QE: the sword of Damocles.

In classical Keynesian economic theory, the injection of money by the Central Bank during a recession should dampen the recession and stimulate recovery. The money was supposed to be borrowed or created, but during recovery, the money was to be repaid or replaced. What this led to is a regular cycle of ups and downs and increased inflation. Republicans would win elections during the inflationary phase, put on the brakes and get voted out during the next downturn. This led to continuously higher spending and greater loss of value of the US Dollar.

This changed with the election of Pres Reagan, who went to supply side economics. This type of economics was based on the idea that a lowering of the highest tax rates acts as a money injection and would stimulate the economy. The resultant increase in economic activity would more than make up for the lost revenue due to lowering the highest tax rates.

The strategy worked. Liberals began to demagog the method as "trickle down economics" and "tax cuts for the rich." As I said the strategy worked and tax receipts went from $500B to $700B. Unfortunately, the Democrat demagoguery worked as well, Republicans lost the election and Democrats doubled spending, wiping out the gains due to the use of supply side economics.

Then came the Obama regime. The Obama regime came to power after unknown sources tried to empty the Nation's banks (via withdrawing $2B Money Market funds/hour) and the FED imposing new rules of accounting (mark to market), which made the banks instantly insolvent. If you go back to my posts in July 2009 you will find my post that contains St Louis FED data on how FED action had stopped money circulation, lowered GDP and elected Obama. The Media has covered up all this and still talks about how the recession started in 2007. However, the "Great Recession" had started in late 2008 or 2009.

Now we come to the Obama regime and how it tried to "fix" the economy. The regime nationalized many banks, Chrysler and GM, student loans and the housing market. In addition, the FED initiated QE1 and QE2 and we now have a QE3. With all the injection of money, the economy stagnates. How come?

In yesterday's Seeking Alpha, an economist by the name of Ellen Brown had pointed out that the QE's are designed to produce good feeling by stimulating the Stock Market (QE1 and QE2) while QE3 is to stimulate housing prices. And what happens to the money injected? It is sequestered in the banks as excess deposits for which the banks are paid interest. As long as this situation is maintained, inflation will remain low. But, the huge sum created by the FED hangs over the government like the sword of Damocles. Should a Republican get elected President, the FED can again wreck the economy by making the banks release this money, creating an instant tsunnamy of inflation, forcing the Republicans to raise interest rates and putting us back into a recession. The FED was not meant to have this authority.