market rates or increased interest on bank CDs. Old-fashioned, market-set, “normalized” interest rates are unlikely to return until after America’s financial system has melted down.
