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Ben Bernanke plans on buying $500 billion worth of US government bonds, in an attempt to "stimulate the economy". This is an utter lie.
The practice of a central bank (like the US Fed) buying government bonds is known as "quantitative easing" (QE). In a nutshell: the Fed has dollars, and the US Treasury issues bonds (1-year t-bill, 5 year t-bill, etc.) that works like a CD. Treasury bonds is how we run a debt; if we couldn't sell any t-bills Congress wouldn't have any $ above the tax revenue they collected.
So with QE, the Fed actually buys up the US bonds (debt) with the dollars it has (since the Fed is our central bank, they control our money supply and just conjure up dollars with the press of a button).
But what the purchase of all these t-bills does is drive down the yield on t-bills: since they are basically buying up these t-bills and taking them off the market, this means we don't have to pay a high an interest rate because all those pension funds/mutual funds that want to buy t-bills have less to buy from. Since the supply is lowered but the same demand is there, the yield we offered drops (we'd love it if the yield was 0%, that would mean debt was cost free).
So what's the big deal, you ask? So the Fed buys $500 billion worth of T-bills, and we have to pay less in interest. That's a good thing, right? Wrong.
See, the REAL INTENTION of Bernanke (working with Obama) is to LOWER THE DOLLAR. Why would they want to lower the dollars? 2 reasons:
1 Lower dollar means our debt is cheaper (if we owe China $100, and the dollar drops, it's now worth less)
2 Lower dollar means our trade deficit (hopefully) decreases. Lower dollar means other country's imports are more expensive to Americans. American exports are cheaper in other countries.
So with QE (it's actually QE2 since the Fed did QE in 2008 to shore up the financial system), we get:
1 Lower interest on the debt
2 Lower relative value for our debt
3 Better trade advantage
I know, what's the downside?
Plenty. As the article above shows, when we our purposely tanking the dollar, other countries aren't happy about it. Imagine your buddy begging you for months to buy a stock in the company he owns. Finally you do, then a month later he SHORTS the stock and tries to drive the price DOWN. Would you be happy with that?
Well, that's what we're doing with the dollar.
The dollar is the world's reserve currency; that means whenever they have a trade deficit, they largely buy dollars with it. That's a good thing for us, an exceptional privilege. This means oil is priced in dollars and not yet or euros; this means that we have countries buying our debt almost automatically.
So having the dollar lose its status as global reserve currency would be absolute disaster. Imagine if oil was sold in euros; if the euro went up, gas would go up by a corresponding amount.
If the dollar lost its reserve currency status, they wouldn't buy our debt. We would have to actually sell it, and we would have to pay a much higher interest rate to do so. Since we already have a huge debt, this would be like missing a payment on your credit card and having your interest rate bump up. Not fun.
And the worst thing that will happen with QE2 is that it will cause inflation. Right now we are in the midst of deflation, or declining prices. But it will be near impossible for the Fed to perfectly sell these t-bills/buy back the dollars when the economy starts growing.
This is a cowardly solution to our massive problems with debt; the hope is that instead of making tough decisions on spending/taxes, the Fed can just inflate away our debt without repercussions.
Not only will this be ineffective, countries around the world will lose faith in the dollar, as well as cause massive inflation; causing even more economic destruction to us in a very short time.
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