Hmm… If this doesn’t sound like it should be taken with a pain reliever, maybe it should. Let’s start with some basic concepts.
The Federal Government raises money in two basic ways (this is the very big picture folks). It collects revenue (taxes) and sells debt securities, which are savings bonds, treasury bonds and bills. Bonds and notes (again, very general terms here) are promises to borrow a sum of money and pay it back at a specific time with a certain amount of interest. Government bonds are not backed with any form of collateral, but by the full faith and credit of the sovereignty of the United States. Basically, Uncle Sam makes a promise to pay his borrowers back. Banks (big banks both here in the United States and central banks in other countries) buy these debt instruments in large quantities, which helps set the market value of the dollar.
See, currency is traded just like any other commodity – orange juice, wheat, oil, etc – and that makes it subject to the same basic principles of supply and demand. High supply with low demand makes lower prices. High demand with low supply makes high prices. Balance supply and demand, and you get what is known as in Economics as equilibrium. At equilibrium, there is enough supply to meet demand and price is stable. The price of money is expressed in the interest you pay in a loan, or are paid for a deposit.
Basically, when Uncle Sam wants to make an impact on the cost of money (to either create or stop inflation), he does so by manipulating the supply of it. The market typically reacts to the change in supply by changing how much it will pay for money, which translates to the interest cost of loans and the amount of interest paid out for deposits. However, other things happen when the supply of currency is manipulated outside of the normal market processes. As interest rates rise, so does the cost of goods made and sold – this is called inflation.
Enter Quantitative Easing: In order to restrict the amount of money in the market, the government buys back its debt instruments. The big question is: Where does the money come from to buy the debt, when it is already severely debt laden and spending at a deficit? Simple and short answer – add more dollars to the system! Fire up the old printing press and fire off some more greenbacks! Come on, they look the same! They must be worth the same amount they other ones are worth, right? Wrong.
So why the big freak out? Inflation.
Goods and services would change prices along with the value of currency both domestically and internationally. Unfortunately the income of the people who are buying these goods and services doesn’t change at the same rate. This is because the businesses that employ consumers are themselves making less money due to the cost of money increasing, which forces them to increase prices, or lay off workers to protect profitability. (How dare these businesses want to make money!) Well, not having a job (or a good paying job) makes it harder for consumers to buy goods and services. So they don’t buy what they used to, which further endangers profitability, which kills business, and more jobs.
But wait! Wait! Uncle Sam as the perfect solution! Spend more government money! Uncle Sam says he can put people back to work by buying stuff or giving away money. But where does the more money come from! Corporations and businesses that are able to stay alive end up paying the penalty of success – higher taxes. At the same time, Uncle Sam starts selling bonds again to our foreign investors again. But now it’s going to cost a bit more than it used to, because your dollar isn’t worth what it used to be.
Ok, so after that rant you are either saying way to go Mike, right on! Or you are saying whoa, you’re being so dramatic. It’s not really that way. You aren’t considering such and such, or, but children must eat somehow (how well I know!). Well, here’s a little experiment to see if the current government philosophy works:
I think we can all agree that if we had less debt to pay in our personal finances, we’d have more money to spend on other things – even if we are spending past our means (just like dear ole Uncle Sam). Just take your paycheck down to the photocopier! Make a copy of it and it to your creditors and say: “Here ya go! This is just as good as the real one!” Uncle Sam thinks it works this way…doesn’t it? When you get out of federal prison, let me know how it worked out!
Your thoughts and comments are invited!
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1 comment:
Truly a very nice site Michael ... Dad
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