For those of you just arriving from Mars, the Federal Reserve, and its fearless and feckless leader has “stimulated the economy” again today to the tune of 600 billion dollars.
The idea is to add lots and lots of liquidity to the markets so banks will lend, businesses will expand and consumers will buy.
Since consumers represent over 70% of US GDP, they have a pretty dang important role in all this nonsense.
At the end of the day, it doesn’t matter what the Fed says,
It doesn’t matter what the Treasury Department says,
It doesn’t matter what the government wants.
The only thing that matters is if the United States consumer is buying.
Right now, he’s not buying and for good reason; he’s unemployed, underemployed or is expecting to get laid off.
If you happen to be one of the more fortunate who does not fall into any of these categories, there’s a pretty high likelihood you’re not quite ready to shoot the wad on a spending spree either.
Why? With the specter of higher taxes (and we mean MUCH higher taxes) lurking as the clock rings in 2011, most sane people are not taking any chances on spending on unnecessary things.
The vacation can wait. The renovation is not critical; only what we need, no more. Let’s keep the car another few years. The kids will go to a state or city college. Repair rather than replace everything.
None of this will change if Ben Bernanke stimulates the economy with one billion or a trillion dollars. It won’t matter.
The consumer is the final arbiter on what direction the economy takes.
If one truly wants to stimulate the economy the first thing you do is stop taxing businesses and individuals to death. This frees up cash for more productive purposes.
Then, make stuff consumers want to buy, not stuff that’s expensive and falls apart.
Then hire people to make the stuff consumers want to buy.
Then pay the people who make the stuff consumers want to buy.
Once employees get paid, they have cash flow to buy the stuff they want.
It’s a virtuous cycle of employment and spending. No employment. No spending. It’s pretty simple.
Artificial stimulation from the government sector will always be short-lived and ineffective whether it’s a billion or a gadzillion quadrillion bazillion dollars. It won’t matter a hill of beans in the end.
Why? Because the business cycle starts with demand, not government. That’s revenues for the uninitiated. (Watch our training videos on Revenues Explained if you’re stumped.)
Businesses don’t want loans, they want customers. It’s the difference between growing liabilities or assets on the balance sheet. Assets you get to keep. Liabilities you have to pay back.
If you think we just spoke Swahili and want some visibility on what a Balance Sheet is, go here to watch our training videos.
The news of more “stimulus” is disturbing because the long term affect is not stimulating at all; it’s destructive.
It’s destructive to purchasing power, it dramatically raises the cost of living and threatens to destroy our quality of life.
What happens when the supply of a commodity is dramatically higher than the demand for that commodity? What happens to its value?
IT GOES DOWN. I know you’re shocked and stunned.
The bigger the gap between supply and demand, the bigger the drop in value.
So what is the US Dollar? It’s a commodity, isn’t it? It isn’t backed by anything but good faith. (A topic for another post.)
Why would US Dollars be any different than any other commodity?
Dump dollars from helicopters and each dollar is worth less and less.
This is called monetary debasement.
Monetary debasement is inflationary.
How Food Costs Have Risen 2009 vs. 2010
It takes more dollars to buy the same goods and services.
The only thing quantitative easing does is stimulate chatter on talk radio.
It does not stimulate confidence or consumption.
What it means for you and me is that everything is becoming more expensive.
Have you noticed yet?
Milk, eggs, food, transportation. They’re all going up in price big time.
The chart above shows the double digit rises in prices from 2009-2010 for key commodities.
Pork is up over 60% in one year. Heating oil is up 29%. That’s staggering.
Why? Because our US Dollars are buying less, so it takes more dollars to purchase what we need.
Don’t blame the oil companies. Don’t blame the farmers.
Blame the Federal Reserve. They are the root of the problem.
When the public finally awakens from its stupor, people will forget it was Federal Reserve policy that caused the hyperinflation we’re facing.
The Romans in ancient times tried the same trick when they were in deep yogurt financing all their expensive military exploits. Except they minted coins, they didn’t print paper. It’s the same idea though.
They debased their coin currency by using less and less precious metals in each coin. The intrinsic value of the coin was far less than the face value of the coin.
It got so bad that few people would accept anything minted by the Romans as a medium of exchange. Eventually, people couldn’t buy ANYTHING with Roman currency.
“Honest weights and measures” with regard to coinage meant the value the coin had stamped on its face was equal to the intrinsic value of the metal it was made of, whether gold or silver- the only monetary metals.
If you skimped on the metal, you were cheating the buyer.
Roman currency eventually became worthless.
Do I hear a Roman echo?
Suggestions to Washington; listen to my Yia Yia Maria’s wisdom:
- Make a budget.
- Stick to your budget.
- Never mind fancy people, cars and clothes.
- Spend less than you make.
- Save for a rainy day because skies always darken at some point.
- Be thankful for what you have and stop whining about the neighbors.
- Give a crust of bread to someone needy;Â you might be feeding an angel and not know it.
This is good wisdom for households.
It’s good wisdom for our government.
When will the Fed get it?
- More dollars stimulates inflation.
- More dollars reduces our purchasing power.
- More dollars degrades our quality of life.
It is true today as it was in Roman times.
Throwing money at problems never solves them.
If you want more, go to “We Are Sinking“. You’ll learn and you’ll laugh.
If you get stuck, hit the Panic Button. We’re the Solopreneur’s lifeline.
