Soros on Interest Rates, Quantitative Easing, and Asylum Watch Opinions

The world is an asylum made up of players and payers. The players are few and insane, but have all the power. The only payers who resist the players are those that cherish their God-given right to live free.

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George Soros is one of the more visible of the players. CEO of Soros Fund Management, he is a very wealthy man. He is No. 15 on Forbes 400 list and No. 22 among billionaires. His official web page describes him as:

GEORGE SOROS has been a prominent international supporter of democratic ideals and causes for more than 30 years.  His philanthropic organization, the Open Society Foundations, supports democracy and human rights in over 70 countries. Born in Budapest in 1930, George Soros is Chairman of Soros Fund Management LLC. As one of history’s most successful financiers, his views on investing and economic issues are widely followed. (Bold added)

The part of that quote in bold is, in the opinion of your humble observer here at Asylum Watch, a gross distortion of the truth. Democratic ideals and human rights, in the mind of George Soros means the masses of humanity (the payers) should be securely under the thumb of socialist nanny state government so that the political elites people like him (the players) can milk them for all they are worth. However, the part on his views on investing and economic issues being widely followed is true. And, on those subjects, we too need to list to him.

George Soros shared his views on a number of important economic issues with CNBC’s Maria Bartiromo.

Soros said that the U.S. needs to reestablish growth to help shrink its debt pile and that the Federal Reserve’s policy of buying U.S. debt, is the right one since it doesn’t add to the net amount of debt outstanding. “It’s about as close to a free lunch as you can get,” he said.

Reestablishing growth is definitely a good idea. But, like any good socialist, you note that he didn’t mention anything about reductions in spending. His reference to the Federal Reserve buying US debt is about the Fed’s Quantitative Easing policy of the last four years, where by, the Fed has been buying mortgaged backed securities and US bonds with money they create out of thin air and placing those assets on their balance sheet. We will talk more about the Fed’s balance sheet and why it is important in a moment.

Soros believes there are signs that the economy is improving.

“It may already have begun,” … “I think it’s most likely to happen this year. Once you’re past the uncertainty about the budget and investment decisions are made I think you’ll see it.”

However, he says, if that happens, interest rates will take a jump and so will inflation. And, dear friends, is when the bill arrives for the  Fed’s “free lunch’, as Soros called it.

The reason that economic growth will cause inflation, which in turn will cause interest rates to go up has everything to do with the Federal Reserve’s Quantitative Easing (QE) policies and its Zero Interest Rate of the last four years. Your humble observer will try to explain.

Quantitative Easing (QE):  OE is what the Fed does when it buys assets and puts the value of those assets on its balance sheet (a proper accounting practice). But, the Fed has no money to pay for these assets. Where do they get the money? They create out of thin air with a few keystrokes on their computers. It is the same as printing money. The purpose of QE, as the Fed Chairman Ben Bernanke has explained several times, was two-fold. One purpose was to make the banks healthy again by buying from the banks some of their toxic assets, mostly mortgage-backed securities (think sub-prime mortgages). This would give the banks an infusion of cash and allow them to get rid of assets whose real value was below the booked value on the bank’s balance sheets. A great deal for the banks! They trade junk asset for book value in cash. The second reason for QE, Mr. Bernanke has told us, was to compete in the bond market by buying US bonds with his counterfeit money to drive down the interest rates on our bods. Low interest rates on our national debt is clearly a good thing.

Zero Interest Rates: The Fed has set interest rates a t zero for fours ostensibly stimulate the economy and put people back to work, which is part of their mandate. The idea was that, with very low-interest rates, people and businesses would borrow from the banks. People would spend the borrowed money driving up demand for the products and services of our businesses. Businesses would then use their borrowed money to expand to meet the increased demand and would they would have to hire more people. In other words, the plan was to get the economy growing at a healthy rate again after the housing and financial crisis of 2008.

How have these plans worked out?

Bernanke’s QE policy has worked exactly as advertised. The banks got heathy by trading their junk assets to the Fed in exchange for the Fed’s counterfeit money and the interest on US bonds is very low and, thereby, the interest on our national debt is low. His Zero Interest Rate policy hasn’t worked. People are borrowing and banks aren’t lending and the economy is sluggish at best and unemployment is still high. There are a multitude of reasons that we won’t go into today.

Where is the all the counterfeit money?

Most of it is in what is excess reserve accounts at the Fed. The Fed requires banks to maintain a certain amount of reserves cash on hand of cover withdrawals by the bank’s depositors. But, the banks can keep additional reserves and store them at the Fed. The last number Asylum Watch has seen was that the banks had over $2 trillion in their excess reserve accounts. It may be $3 trillion now because the Fed’s balance sheet is now $3 trillion.  This explains why the printing of all that counterfeit money hasn’t caused  ny inflation by the governments way of calculating it. The Zero Interest Rate policy didn’t work as planned for the Fed, it  has worked very well indeed for the banks. With no risk to the banks, they can borrow from the Fed at zero interest and buy US Bonds from the Fed that pay, let’s say, a 2% interest rate. So, if the excess reserves are $2 trillion, the banks are making about $ 40 billion per year off of this scam with  zero risk.

How will the Fed deal with inflation if Soros is right?

That, my friends, is an interesting question. In spite of what Soros says, there is no free lunch. Here is what you need to understand. What the  Federal Reserve does is called monetary policy. What are politicians in Washington do: taxing, spending, and borrowing, is called fiscal policy. Sadly, the fiscal policies of our are rarely if ever coordinated with the monetary policies of the Fed. If the two had coordinated back in 2009, the fiscal policy would have been to balance the budget. The Fed;s QE would have done what it was intended to do and soon there after inflation would have started going up. The Fed would have dropped their Zero Interest Rate policy and instead would have raised interest rates to curb inflation. The free lunch would have been paid by you, the payers, in the form of inflation and/or higher interest rates; but the economy would have gotten back on its feet. But, the politicians didn’t do that. They spent over a trillion dollars a year more than they took in and our national debt is quickly approaching $17 trillion.

If Soros is right, the economy is going to improve in spite of the policies of the current administration, then he is also right the inflation and interest rates will jump. The reason is simple. The banks  will want  to use some or all the trillions of dollars that the banks have in excess reserves to take advantage of the growing economy. That will cause inflation and the inflation will cause interest rates to go up.

Obviously, the Fed will not be able curb inflation by raising interests, as they normally would. That would cause the economy to stall or go into recession and it would increase the cost of servicing the national debt. The only tool Bernanke has left in his monetary tool bag, is to sell the assets on the Fed;s balance sheet. That way he would be removing the counterfeit money he created with QE from circulating in the economy. This is very tricky business. Soros called it: “delicate two-phase maneuver’. I would call it a high-wire act without a net. Asylum What sees at least three things that make the Fed’s job of selling its assets tricky:

1. If they sell too fast, they risk stalling the economy or worse. But, if they sell to slow, the inflation and high interests will continue.
2. The Fed should be able to sell the US Bonds they have, if the don’t upset the bond market. However, some their mortgage-backed assets are toxic (sub-prime) and if they can find buyers, they would likely have to sell at a  steep discount to the book value and that would leave too much of the counterfeit money in circulation where it will continue to cause inflation and interest rates to rise.
3. While the Fed is walking the tight rope to keep the economy growing, the politicians continue to work in the opposite direction with their idea of good fiscal policy; more spending, more debt, and more regulations that will drag on the economy.

Asylum Watch hopes that Soros is right about the economy improving. It is going to be fun to see if the political elites of the Obama administration can knock the banking elitist, Bernanke off his tight rope.

Well, now you know what I’m thinking. What are your thoughts?