Federal Reserve Lawsuit: QE Blamed For Loss in Purchasing Power

It looks like Americans are not the only ones who are worried about financial strategies employed by the U.S. Federal Reserve.

A woman from Kunming, in the Yunnan providence of China, is attempting to file a lawsuit against the U.S. Central Bank on grounds that the Fed is simply issuing too much currency.

The woman, Liu Hua, placed $250 into an account in 2006 and has now seen it shrink by 30% since that time. Her son, Li Zhen is also her attorney and has brought the case before the Kunming Intermediate People’s Court. The court has not yet decided whether they will be officially filing the case.

Zhen’s aim in the lawsuit is to stop the Fed from continuing its practice of quantitative easing, as well as alerting the people to their rights. The lawsuit specifically alleges “the abuse of monopoly in issuing currency.”

The Feds have employed this strategy in question, called quantitative easing, since 2008 in order to promote economic recovery. The practice is a governmental monetary policy aimed at increasing the money supply by purchasing government securities and others from the market. The strategy is then supposed to increase the money supply by “flooding financial institutions with capital, in an effort to promote increased lending and liquidity.”

This strategy is typically put into place after interest rates have been lowered as much as possible but yet have still to be low enough to encourage lending. Investopedia explains that a problem with the policy is that it commonly will lead to more money being available while the number of goods remains fixed, thus leading to higher prices or inflation.

The Fed has employed three rounds of quantitative easing since the 2008 crisis. Fox Business reported two San Francisco Fed researchers have claimed that the practice has weakened the dollar.

Zhen is pursuing two goals; first, that the Fed stops the alleged “abuse of its monopoly” of issuing dollars and that they make a “symbolic compensation” of $1 to his client/mother. Zhen will be on the search for others who have experienced a similar situation I order to bring a class action suit in a U.S. court.

Earlier this month, the International Monetary Fund cautioned the U.S. and others against the use of quantitative easing. They claimed that in short term cases, the practice can be reasonable, but awareness of the side effects is essential.

The Bank of Japan engaged in similar practices prior the U.S. between 2001 and 2006.  The Economist, in 2009, issued a stern warning against the practice of quantitative easing to policymakers, citing evidence from Japan.

This woman from China has highlighted a serious concern for Americans. While this seems to have made headlines because it of the abnormal legal situation, the cause behind her concern remains.

While it may be found that Hua’s case simply comes down to what Professor Wang Xiaoye refers to as a risk of depreciation involved when investing in currency, the larger issue of questioning the Fed’s practice of quantitative easing remains.