Fed’s “Easing” May Cost You
The Federal Reserve has gone on another grand monetary experiment in hopes of jump starting the recovery and creating jobs. Unfortunately, one of the consequences of this second round of quantitative easing (QE2), might hit your pockets at the grocery store and gas station.
When the Federal Reserve uses new money to buy bonds from the government, they’re pretty close to just printing up money from nowhere. The intended effect is to spark economic activity and new investment in the kind of productive activity that pays the bills, but until and unless that money is then taken back out of the economy there is a risk of prices going up in relation to the growth of the money supply.
Workers in America will be hard hit since there are no raises in sight and most people are just glad to have a job, but the biggest critics of QE2 have been from the international scene. Developing nations from Brazil to China have protested the effects of this, calling it exported inflation and an unfair trade advantage. As we live in a world of fiat currencies, there is really nothing to stop these other nations from entering a new “race to the bottom” with undervalued currencies. If two or more nations got in to such a game of monetary chicken, the ultimate effect might be both of them falling off the cliff together while the onlookers enjoy clearance-sale prices on the land and labor of the devalued nations.