The American solution to the 2008 financial crisis was flooding the economy with money. There was the TARP, the Troubled Asset Relief Program, a $700 billion bailout of the US' largest banks. But that was only the beginning. Dr. Ben Bernanke at the Federal Reserve bank added another $9 trillion to the money supply with his policy of "quantitative easing" which is just a euphemism for "printing money." The Fed has printed money again and again. There was a follow-up policy, QE2, because the Fed figured it hadn't printed enough money with QE1. In addition to the US Fed, the European Central Bank (ECB) has been printing money to bail out Greece and other vulnerable European economies. The Central Bank of Japan has also been printing money fast and furiously. Both the US Fed and the ECB are legally prohibited from buying up their country's debts directly, but they can loan money to their big banks and these banks can in turn loan money to the respective countries in an indirect "wink-wink" transaction thus getting around the inconvenient limitations imposed by law. As a consequence another layer of interest accrues to the big banks increasing their power and dominance over the world economy to the point that supposedly sovereign countries have become mere dependencies on them.
What does all this money creation do? First, it supposedly offers a stimulus to economies that are verging on recession. But that is not really happening due to the fact that most of this money is simply being siphoned off by the world's big banks, and, instead of stimulating the economy, is simply going into the financial sector fueling even more speculation and contributing to a possible further meltdown and bailout down the road. In Europe the money is simply going to pay down debts incurred by the various countries. Nothing is being done to spur Greece's economy, for example. Instead the Greeks are being subjected to a regime of austerity - firing workers, reducing pensions and generally creating economic malaise for the average Greek citizen. This will force the Greek economy into a deeper recession with the result that Greek indebtedness will only increase requiring another round of bailouts by the ECB.
Another effect of printing money, sometimes called government "fiat money", since it's not backed by gold or anything else, is the debasement of the currency and inflation. In general the larger the money supply, the more inflation there is. This is not a big concern when an economy is in recession, but becomes a greater concern when the economy starts to "heat up." As far as the debasement of the currency is concerned, the dollar is starting to lose value with respect to other currencies. The more fiat money the government creates, the less the dollar will be worth and this has implications for the dollar as the world's "reserve currency."
Ellen Brown has written extensively about the good aspects of fiat money, namely, Abraham Lincoln's use of it to win the Civil War and build the transcontinental railroad. But all fiat money is not created equal. In Lincoln's day his fiat money went directly into the "real" economy. That is it went to average working people to fight a war and create infrastructure. It avoided having to borrow the money and saved the US government $4 billion in interest. There is a difference in the fiat money that the Fed and the ECB are creating today. Their fiat money is going directly into the financial sector instead of into projects that distribute the money to average citizens and workers. In other words in a perverted downward spiral, today's fiat money is going to pay off the world's big banks like JC Morgan Chase and Goldman Sachs and to pay interest on huge debts owed to private bankers. The Lloyd Blankfeins and the Jamie Diamonds of the world are profiting while the average working person and citizen is only going deeper into debt. The money is not "trickling down", making Republican assertions that all we need to do to get the economy booming again is to give more money to the rich, a ridiculous assertion. The only way to get the economy working again is to give the money directly to the average working person, but this possibility is not even on the radar of the world's western economies like it was during the Great Depression. That is, instead of inserting fiat money into the financial sector resulting in huge profits for bankers and miniscule results for the middle class, the money needs to be inserted into the economy directly at the middle class level which is to say in the form of infrastructure development and support programs like food stamps and tax breaks for the middle class.
The dollar is the world's reserve currency only because the US cut a deal with the middle east oil sheiks that oil on the world market would only be traded in dollars. But here too the dollar is being undercut since some countries, notably China, are cutting direct country to country deals which bypass the world oil market and bypass having to purchase oil in dollars. There are also moves afoot to replace the dollar by a basket of other currencies which would compete with the dollar. All of this is not promising for the continuance of the predominace of the dollar. Increasingly, US Treasuries are becoming less desirable as investment vehicles which means that the money printed by the Federal Reserve is increasingly being used just to buy up the US deficit which is the shortfall between Federal government expenditures and Federal tax revenues. So money is being printed just to bridge the gap. Obviously, this can only be a short term solution to US deficit and fiscal problems. For the long term the US economy itself has to produce tax revenues sufficient to balance government expenditures or, more likely, to pay increasingly higher interest rates to attract private investors just as Greece and Spain are having to do.
So as the US money supply is further diluted by quantitative easing, the value of US money is diminishing, dollar-denominated debt is less desirable as an investment and the role of the US dollar as the world's reserve currency is being eroded. European countries are in a similar predicament having become essentially subsidiaries of US and European banks. One of the statistics that substantiates these assertions is that 93% of the income gains since the Great Recession have gone to the upper 1%. In other words most of the money created has gone to the hedge funds, large banks and other elements of the financial sector. This money has not "trickled down" to the real economy. This is the ultimate denouement of the fact that the western world has relied too much on debt basing their economies. Rather than spending from strength which is spending from savings and accumulated wealth which countries with sovereign wealth funds are able to do, western countries and individuals have overspent by going into debt and the accrued interest is only driving them further into debt. The result is that huge amounts of interest are owed to the big banks, and this amount of money is swamping western economies and debasing the values of the dollar, euro and yen.
In a Trillion Euros Didn't Buy Much Time, Rick Ackerman discusses the fact that the US and Europe have both been reduced to the same level. Their central banks are being forced into the position of bailing out the US and the European countries by buying up their debt since private investors are becoming more and more reluctant to buy it. The US Fed is printing money to make up the difference between US government expenditures and what US taxes and private investors are willing to fund and in the European case, the ECB is buying up Greek and Spanish debt that private investors are turning up their noses at. This buying of debt means that central banks are effectively printing money to pay off the big banks which are owed money that US and European citizens as taxpayers don't have the money to pay and which increasingly cannot be borrowed from private investors.
All this supports my contention that the real action in the world economy these days is not with the average worker/consumer. The average person is becoming increasingly irrelevant. Instead the big banks, hedge funds and central banks are where the action is. In the US the big banks were bailed out while practically nothing was done to bail out the average person. Just think of the foreclosure crisis where HAMP, the Home Affordable Mortgage Program, turned out to be a worthless, toothless approach which did more damage to the average home owner by raising hopes which were later dashed than if it had never been enacted. It did almost nothing to protect home owners from being foreclosed on even though most of the foreclosures were fraudulent. In some cases home owners were led on being promised modified mortgages if they would only keep up current payments only to be foreclosed on at a later date instead of being given the revised mortgages they had been promised. The government's attitude was "we have to let the banks do anything they want, even engage in fraudulent activities, because to do otherwise would risk collapse of the entire system." Ellen Brown's plea for the elimination of the debt based, interest oriented economy in favor of public banking favoring fiat money injected into the real economy instead of into the financialized economy seems further and further from any possibility of being realized.
