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Why the US government’s $600 billion cash infusion is a bad idea

You might’ve heard the term QE2 being banded around political and finance websites in conjunction with the $600 billion that is going into the US economy. Anytime money goes into an economy might sound like a good thing, but in this case, I don’t think it is.

Here’s why.

QE or quantitative easing refers to adding more money into the finance system in the hopes that it will stimulate the economy.

Here’s a summary of what QE1 involved:

With QE1, the Fed’s newly printed dollars were used (for the most part) to purchase illiquid assets such as mortgage backed securities from the large commercial banks. Whether by choice or not, the cash received for these securities is being held on deposit at the Federal Reserve Banks (i.e. the Fed bought assets from the large commercial lenders who are just keeping that cash at the Fed).

From: Seeking Alpha

Was that a good thing?

Here’s what happened:

We can speculate on the reasons why the large lenders are keeping their powder dry at the Fed. For one thing, the banks are still reluctant to lend. Also, the deposits are receiving 0.25% interest.

In case you don’t remember how much was involved. Here’s a reminder:

Remember QE1? That was when the FED (printed money and) bought back $800 billion in worth less, and worthless investment paper from the banks which they will hold until the troubled banks decide to buy them back.

(source)

Very little of that money actually reached the economy, and hence the velocity of money was minimal and despite what trade and employment figures show, the economy seems to be barely chugging along.

Forbes has observed some of the recent effects of QE2, namely “QE2 has already damaged the ordinary lives of the middle class and the poor by driving up the price of basic foodstuffs  required in the average American’s diet. Sugar is up 5.7%, wheat, 5.8%, oil, up 8%,, soybeans, up 5%– all inside of the first week of QE2.” (source)

And what’s going to happen with QE2 is that it’s going to be used to mop up a large chunk of US government bonds. So the Federal Reserve is going to essentially be printing more money and adjust the amounts that are owed to bondholders.

This means that the government will seem to owe less debt, however, it’d weaken the US dollar against other foreign currencies. Goods that are being imported into the US such as your Sony BluRay player, your lawnmower which was made in China are going to cost more (because of the weak US dollar).

For affiliates outside of the US, such as in the UK, Australia and Asia, a weakening dollar means your income will drop. Taking the Singapore dollar as a benchmark, the US:Singapore forex conversion has resulted in a 30% drop in earnings in the last 4 years.

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What this means for Internet marketers: US consumers (still the largest demographic for any product/offer that you might own or might promote for a CPA or CPS network) will look for ways to deal with a drop in income and in some cases, unemployment.

Bizops, finance-related offers and money saving offers should do well. Penny auction CPAs seem to be going gangbusters at several networks, even though some cynics had said they were on their way out having been launched sometime back.

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On the economic front, what’s worrying about the latest QE2 measure is talk that the government might launch QE3, QE4 and so on in hopes of stimulating the economy. However, this could be as effective as pouring money down a blackhole which will ultimately weaken the US economy and the business owners who depend on it.

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President Barack Obama, has been a charismatic face to the current administration, although the track record shows that the Democrats might be clueless about solving the current economic problems. On the other hand, voters are also reluctant to give control back to the Republicans who’re perceived to have created many of these problems in the first place. The swing to the populist Tea Party in the recent mid-term elections might be a knee jerk reaction to “politics as usual”, but none of their rhetoric nor policy bashing seems to have any answers to digging the economy out of its hole, aside from calls for a smaller government.

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That $600 billion QE2 might have been more effective if it had been made available to small business owners or to organizations like the small business administration.

As it stands, business owners, especially internet marketers should brace themselves for short term opportunities and possibly some tough times ahead.

6 comments on Why the US government’s $600 billion cash infusion is a bad idea

  1. Hannah
    November 9, 2010 at 2:36 pm (4 years ago)

    I really don’t understand how the government has forgotten that this happened in Weimar Germany only 70 years ago and that it completely destroyed their economy to the point which led to extremism and forced a war to reinvigorate their economy. The Americans don’t have that luxury either, already being stuck in two wars.

    And yeah, only 18 months ago the Australian dollar was hovering around 65 US cents.

    Now it’s at $1.01

  2. Deck Jets
    November 23, 2010 at 9:50 am (4 years ago)

    It’s good to see you posting on this topic, I need to bookmark this web site.

  3. filmindir
    January 3, 2011 at 5:24 am (4 years ago)

    Want to succeed at Internet Marketing Get into the Keiretsu

  4. oyun
    January 21, 2011 at 6:54 pm (4 years ago)

    Dude Im trying to integrate AdSense with WordPress. Difficult but it can be done.

  5. SEO in Sri Lanka
    March 4, 2011 at 9:08 pm (4 years ago)

    Agreed, I dont understand how this was in the budget in the first place. Bookmarked !

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