Although most economists are loathe to admit it, inflating the currency really serves as a form of stealth taxation. The entire goal of inflation is to allow the issuer of the currency to buy things with the full initial value of the money being inflated while simultaneously reducing the value of the money held by everyone else. In other words, inflation transfers the value represented by monetary tokens (bills, banking computer data, etc.) from the people who hold old tokens (the bills in your wallet) to the people printing the money (in America, the Fed).
The Fed usually [sic] manages the economy by adjusting short-term interest rates. With those rates already near zero, Fed officials had to dust off a strategy for boosting the economy that debuted during the darkest days of the financial crisis. The Fed plans to create money, essentially out of thin air, and then pump it into the economy by buying Treasury bonds on the open market. These purchases are to be finished by the end of June, the Fed said.
Stop laughing at the “manages the economy” bit and focus on the emphasized text. What is really going on here?
What is really going on is that the Fed is stealing $600 billion dollars of real value from your pocket and using that value to fund the US Federal government through Treasury bonds. The real transfer of real value goes: You–>Fed–>Government.
It’s a damn tax increase craftily carried out using the finance system.
The only difference from a formal tax is that in this case instead of taxing just American citizens or those doing business in America, it taxes everyone on the planet who holds either dollar bills or assets denominated in dollars. That ain’t cricket. This financial mess is our screwup and we shouldn’t be picking the pockets of the rest of the world to pay for our mistakes.
Worst of all, it’s stupid. You can’t fix the economy by tricking people into taking economic action against their own self-interest. It doesn’t do any good to lower interest rates and encouraging lending if the value of the lent money has deceased. So, great, a building business can now get a loan to pay 10% more concrete but now, thanks to inflating the currency, concrete costs 10% more, so they end up buying the same amount of concrete. Economically it’s a wash.
After all, if screwing around with the money supply worked as the Fed thinks, then you could make an argument that deflation should have the same effect. Deflation would make the money that individuals and businesses already have more valuable by decreasing the cost of goods they buy. That would mean that loans made with deflated currency would buy more stuff making the loans more valuable in terms of real goods and services.
The problem here is that the Fed is governed by bankers and bankers equate good economies with large numbers of loans so they believe that making large numbers of loans will create a good economy. It won’t. All it will do is to increase the costs of things the loans buy and destroy the value of the dollars held by people stupid enough to be thrifty.
There are no short cuts and no magical cures. The ugly truth is we used thirty years of massive government intervention in the residential real estate market to intentionally distort the market’s feedback mechanism so that people could get housing they couldn’t actually afford. Now, we have massive numbers of houses that are too fancy, built in the wrong communities and owned by people who can’t pay for them. All the jobs associated with those white-elephant houses, from construction to financing to selling to landscaping, are now gone and they won’t come back. A lot of the money lent to build the white elephants won’t ever be paid back and all that potential investment wealth is gone. All the real wealth, real goods and services, associated with those houses has been removed from the economy and that real wealth won’t ever magically reappear.
We are simply going to have to grit our teeth and admit that we can’t magic our way out of this by fooling people into thinking that all that real wealth didn’t disappear. We just have to concentrate on shifting economic activity away from the white-elephant housing and toward other activities that produce real material wealth. That will take time and it can only be done by the free-market operating to efficiently handle the reallocation of resources.
As I wrote in my previous post, sometimes the best thing to do is nothing. Nothing is certainly better than raising taxes $600 billion in the middle of a massive recession.