Why is the Federal Reserve Deliberately Stimulating Inflation?
One of the problems Germany had prior to World War II is the desire to print money to solve its economic problems. The measure was counterintuitive to the belief that it would help the economy at the time. More money?! Well, we should be able to buy more things and pay more bills. Eventually, a wheelbarrow of Deutschmarks was required to buy a loaf of bread. The effect was a devaluing of the currency to mere worthlessness. Fuel for the furnace. Of course if you have had a World History course you know that the method was horribly unsuccessful.
Recently The United States Federal Reserve Chairman, Mr. Ben Bernanke, announced that the Fed would make more money available for lenders to stimulate the economy. They are essentially printing money much like Germany did. They don’t really have any more money. But through manipulations of the value of the dollar and some other tricks, more money is made available. It is not like there is a big pile of money in the basement at the Fed and somebody says, “Get the shovel!”
The “stated” hope (I say “stated” to mark the notion for reference later on in this post) is that the measure will hopefully lower interest rates and make it possible for automakers and real estate brokers to sell more. In general, the method is to be ‘stimulative.’
I hope this will be the net effect. Because we recently saw the same method used by Alan Greenspan during the Clinton and Bush administrations and it resulted in the real estate bubble and a substantial stock market correction, what some are now calling a crash in slow motion because it didn’t happen all in one month. Homes that were mere shacks suddenly were priced like the proverbial mansion because it was so easy to come by a home loan. But the result was that a working stiff could no longer afford to buy a decent home, nor maintain it for that matter. Demand increases price.
Everyone knows that wages and salaries do not and have never really kept pace with inflation. And generally, for some reason the government’s forecasts and readings of inflation don’t seem to coincide with the truths of the free market. When the government talks about things, they always seem to come out a bit rosier than the dandelions which populate the lawn.
So, if the government (The Fed) wants to make more money available for loans, which is great really (unless you know it will drive inflation up), and the same method used within the last decade no less caused the worst recession in The United States since The Great Depression, then why are we doing it again so soon? What really is behind the repeat performance?
I think I may have at least a partial answer. Taxes.
If interest rates are lowered, people can afford to buy more house and more people, theoretically, can afford to buy their first home. The problem is that the artificial demand created by a Fed manipulated market drives up the prices of the homes. Greater demand increases price. Basic economics.
So why do it? Why drive up the prices of products? Why not let the market work itself out? Is not that what the government is supposed to do in The United States? Protect the free market? Not manipulate it? If they could manipulate it for everyone’s benefit (and let us hope this latest measure will do so) that would be great. But many believe they rarely do so. Yet, again, within the last decade, the constant tinkering with interest rates by Alan Greenspan and the Fed brought about a current economic downturn that even the Fed thinks will take years from which to crawl out of.
So what is going on? A surreptitious increase in taxes. But why? The economy is bad. Sales are down. Fewer sales, less taxes. Sounds devious beyond the scope of the government, right? Why not let the market correct itself? Why not let the price of cars come more in line with what the American public can afford? It is after all a free market, is it not? Let’s find out. Read on.
If you drive up the price of a home, the sales and other taxes are concurrently driven up as well. If you make a car more expensive, you increase your tax levy on that car automatically. In effect, you raise taxes without legislating an increase in taxes, something nobody will go for today. It’s tricky. Real tricky.
The stock market does well also when interest rates are lowered. The problem is when things return to normal, the market corrects itself. I would say that would be fine, but the problem is that so many organizations, both government and private have all of their pension funds wrapped up in the market that when the market corrects itself, people who have been working for five or six decades suddenly find themselves unable to retire because all of their pension funds have mysteriously vanished. That is tricky as well. Perhaps even trickier than the loose monetary policies themselves that bring about the problems in the first place. The problem with driving up the value of the stock market by lowering interest rates and making more money available is that not everybody has the time or the ability for that matter to watch the market and to be prepared when it does correct itself. Since most government pensions are the result of taxation, I think it is incumbent upon our elected officials to install some form of regulation upon the market to address such corrections on behalf of the pensioners, or to ensure that the Federal Reserve is not so liberal with its monetary policies, whether they be to stimulate the economy or to increase taxes as I’ve described, indirectly.
In this anti-big government environment we are currently in nobody wants to say “I’m going to increase taxes.” I have not seen a single political ad (and we are swimming in them right now) that is endorsed by any politician, even the most left-wing, that has said “Elect me. I’ll raise your taxes.” If you are going to say that, you may as well commit political suicide because as they say, “you ain’t gettin’ my vote.”
I believe in fact that the reason Alan Greenspan lowered interest rates so much was exactly that. To raise sales taxes. It’s much easier than legislating higher taxes, making them law, and most people do not really know what is going on when it is done in such a slick manner.
I think it’s great that The Fed is making more money available to lenders to make loans more available to the market.
But let’s not make the same mistake again, so soon, particularly since we are not out of the hole they dug for the country like, what, was it yesterday?
And what repeats itself, again?
That, ladies and gentlemen, is what is behind the latest measures at the Fed. The government is looking out for its bottom line. Which, by the way, is right about at your neck level. And from what I can tell, you have had it up to here!
By the way, the best time to shop for cars is on Sunday morning.
Copyright © William Thien 2010
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