If there is reincarnation, I want to come back as a mega-bank, or better yet as the Fed.  Monetary Czar Bernanke is embarking on a buying spree euphemistically called QE 3.  The gnomes of Fed-land are really smart.  They know how much the economy will grow for four years . They know that inflation will be 1.8% in 2012, 2013, and 2014, and (I'm not kidding!) 1.9% in 2015.

Of course, they have to be that smart.  They have been granted the privilege of creating money whenever the fancy strikes them.  Usually, they use that money to buy U.S. Treasury instruments of various maturities.  This time, they will concentrate on long-term (how long?) securities, and maybe some mortgage-backed securities, just for variety.

In principle, this strategy should increase the value of long-term debt instruments.  That is the same as lowering long-term interest rates.  One might wonder why they don't buy other things, too.  If they bought land or homes or cars or gold, the owners of those asset classes would probably benefit because -- unlike financial instruments -- supplies of those assets take time to increase in response to this increased demand.  That would increase the money supply while lowering the asset supplies, at least temporarily.  So everyone will rush to build more homes or cars, etc.

But what will happen to the assets they bought?  I guess they could crash the cars and burn down the homes so that the market will feel comfortable investing their new-found money in production.  If so, then in a year or two, the supplies of these assets will recover to current levels.  If not, then existing (reduced) supplies will go up in price.

Are you worried about the supply side?  Don't be stupid.  That is voodoo economics.  Art Laffer should be institutionalized.  Jack Kemp and Milton Friedman are dead.  The Reagan years proved that supplies will automatically keep pace with the money supply.

It sounds too good to be true.  It is just a version of the progressive dream of hiring workers to dig holes on Mondays, Wednesdays, and Fridays, and to fill them in on Tuesdays and Thursdays.  Another similar idea is to build ships and sell them to the Fed, which just sinks them.  It is a Keynesian dream come true.  No more missing demand to hold down economic growth.

This is the economic equivalent of a perpetual motion machine.  The Fed don't need no law of Conservation of Energy.  Somehow they can just create money out of thin air whenever they want to.  Nobody can stop them.  The dumb populace will feel rich by owning more dollars than they ever imagined.  Production will magically rise to prevent inflation.  Wages will rise.  We are talking real wages!  Everybody will be richer.  Not only that, but we will no longer have to borrow from China. The Treasury can just borrow from the Fed.  If current owners of U.S. debt get worried, they can just sell it to the Fed.  Eventually the entire national debt can be paid off.  We can run large deficits forever.  Medicare will be solvent.  Hallelujah!

It is remarkable that nobody ever thought of doing this before.  Well, that's not exactly true.  Many Latin American countries do it from time to time.  Famously, Germany did in 1921.  How did that work out for them and for the world?  Pretty much every issuer of fiat currency in history has done it eventually.  But never before has a nation with enough nuclear weapons to obliterate the world tried it.  It should be especially safe when that nation's currency is the reserve currency of the world.

Let us hope that Ben Bernanke isn't a charlatan, and that his lapdog Paul Krugman really knows anything true about economics.  What could possibly go wrong?

Urgent message to Rand Paul: please follow through with your efforts to order an audit of the Fed.  If you don't, I fear for our nation's future.