THE ROAD TO STAGFLATION
by JC Leahy
Obama Government Plan to Impoverish Americans to Pay Federal Debt
The road to stagflation is paved with good intentions. The day after the November 2, 2010 elections, the Federal Reserve announced that it would buy $600,000,000,000 of Treasury Bonds on the open market. That sounds like boring financial news, right? Here's what they don't tell you: For the Federal Reserve to buy U.S. Treasury Bonds equates to printing money. This will tend to devalue the dollar and cause inflation. Another way to put it is that the Federal Government will be quietly raiding YOUR paycheck and grandma's retirement fund to pay off it's own insane amount of debt. If this is accompanied by anti-business governmental policies (such as the planned Jan. 1 expansion of EPA regulation, Democratic-style health care reform, business-bashing rhetoric like President Obama's, tax increases of any kind, and uncertainty of policy, then the result will be continuing job shortages and stagflation.
Here's how it happens: When the Federal Reserve buys Treasury bonds on the open market, it pays for the bonds with dollars that it creates, literally, out of thin air. These dollars may be disbursed in the form of checks that can't bounce because the Government says so, or in the form of simple computer entries. When, years ago, the North Vietnamese government created new U.S. dollars with a very sophisticated counterfeiting operation, they were said to be trying to harm America by depleting the value of the dollar and creating economic chaos. Nowadays, for the Federal Reserve to buy bonds with made-out-of-thin-air electronic dollars, will also have the same effect of depleting the value of existing dollars and fostering inflation.
But wait a second!! This dilution of existing dollars is more profound than it first appears! This is because of the fractional-reserve-based bank regulatory system. The underlying legal rule for commercial banks in the United States is that for every dollar of deposits on their books, the bank must have 10% of that amount in actual cash reserves. Conversely, if $1,000 of newly-created money is deposited in a bank, the bank is free to loan out $900 of that amount, keeping only 10%, or $100 in reserves. This fractional reserve requirement leads to what economists refer to as the "multiplier effect." Look how the multiplier effect works when multiple banks are involved.
Bank A receives a $1,000 of magic cyber-dollars as a deposit and loans out $900,
Bank B receives the $900 deposit and loans out 90%, or $810
Bank C receives the $810 deposit and loans out 90%, or $729
Bank D receives the $729 and loans out 90%, or $656
Bank E receives the $656 and loans out 90%, or $590
Bank F receives the $590 and loans out 90%, or $531
And so on and so on... In the above example, $1,000 of new money has created $3,685 of new bank deposits ($1,000 + $900 + $810 + $729 + $656 + $590). If we carried out the mathematical progression, we would find that $1,000 of magic cyber-dollars actually creates $10,000, made from thin air. Hence, when the Fed says it's going to buy Federal Government securities on open market in an amount equal to our entire defense budget, and pay for them with magic cyber-dollars, it's a very big deal.
If the Fed (or a sophisticated counterfeiter like the North Vietnamese government) places, $600 billion of newly created money into the system, it will actually create $6 trillion of new dollars. Pause here and think about that. What do you think that means for Grandma's retirement account? What does it mean for your paycheck?
But wait a second!!! It may be even an even bigger deal! Why? Because the bank may (and often will) encourage you to move your $1,000, or whatever the amount is, from a deposit account to a money market account. The reserve requirement on money market accounts is not 10% --- it's ZERO percent!!!! Whew!!!
The end result of "monitarizing" Federal debt this way is to pay for ridiculous, profligate Federal spending by taking it out of the paychecks, and savings accounts, and retirement accounts of hard-working Americans and vulnerable retirees, and handing it over to the Chinese and other creditors.
Impoverishing Americans in this way will not make America more competitive with the Chinese because there are other barriers to American competitiveness besides the currency exchange rate! These barriers include burdensome regulation, high taxes, Democratic health care reform, and uncertainty in the tax and regulatory environment.
Why did the Federal Reserve wait until the next day AFTER the 2010 election to hatch this unusual plan? Just a coincidence? Maybe.
I've been saying for a long time that this would happen: dramatic expansion of the monetary supply coupled with anti-business policies of the Democrats, leading to stagflation. Stagflation is "hell" for everyone. Now, Glenn Beck is beginning to sound like me! Those of us who lived through the Carter Administration remember stagflation!!! President Obama is Jimmy Carter on steroids!! We've already been here, folks!!! Can't we learn from our mistakes???
World leaders are now calling President Obama "clueless!" What else can politicians do? Borrow more from the Chinese? Cut spending? Raise taxes? What can YOU do? Start listening to Glenn Beck? Tell Grandma to buy gold? (Not a bad idea!) Get politically involved? WHAT DO YOU THINK?? (Comment below.)
For 2011, the Federal Reserve's plan will give the economy "sugar high" boost, but it will lead to stagflation (and possibly worse) unless the new Republican Congress can create an environment conducive to the growth and flowering of American private enterprise. If there is no flowering of private enterprise, JOBS WILL NOT BE CREATED!!!!! That is the challenge of 2011.
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