About 20 years ago, America began living in bubbles. Back then, the big bubble was housing. The goal was to have folks use home ownership as a vehicle to climb the economic ladder. Folks owning homes would see their equity grow as housing prices rose, after all. Getting more people to own their own homes would see more people building wealth. It was, according to the proponents, a no lose scheme. The government got involved and pressured lenders to relax their standards so that more folks could qualify for mortgages. In order to overcome the reticence of some banks to lend to poor risk borrowers, government guaranteed credit was used to buy up mortgages from banks that originated them. We went from a world of standard mortgages to one where higher risk folks got mortgages. Then, after further intervention by the government, we moved on to the world where sub prime mortgages were available. There was no credit check needed. If someone said they could afford to pay the mortgage back, that was good enough to get the loan. More and more houses were sold and the prices just kept going up. When questions were raised about the credit worthiness of the borrowers, the gurus of both Wall Street and Washington told themselves and each other that there was nothing to worry about. Prices of homes would go up, and the rising value of the homes would more than guarantee repayment of the loans. The "wise men" of finance and government knew best. these "experts" could tell that there was nothing to worry about; rising home prices would continue and would prevent any problems. Well, we all know how that one turned out. Home prices fell; mortgages went unpaid; banks and the government lost fortunes; and our economy nearly collapsed into a depression. Simply put, the gurus, geniuses and experts were wrong, and we all paid the price.
So, here we are just a few years later, and we are once again heading down the road to another bubble. This time it is the Federal Reserve that is creating the problem. When the economy was on the brink of destruction, the Fed not only brought down interest rates, it also decided to engage in quantitative easing. In simplest terms, the Federal Reserve bought the bonds issued by the Treasury to cover the national debt. That means that the Fed printed money and used those funds to pay for the nation's debts. Quantitative easing was followed by QE2 which repeated the entire process. Then we had Operation Twist and now were are on what seems like perpetual easing. Each month the Fed is buying 85 billion dollars of new debt. That comes to over one trillion dollars each year.
Let's take a moment to consider what all this extra money does to the economy. The Fed hopes that it will increase economic activity and actually lead to low levels of inflation (the goal being about 2%). Even with all this "easing", the economy still shrank last quarter. All that has grown is the money supply. It used to be that the goal was to grow the money supply at about the same speed as the growth rate of the economy. During the Obama years, the economy has grown by roughly ten percent, but the money supply has more than tripled. Trillions of extra dollars are sloshing around the system. At some point, when the economy finally picks up, all that extra money will mean an enormous burst of inflation. And when I say burst, I do not mean 3% or 4% which would exceed the Fed's target; I mean 20 or 30 percent or even some number higher than that.
Now, it is important to remember that the gurus, geniuses and experts of Wall Street and the government have told us not to worry. If inflation starts to rear its ugly head, the Federal Reserve will recognize it at once and will start removing funds from the money supply. This has to be one of the stupidest and most arrogant positions coming from this crowd in a long, long time. First of all, by the time the Fed recognizes the problem, it will already be too late to stop it. Reliable economic statistics don't come in until months after the events have happened. Then, once the Fed realizes that there is a problem and agrees to act, it will have to remove something like $2 trillion of excess cash from the money supply. The only way to do this is to sell the various bonds owned by the Fed. This is literally impossible for the Fed to do without causing a rise in interest rates to some rather elevated levels. The higher interest rates will lead to even higher inflation. Ultimately, we will see the bubble burst again. This time it will be a severe recession or even a depression.
The sad truth is that the government cannot manipulate the economy into growing through gimmicks. We need leaders who understand this. The gimmicks ultimately fail.
So, here we are just a few years later, and we are once again heading down the road to another bubble. This time it is the Federal Reserve that is creating the problem. When the economy was on the brink of destruction, the Fed not only brought down interest rates, it also decided to engage in quantitative easing. In simplest terms, the Federal Reserve bought the bonds issued by the Treasury to cover the national debt. That means that the Fed printed money and used those funds to pay for the nation's debts. Quantitative easing was followed by QE2 which repeated the entire process. Then we had Operation Twist and now were are on what seems like perpetual easing. Each month the Fed is buying 85 billion dollars of new debt. That comes to over one trillion dollars each year.
Let's take a moment to consider what all this extra money does to the economy. The Fed hopes that it will increase economic activity and actually lead to low levels of inflation (the goal being about 2%). Even with all this "easing", the economy still shrank last quarter. All that has grown is the money supply. It used to be that the goal was to grow the money supply at about the same speed as the growth rate of the economy. During the Obama years, the economy has grown by roughly ten percent, but the money supply has more than tripled. Trillions of extra dollars are sloshing around the system. At some point, when the economy finally picks up, all that extra money will mean an enormous burst of inflation. And when I say burst, I do not mean 3% or 4% which would exceed the Fed's target; I mean 20 or 30 percent or even some number higher than that.
Now, it is important to remember that the gurus, geniuses and experts of Wall Street and the government have told us not to worry. If inflation starts to rear its ugly head, the Federal Reserve will recognize it at once and will start removing funds from the money supply. This has to be one of the stupidest and most arrogant positions coming from this crowd in a long, long time. First of all, by the time the Fed recognizes the problem, it will already be too late to stop it. Reliable economic statistics don't come in until months after the events have happened. Then, once the Fed realizes that there is a problem and agrees to act, it will have to remove something like $2 trillion of excess cash from the money supply. The only way to do this is to sell the various bonds owned by the Fed. This is literally impossible for the Fed to do without causing a rise in interest rates to some rather elevated levels. The higher interest rates will lead to even higher inflation. Ultimately, we will see the bubble burst again. This time it will be a severe recession or even a depression.
The sad truth is that the government cannot manipulate the economy into growing through gimmicks. We need leaders who understand this. The gimmicks ultimately fail.
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