Quantitative Looting, QL

by Jeff Fisher
Oct. 13, 2010

Governments are spending far more than they could ever hope to collect through taxation.

In order to finance these yawning deficits, governments are borrowing massive amounts of capital from the private sector.

In normal times, government deficits are financed by investors choosing to invest a portion of their savings in government debt securities.

The amount of savings transferred from the productive economy to fund unproductive government spending is usually a fraction of total annual savings generated by the productive members of the economy.

Government deficits consume capital and tend to lower the productivity of labor below what it would be in the absence of government deficits.

However, if deficits are small relative to savings, net savings tend to increase and the capital stock of the economy is maintained and standards of living remain stable.

Today we are living in anything but "normal times."

Since 2008 governments have been running deficits far in excess of annual savings.

As a result, capital well beyond what the economy can save annually must be extracted from the existing pool of private capital in order to fund the schemes of the State.

This poses a problem for governments unwilling to cut their expenditures.

How can that capital be seized and used to fund the State?

Taxes can not be raised enough to meet the deficits and massive borrowing threatens to spike interest rates.

Quantitative Looting (QL), or debt monetization, is a very effective means of funding government spending beyond what is available through taxation or borrowing.

It enables the State to loot the entire capital stock of the country using its legal tender as money.

Or, in the case of the USA with the dollar as the world's reserve currency, QL enables the US Government to loot the savings of the entire world.

QL enables the State to bypass taxation and the private loan market and simply capture what it needs with the purchasing power created by newly printed money.

This printing press money allows the State to bid away capital from the productive economy and consume it as needed.

The immediate consequence of QL is a massive looting of savings and higher prices for the goods and services that the government purchases.

Furthermore, the new money created by QL becomes high-powered money which can be the base for further credit inflation of the fractional reserve system.

The longer-term effects of QL are a shrinking of the productive sector of the economy as it is robbed of savings and capital, and accelerating impoverishment of the majority of people in society as savings dwindle in real term and prices for consumer goods skyrocket.

So, next time you hear cheers for QE, think QL and all the destruction it brings.

Rothbard addresses Fed direct purchases of Treasury debt briefly in his book The Mystery of Banking and simply states that it would be "wildly inflationary."

In summary, QL or QE is simply a means to loot savings on a grand scale by using the printing press.

It destroys the capital structure of the economy and creates a huge incentive for people to withdraw capital from the banking system and the productive economy.

Replacing old equipment and maintaining production will be far more costly than businesses currently estimate.

As savings vanish and capital flees prices will rise faster and faster.

The inflationary fire of QL will not be extinguished until at least these two things occur:

The Fed must stop the monetary inflation.

The US Govt. must balance its budget.

If these two actions are not taken, the dollar will lose purchasing power at an ever faster rate.

The most dangerous and destructive stage of every hyperinflation is the final few months or years.

It is not too late to exit the financial system, the Dollar, or the US paper markets (Muni, Corporate, or Treasury); however, time is growing very short.

October 13, 2010

Jeff Fisher [send him mail] is an independent investor and professional trader living in Austin, TX. Formerly, he co-managed a successful hedge fund.

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