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Opinion

In quest for jobs, Fed chair Bernanke's money spigot hurts economy in long run

US unemployment fell to 7.8 percent (a possible boon to President Obama, whose economic leadership Mitt Romney criticizes). But job growth remains slow. Fed Chair Bernanke's quantitative easing policies aim to boost the economy, but they will more likely spur inflation and capital flight.

By Barry W. Poulson / October 5, 2012

Chris Martin marches a Labor Day parade in Charlotte, North Carolina, Sept. 3. The Bureau of Labor Statistics announced that US unemployment fell to a near four-year low of 7.8 percent in September, but job growth remains sluggish, with only 114,000 jobs added last month. Op-ed contributor Barry W. Poulson says Fed chairman Ben Bernanke's quantitative easing policies could 'drive off capital as well as the employment it could create.' If the Fed 'truly wants to see more jobs, [it] needs to ease up on the easing' by 'implementing less, not more interventionist policy.'

Jessica Rinaldi/Reuters/File

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The Bureau of Labor Statistics reported today that the US unemployment rate fell to 7.8 percent, but job growth remains sluggish. (The economy only added 114,000 new jobs last month.) The Federal Reserve has been trying to remedy this slow growth, but its policies may be doing more harm than good in the long-run.

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“We want to see more jobs.” With that statement last month, Federal Reserve Chairman Ben Bernanke launched yet another round of “quantitative easing” (QE3) – a program of pumping new money into the financial system with the aim of driving down interest rates and incentivizing businesses to grow and hire.

The move is not surprising. In his extensive writing on the failures of the Fed during the Great Depression, Mr. Bernanke criticizes it for increasing interest rates in the mid-1930s – triggering a recession just as the economy was beginning to recover. If we were in the same pickle today, one could defend the Fed’s efforts to keep rates artificially low. However, the current financial crisis is quite different.

High interest rates played a significant role in laying the groundwork for the Great Depression. As such, efforts to lower them may have mitigated the hit our economy took in the ‘30s. When our recent crisis hit, however, interest rates were already artificially low. Further lowering them only exacerbates the risk of triggering capital flight.

Capital flight occurs when investors en masse pull their assets out of a country due to diminished confidence in its financial system. Historically, the phenomenon was mostly limited to emerging economies, as witnessed in Asia and Latin America during their financial crises over the past decades. The past several years, though, have seen massive capital flight from developed economies – including Southern European countries such as Spain and Greece – in the wake of speculation on devaluation of their currency.

As a result of quantitative easing, the value of US currency is at risk, and we, too, are no longer immune to capital flight. We haven’t hit the financial state of the euro zone, but the magnitude of our economic crisis is already unlike anything America has ever experienced. 

Some analysts estimate the central bank could print as much as $2 trillion to pay for this open-ended plan – more than doubling the amount of US currency currently in circulation. Such a flood of new money will likely drive down the value of the dollar relative to other currencies and assets.

The dollar has already weakened significantly against other currencies. During an earlier round of quantitative easing (QE2), when the Fed purchased $600 billion in bonds, the value of the dollar fell 18 percent compared to a market basket of currencies. In the months leading up to QE3, the dollar fell 6 percent. And with the Fed now set to pour $40 billion into our banking system every month for the foreseeable future, we can expect even greater devaluation.

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