When people refer to the Federal Reserve “printing money out of thin air” they are referring to Quantitative Easing (QE). This practice doesn’t actually involve the printing of physical money, but the net effect is the same; they increase the money supply by flooding financial institutions with capital.
How does the Fed pay for this? Well, saying it’s “out of thin air” is indeed correct… they simply create money that never existed.
Will inflation be inevitable?
Ben Bernanke claims these trillions of new dollars won’t cause increased inflation, but even a 5th grader can figure out that the more money available, the more prices will go up. It’s the law of supply and demand.
Of course at the end of the day, more money does not make anyone richer if everyone has more of it (wealth is always relative to others). Instead, the net effect will just be higher prices for everything across the board, which drives down the value of a dollar. This is the reason why so many are shifting some of their money away from US currency and into precious metals, such as silver mint products.
Cheap credit won’t fix the problem
During the first round of quantitative easing at the start of the recession, the idea was that more money would lead to cheap credit for consumers and businesses, and somehow, that would fix the economic problems.
As we’ve all seen, that simply hasn’t worked. Mortgage rates have been at all-time lows, but home prices keep falling. Credit card offers seem like they’re on steroids, with banks giving away huge cash back bonuses and 0% balance transfers for unusually long periods of time. Credit Card Forum states are like a drug, where consumers have become dependent (and expect) airline and cash back credit cards with unjustifiably high incentives, which simply are not sustainable or profitable for the banks to offer in the long term. To keep that party going, banks will need more QE.
Conclusion? QE 1 and QE 2 have not spurred economic prosperity. Instead, all they have done is gotten us hooked on the high of easy money. Eventually, we’re going to have to sober up.
What will QE 3 do to inflation?
Being that it’s an election year, don’t be the least bit surprised if we see yet another round of QE. Obviously, this means now is an important time for re-evaluation of your assets to determine whether you should buy silver as a head against further inflation.