Economics Lessons for Liberals: Inflation

This past week, the Federal Reserve announced that it’s going to buy $300 billion worth of long-term Treasury bills over the next six months, and $750 billion of mortgage-backed securities, to try to loosen up credit and lower mortgage rates. It was also announced that they’re not going to raise taxes to come up with this additional trillion-plus dollars (on top of the recent bailouts and stimulus bill). Instead, they would just crank up the printing presses and print up the money.

How many things can you find wrong with this picture?

Wasn’t it loose credit that created the current financial crisis they’re purportedly trying to get us out of? Aren’t mortgage-backed securities the “toxic assets” that precipitated the collapse of all those banks and financial institutions that we’re already bailing out with our tax dollars? These are the very building blocks of the biggest Ponzi scheme in economic history, but the Fed, in its infinite wisdom, sees fit to gamble 3/4 of a trillion dollars of our money on the most discredited and dangerous financial instrument ever concocted to dupe unsuspecting investors. Only, at this point, they can hardly be said to be unsuspecting.

We’re supposed to be placated by the fact that, this time, they’re not using our tax dollars, but are printing up the money on their little printing presses. So, therefore, it doesn’t cost us anything, right? That would seem to be what they expect us to believe.

Economics for Liberals, Lesson #4.* When the Fed prints new money, it devalues all the money that’s currently in circulation. Printing more money literally dilutes the value of everybody’s savings, investments, salaries, and retirement funds.

Currency has no intrinsic value; it’s merely symbolic of the value of goods and services that can be exchanged. The only way to increase the total value in a system is to increase the production of goods and services that somebody wants to consume. The sum total of the currency in a system represents the sum total of the real value in the system (goods and services produced). The value that each unit of currency represents is the ratio of the total units of currency to the total actual value in the system. When the actual value (goods and services produced) remains stable, but the total units of currency are increased, each unit of currency represents less of the total actual value and, consequently, has less purchasing power. That’s what’s known as inflation.

Inflation is simply another type of taxation. Instead of taxing you on each incremental unit of value you produce, the Fed simply dilutes the value of everything you currently have, as well as every dollar you will earn in the future. It’s an invisible tax, because you don’t see the government taking it away from you. You see higher prices for everything you buy, and you blame the producers. But the producers are paying higher prices for everything they have to purchase to produce what they sell to you.

So everybody’s stuck paying higher prices for everything, but they don’t have any more money. So everybody’s purchasing power is reduced, making everybody, in real terms, poorer than they were before the currency was diluted. That’s because the money that was printed up by the government was not distributed to the people whose currency lost its value, but rather was used to buy whatever the Fed buys with it. — In this case, toxic assets that they know are overvalued.

How do I know with such certainty they are overvalued? Because, if they were not overvalued, they’d be able to be sold on the free market. The very fact that government has to buy them up indicates they’re not worth the price at which the government is buying them.

Economics for Liberals, Lesson #5. The value of an investment is based on the ratio of risk to potential reward. If the risk is greater than the potential rewards, the investment is overvalued and nobody will buy it unless the risk is reduced or the reward potential is increased. In many investments, the risk is simply the risk of losing what you invested, so the risk can be reduced by lowering the price. When a balance is reached between risk and potential, buyers can be found on the free market who are willing to assume the risk.

But, when the government assumes the risk, the people making the decisions aren’t risking their own money. They’re risking the taxpayers’ money, either directly (through taxation) or indirectly (through inflation). In this case, the Fed is cranking up the printing presses and diluting all of our savings, investments, salaries, and retirement funds to purchase investments that are known to be bad before they buy them. If any corporate CFO were to behave that way, knowing what we all know today, they would be fired.

And, to add insult to injury, they think we’re stupid enough to believe it isn’t costing us anything because they aren’t raising our taxes — yet. But the biggest irony of all is that the purpose used to justify this devious machination is to perpetuate the very circumstances (loose credit and easy availability of mortgages) that got us into this economic crisis in the first place.

Just how stupid do they think we are? Just how stupid are we?

*Lessons #1-3 are posted in Economics Lessons for Liberals: Minimum Wage.


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12 CommentsLeave a comment

  1. And you haven’t even touched upon the massive mis-allocation of resources that “Stimulus” is going to create.
    .

  2. NYD,

    That is a great explanation. Economics is difficult to teach anyone. Teaching it to your target audience is like putting calculus in front of a chimpanzee.

    “And, to add insult to injury, they think we’re stupid enough to believe it isn’t costing us anything because they aren’t raising our taxes”

    There are millions of Obama voters who are stupid enough, and they outnumber you and me.

  3. […] presents Economics Lessons for Liberals: Inflation posted at Government is not your Daddy., saying, “When the Fed prints new money, it devalues […]

  4. It is always dangerous to make predictions, but I will make them anyway. Just based on things that have happened in the past. Much of the cost and effect of Obama’s agenda will be 2 years or more down the road.

    The economy is picking up. The stock market is mostly going up, now that Obama and the hedge funds have knocked the little guy out of the market in a battle of nerves. The little guy will get back in as he always does when the market is much higher.

    As things get better, gasoline will go up. When this starts to hurt, Obama will bash the oil companies and steal their windfall profits to waste on alternative energy. Domestic oil and refining capacity will not keep up with demand. Prices will continue to rise, pushing up inflation. Obama will put price controls on gasoline and increase taxes on it at the same time.

    This will help clear the inventory of small cars and hybrids that nobody wants, which are clogging dealer lots right now.

    Obama will start emptying the strategic oil reserve, that Bush spent 8 years filling. The justification for this will be that since we are transitioning away from an oil based economy, we will no longer need this cushion.

    As President Obama enters his third year in office, inflation and gas lines will make him appear more and more like Jimmy Carter. This is where his investment in Acorn will pay off. The street mob will demonstrate against the enemies of the state.

    This is not even a worse case scenario. A better prospect would be either a Republican mid term election return to power, or a Democratic blue dog revolt in Congress. These might save Obama from himself.

  5. […] presents Economics Lessons for Liberals: Inflation posted at Government is not your Daddy., saying, “When the Fed prints new money, it devalues […]

  6. When socialist Europeans are telling you that you are too big a spender, Mr. President, do you ever stop and think maybe they are right?

  7. dogs (all Americans)

    you all must die as soon as possible

    if you have a little bit selfrespect than you must have do it

    you all are sons of bitch i know

  8. Gee, sony, why don’t you tell us what you really think?

    And who is this bitch you know who claims to be our mother?

  9. Economic Lessons for Conservatives:
    The best way to clean up toxic assets is to dissolve the owner of the bank, debtors of the bank and hand out shares to the depositors. It will eliminate overleveraging and make sure it will not come again. The banks will be free to lend again, if there is someone who is not over-leveraged. The toxic assets will still be their; but now the banks can obtain a profit on them.
    No: the bank-bailouts are for the conservatives.

    I do agree that printing money should not be done and that government balance sheets should try to balance.
    But currently in the present environment; a tax increase will have the same effect as a tax decrease in normal time. A tax decrease will only effect the personal over-leveraging. This will be on a personal basis, not a national one. One must remember: unemployed persons cannot reduce the over-leveraging. Other means of reducing over-leveraging is inflation, nullifying the opposite side of the leverage or full employment. Free market says nullifying the opposite side is the only true way to do this. Government says: inflation will nullify the over-leverage in scale. Full employment makes everyone happy; to do this spending must occur; if people can’t or won’t spend because their goal is to reduce their over-leveraging; the government must. The conservatives should say, on improvements, efficiency, structure, effectiveness, not paint, uselessness, no effective return on the dollar and expenses in the future.

  10. paofpa,

    As a conservative, I would love to receive your economic lessons, but I can’t figure out if you actually have anything to say. Twenty-four lines of nothing. At least sony can express a thought.

  11. Paofpa simply said that we have a credit based currency. If the unemployed attempt to reduce their over-leverage (debt) the whole monetary ssystem must contract. The only way to avoid that is for the government to step in in their place and become the debtor of last resort.

    When the government issues sundry bonds (borrows) those bonds must be bought by somebody. American investors, foreign investors, or the Fed Reserve. When investors question our credit and capacity to make good on those loans and decline to purchase the bonds, the Fed purchases them with money neither it nor the treasury have.

    In a real sense, the $1.6 trillion to fund the stimulus and the budget deficit are simply IOUs to whomever happens to end up with those dollars. (The true meaning of Federal Reserve Note.)

    Calculated inflation is the only way to satisfy the obligation.

  12. This board has been quiet compared to the others. I believe we are getting close to seeing the printing of money coming home to roost. There are all kinds of rumblings in the bond market. The Chinese are getting uneasy about buying our debt. You can defy basic laws of economics for only so long.


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