Fed Chief Ben Bernanke has decided to print more money in hopes of reviving the economy. I hope Ben is not doing this for political reasons; I hope it is because he truly believes this will save the economy. Whatever his reason, it is my belief this is one of the worst moves of the last four years. The last four years have been a financial disaster, so it takes some doing to top what has happened so far.
When cell phones were first introduced they were not only large, they were very
expensive. Everybody was talking about how they were the future. Some of us
held off buying a phone because it was hard to justify the expense. We also understood all new products are expensive, but soon competition would increase the number of cell phones and the price would drop. You will remember
that is exactly what happened. When you increase the numbers of anything the value drops.
Another example is cars. When first introduced, they were very expensive and few people had them. Enter Henry Ford and the idea of mass production. Soon the middle class could afford an automobile and it created a whole new industry.
I go over these stories, stories you all know, to remind you as something increases in number, it decreases in value. With Mr. Bernanke printing more money the value of the dollar will fall. Every dollar printed makes an existing dollar worth less. This loss of value will come through inflation. It has been a long time since we had real inflation. During the Carter Administration mortgage rates were over 12 percent if I remember correctly.
Researching this led me to a review of the qualifications of Mr. Bernanke. I found he is a very smart man, Harvard educated, a professor at Stanford, a tenured professor at Princeton.
He served for years as a member of the Board of Governors of the Federal Reserve System. This is a man who taught himself calculus as a young man because it was not taught in his grammar school. His entire education is based on the study of economics. He developed the theory of The Great Moderation “where modern macroeconomic policy has decreased the volatility of the business cycle.”
With this background how could he think printing money is the answer to our current problems with the economy?
Maybe, just maybe, Greenspan was a great Fed Chief. Greenspan made it appear so simple that perhaps the idea of decreased volatility in the business cycle actually made sense. Like all theories, the final test is how it performs in the real world. We must not forget the bubble was in housing and easy money, not Fed action. I do understand a number of people were calling for less money in the system at that time. But inflation was dead for a couple decades and it was good for us.
According to news reports this purchase of bonds is an open ended commitment by the Fed. Yet, if you listen to other economists they will tell you this pumping of money into the system will not work. The last attempt by the Fed to fix the
economy cost nearly a trillion dollars and had a negligible effect on the economy. I have a couple predictions that you might want to think about.
If the Fed continues to print money, and Obama is reelected, this process will result in inflation approaching 10 percent within two to three years.
When the Fed stops buying mortgage bonds, the mortgage rate will again exceed 10 percent.
The resulting slowdown will be at recession levels. The people who are making money off this move by the Fed are JP Morgan Chase, Goldman Sachs and Morgan Stanley. The people making money on this deal will be the big stock market
Despite everything you are led to believe, the middle class will be the losers as we print more money. If you are poor, it is going to be a mess.
The government will not be able to deliver everything they promise. In order to pay for their promises the Federal Government will have to raise taxes to confiscatory levels. This will drag down small businesses. Most actions taken by this administration has benefited the rich and cost the middle class. Expect more of the same.
Please understand I am not an economist, but do have a pretty fair understanding of what is happening. You must do your own research. If you have money in the bank, you will gain over the next several years. This will be a temporary gain for our seniors. Initially if you are a small investor, you could make some pretty good money. But look out at least two years and you can figure out where an overabundance of money will put you and your plans.
Bottom line, this intervention by the Fed is ill advised and dangerous.
Sooner or later we are going to face the music on the debt and on the suppression of small business growth. The people who are going to be hurt the most are middle class and those struggling to get into the middle class.
The government is not your friend; it is a system which belongs to the people. Control government or government controls you.
Our system was set up to offer the best chance to each citizen. What is happening now is outside our system. It is not illegal; it is just outside the American experience of limited government and unlimited individual opportunity.
This program Bernanke is following will only benefit the rich and the connected. Mr. Bernanke has the training and understanding of the system that should tell him he is making a mistake. Mitt Romney was correct to ask Ben Bernanke not to undertake this action.