Watching the Green Bay Packers play the Dallas Cowboys makes me forget that the country is in a huge financial mess – a mess instigated by clueless regulators and carried out by foolish consumers and greedy financial executives. Anyway, let’s get back to focus.
In my last article, I covered some basic concepts of monetary policy and how the Federal Reserve uses those tools to stimulate or cool the economy. I also spent some time explaining who may be at fault for the mess we are in now.
Now with the Treasury Department having proposed a new facility over the weekend which would allow it to BUY up to $700 BILLION of sketchy mortgage debt, and funded by the Fed buying these bonds (if I understand the reports correctly), they will pump hundreds of billions of additional dollars into the financial system. What will be the result of this? let’s discuss what happens when the Fed pumps money at unprecedented levels.
First, review these videos of Congressman Ron Paul questioning Federal Reserve Chairman Ben Bernanke about the effects of adding money to the system and the inflation it can cause and the other of him explaining to the House his view of the situation:
(just a note: a lot of people like Ron Paul’s message but there are many who disparage him. I have to say, after hearing all of the other candidates thoughts on economic issues, he is the ONLY ONE who GETS IT)
Second, for those of you who have been reading my column all along, you may remember my article on Fleckenstein quoting Marc Faber explaining “Zero Hour,” the point when so much monetary stimulus that it no longer stimulates growth in the economy, it only INCREASES INFLATION. Here is that article for review:
Now that you have that background information, understand the following point as well as you can please: our national debt is the noose tightening around our neck that is going to kill us. Remember how people have been saying for 20+ years now how we would someday pay for all the debt we were building, both on a personal AND national basis?
Well, TODAY is that someday. We’re here. And you can blame most members of Congress for this and your president. As I mentioned in my last article (part 1), as long as you have elected politicians making these tough decisions, you are apt to get short term (hopeful) fixes and NOT apt to get real solutions. Just like overeating for years gets you tremendously overweight. And reversing this situation often requires discipline and some pain (exercise and eating less). Getting out of this credit mess SHOULD be a little painful – bankruptcies (corporate and personal), foreclosures, and other stress is NORMAL as we detox from this mess.
However, as I have stated before, the politicians are going to choose the course which is best for their image and/or chance for reelection. Think about it, who ran the SEC before Chris Cox? Harvey Pitt – a knowledgeable attorney. Now that Cox, a former Congressman runs it, we get ridiculous ideas such as banning short selling and ignoring violations of Sarbanes-Oxley disclosure rules.
They should allow the country to go through some pain to clean out the system but they won’t. Since they won’t, let me tell you what is going to happen. Billions of additional dollars get pumped into the system. Then we have too many dollars chasing too few goods, the classic definition of inflation (too much money in the system causes prices to rise!).
As inflation rises, the Fed will probably exacerbate the situation by lowering rates in order to “stimulate the economy.” Then the value of our dollar will continue to fall as foreign countries worry about our ultra high debt and low interest rates on the money. Rates will have to rise in order to make our debt more attractive to others. When people experience the problems of inflation, they will wish they could exchange it for the problems we are “avoiding” by these bailouts.
1. Politicians are another group of people who will further irritate our current problems. Their naturally short term focus is the major cause of their mistakes.
2. Politicians will help flood the system with money and recklessly explode inflation levels.
3. Inflation will put enormous financial strain on the living expenses of all Americans.
Remember, what they do now, we will potentially pay for, for the rest of our lives.
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