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The Fedís New Bubble (Masquerading as a Jobs Program)

  

The latest jobs bill coming out of Washington isnít really a bill at all. Itís the Fedís attempt to keep long-term interest rates low by pumping even more money into the economy (ďquantitative easingĒ in Fed-speak).

by Robert Reich    October 16, 2010   

The latest jobs bill coming out of Washington isnít really a bill at all. Itís the Fedís attempt to keep long-term interest rates low by pumping even more money into the economy (ďquantitative easingĒ in Fed-speak).

The idea is to buy up lots of Treasury bills and other long-term debt to reduce long-term interest rates. Itís assumed that low long-term rates will push more businesses to expand capacity and hire workers; push the dollar downward and make American exports more competitive and therefore generate more jobs; and allow more Americans to refinance their homes at low rates, thereby giving them more cash to spend and thereby stimulate more jobs.

Problem is, it wonít work. Businesses wonít expand capacity and jobs because there arenít enough consumers to buy additional goods and services.

The dollarís drop wonít spur more exports. It will fuel more competitive devaluations by other nations determined not to lose export shares to the US and thereby drive up their own unemployment.

And middle-class and working-class Americans wonít be able to refinance their homes at low rates because banks are now under strict lending standards. They wonít lend to families whose overall incomes have dropped, whose debts have risen, or who owe more on their homes than the homes are worth ó that is, most families.

So where will the easy money go? Into another stock-market bubble.

Itís already started. Stocks are up even though the rest of the economy is still down because money is already so cheap. Bondholders (who canít get much of any return from their loans) are shifting their portfolios into stocks. Companies are buying back more shares of their own stock. And Wall Street is making more bets in the stock market with money it can borrow at almost zero percent interest. 

When our elected representatives canít and wonít come up with a real jobs program, the Fed feels pressed to come up with a fake one that blows another financial bubble. And we know what happens when financial bubbles get too big.

 

 

 

 

 

 

Unemployment situation in America and other western European countries is clearly getting out of control

 

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