A lot of people are wondering why the Federal Reserve plans to pump another extra $600Billion into the ailing US economy. Even the New World Order Commissars at the IMF and the World Bank are saying it's a bit crazy. So why are they doing it? Well, the Fed's claim is explained right
here. To summarize:
1. The recession is supposedly leading to deflation.
2. Deflation is evil.
3. We must create illusory wealth to be lent out to stimulate new spending.
4. New spending will get the economy moving in an upward spiral again.
Okay, I honestly don't know how these people can fit so many fallacies into one policy. Now, let's be clear on this, I never took an economics class in my life. I am not an expert here. All I do is use common sense, a commodity largely undervalued in today's world.
H.L. Mencken once wrote "
I am strongly in favor of common sense, common honesty and common decency. This makes me forever ineligible to any public office of trust or profit in the Republic. But I do not repine, for I am a subject of it only by force of arms."
I know this inflation/deflation topic is a huge one, so I will try to limit it to basics and expand in some later post. After all, all four of the premises stated above (and in which our intellectuals believe) are false. So let's now use some common sense and apply it to the theories of those who "
hold offices in the Republic"...
So what exactly happened over the course of the real estate bubble, while it was getting pumped by the government and the Fed? I previously touched on it
here, but now I'll explain it using the example of one house belonging to one man.
Let's say Mr.Smith bought a house in the year 2000 (right after the Fed started subsidizing housing in the post tech-stock bubble era) for $200,000. Interest rates are at a low 4-5%. Money from the Fed is practically guaranteed to all banks who want it because of the low rates they would have to pay when getting it, so Mr.Smith easily gets a mortgage. He then realizes (miraculously!) that his house is appreciating in value because investment in the subsidized housing industry is growing so much. Mr.Smith then takes our all sorts of loans against the value of his house and lives off of them as if they were a salary. Heck, he might as well! The prices are doubling every year! But wait a second, if Mr.Smith started with $200,000 and he now has $400,000, what does this mean? It means one of two things, either (a) his house actually doubled in value, or (b) the liquidity frenzy and mania of malinvestment created the illusion of his house being worth so much money and it is actually still worth around $200,000. But he has already taken out another mortgage and so owes banks $400,000. He thinks the scenario (a) is true, and the bank is willing to gamble that it is so (after all, with money being so cheap because of the interest rate, it is only too easy to attempt this sort of investment in Mr.Smith's house). But, alas, 2008 has come around. Mr.Smith has by now taken out something like $600,000 on his property and lived happily until one day some guy somewhere realized that in reality Mr.Smith's house is only worth around $200,000. And hey, the bank still wants its money back from Mr.Smith. Scenario (b) was actually true! Now Mr.Smith cannot take out any more loans! And, what is more, it doesn't even occur to him to pay his current loans back. Why pay off the $600,000 to keep living in a house worth $200,000? So he simply stops making payments. Now the bank seizes Mr.Smith's house (he goes off to live in cheap rental housing) and must auction it off to reclaim some of its lost money. Sadly the house only fetches $150,000 at auction, so the bank just made a colossal loss of $450,000 (600-150=450)!
Let's go back to the Fed and their definition of deflation. They claim that this money which just disappeared off the markets (450,000 in asset value) is deflation of some kind. In reality, however, this value never existed! The "losses" of money supply are losses of people who made bad market decisions. Under a capitalist system this is perfectly acceptable.
Sadly Mr.Bernanke is not a capitalist...