Living in La-La Land

Let’s take an intellectual journey to a make believe world; the real world is too complicated to wrap our minds around. In our fake world, there is only one product. Let’s say the product is houses; our make believe people have to live somewhere! A house costs $10,000. Five-hundred houses exist in the make believe economy. In order to make buying and selling homes convenient, the government prints paper money. In order to ensure there is enough money to cover the cost of all the houses, the government printed $5,000,000. The money is backed by a real product, a house-standard. This money goes into the economy.

Now let’s say the government decided one day that it wanted to give each citizen a rebate. The citizen’s are excited to have a little extra money. For fun, let’s assume the government has printed up another $1,000,000 dollars. All the citizens get a little dose of love from their government. What do you do with extra money in a one product economy? Well, I don’t know and I am not going to put too much mental energy into thinking about it. That isn’t what we are trying to learn.

After this extra money is introduced into the economy, one of our fake friends decides he wants to sell his $10,000 house and move to another house. Our fake friend is surprised to learn that his $10,000 home is now worth $12,000. He hasn’t made any improvements to the home. Did the homes value go up $2000? Uh, no… the extra money printed by the government artificially inflated the value of this man’s home by 20%. There are still only 500 houses giving value to the now $6,000,000 in circulation. His dollar that used to be worth $1.00 is now only worth $0.83. The dollars in circulation are worth less, not worthless just not worth $1.00. Printing money out of nothing causes inflation.

Wasn’t that fun? Well, in the real world, the economy works in a similar way. Our government spends way too much money. Where does that money come from? Well, certainly our taxes. I’ll tell you a secret; our taxes don’t cover our federal budget. The government gets more money from individual citizens by selling US Savings Bonds, but this doesn’t really make a dent in our needs either. Our government borrows money from private investors and foreign governments too. Japan, China and the United Kingdom are our biggest foreign investors. But the largest chunk of our National debt, about 40%, is owed to the Federal Reserve Bank. The Federal Reserve Bank is a private bank that prints money for Congress. Yes, our government gets a good bit of the money it “needs” to operate by printing it. Doesn’t that sound as if it should be illegal? Well, technically it is. But, apparently the US Constitution is “more what you’d call ‘guidelines’ than actual rules.” Printing money might seem like a good thing to some people. Our elected representatives can promise to never raise taxes while continuing to spend money. We get all the services that we feel as Americans we are entitled to; our elected officials get to keep their jobs. After all, if they raised our taxes or cut services we wouldn’t continue to vote for them. The newly printed money causes inflation.

Now some people seem to have benefited from this pattern of printing money and causing the cost of everything to go up. When my own parents sold their home in Arizona, the value of their home had gone up almost $300,000 in the 25 years they lived in it. Their house increased in value by over 300%! Incredible! Part of this is because everyone and their brother wants to live in Phoenix. But, inflation, more accurately the devaluing of the dollar, accounts for most of the “increased home value.” They moved to an area of the country where housing costs are far more reasonable than in Phoenix; they purchased a new home with cash with the money they made on the sale of the Phoenix house. That’s very good. Or is it? You see my Mom’s parent’s both lived into their 90’s. My Mom will likely live another 25 years. She is retired and living on a fixed income. As the government continues to spend, and continues to print money to cover their spending, the cost of living will continue to rise, will my Mom’s income continue to cover her expenses? America’s founders were passionate about the issue of taxation without representation. Yet we tax our children without giving it any thought. The money we are spending now is a tax on the future generation. Marissa, David and Beverly, none of whom can vote, will have to pay for our frivolousness. Our national debt is now $9.4 trillion. Have you ever calculated interest on $9.4 trillion?  When do we as Americans say, “Enough?”

The rebate we are all promised is a scam. It is not like the US Treasury took in too much money in taxes and is redistributing what we overpaid. It is certainly not like our representatives have decided to tighten their belt, spend less money and move the money they are saving by decreasing their costs back into the economy. Our government is beyond broke. The US Government will have to borrow more money to fund the rebate. A majority of this money will come from the Federal Reserve. The Federal Reserve doesn’t have the money either. They are going to make it out of nothing and then charge the US Government interest on it! That seems to be a pretty good deal for the international banking interests who make up the Federal Reserves. Wouldn’t you like to charge interest on nothing? The new money is not backed by any real products. With more money in circulation, the cost of everything we purchase will go up because the value of the dollar has gone down. It is the reason we are all paying a small fortune to buy gas. And, why we are all eating chicken instead of steak… buying our coffee at McDonald’s instead of Starbucks.

My rebate check will go in my savings account to help offset the inflation that the rebate program is going to cause. Spending my rebate check frivolously will not jump start the economy; it is not my patriotic duty. Spending my rebate check does little more than put me at a financial disadvantage.

Related Link: To whom do we owe all this money? Who owns the Debt?