But the ramifications of corporate greed and political incompetence hits us all. Anyone with money in a superannuation fund, investments in the stock market, property, or simply in the business they are running, is vulnerable to problems in international financial markets.
The soaring price of gold is a stark indicator of a loss of confidence in currencies.
On Wednesday, November 3, 2010, Ben Bernanke, Chairman of the U.S. Federal Reserve announced a second round of quantitative easing (QE2) to stimulate the economy. The plan was to purchase $600 billion of U.S. Treasury securities by the middle 2011. It was just after the November 2, 2010 General Election, and most of the world missed it because the election dominated the headlines.
For those of us who aren't sure what 'quantitative easing' means, here's Wikipedia's definition:
Quantitative easing (QE) is an unconventional monetary policy used by some central banks to stimulate their economy when conventional monetary policy has become ineffective. The central bank buys government bonds and other financial assets, with new money that the bank creates electronically, in order to increase the money supply and the excess reserves of the banking system.
This allowed the U.S. Government to authorise the Treasury Department to print money. No real currency has actually been printed, but the Federal Reserve has been able to electronically credit each commercial bank, allowing them to buy maturing U.S. bonds and treasury notes as part of their liquidity reserves. The Federal Reserve started this even before the financial meltdown of 2008, a policy which is plunging the US (and the rest of the world) into a financial disaster which is likely to last for decades..
As well as the $600 billion quantitative easing announced last November, the Federal Reserve announced that it was "reinvesting" an additional $250 billion to $300 billion from the proceeds of its mortgage portfolio in U.S. Treasury securities - a total injection of about $900 billion.
If at some stage, the Federal Reserve concludes that the U.S. economy is not growing fast enough, and decides more quantitative easing is needed, a third round may begin and then we can all kiss economic stability goodbye! Many economists believe that the Federal Reserve is already out-of-control and that the global economic system is heading for disaster.
The sad thing is that the Federal Reserve seems to believe that the policy has been working.
Accumulated problems within the U.S. economy after many years of neglect, inaction and excessive spending on pointless wars, have now been aggravated by turmoil in the Middle East and natural disasters on a scale which is mind-boggling.
From November 2008 to March 2010, the Federal Reserve bought more than $1.7 trillion in mortgage backed securities and treasury bonds. Through its quantitative easing policy, it created a portfolio of U.S. bonds and notes purchased from banks totalling more than $2.5 trillion by the March 2011. Some critics see the rising price of oil and other commodities as indicators of broader price increases which are set to spiral out of control as the U.S. risks heading into hyper-inflation territory..
Some believe that the Federal Reserve strategy may have helped stabilise the economy in the short-term, but unemployment still remains high (8.8% at the end of March 2011). Monthly U.S. home sales are still close to record low levels. New construction is also at historic lows. Banks tightened their credit criteria and have not been not lending much. As at January 2011, American banks had excess reserves of $1 trillion as customers borrowed less and bankrupcy rates increased.
Foreign countries are balking at U.S. government's quantitative easy policies, and the U.S. will either have to start paying higher interest rates on government debt in order to attract enough investors, or the Federal Reserve will just have to drop all pretence and permanently start buying up most of the debt. Either way, the financial world will never be the same.
