The Federal Reserve announced yesterday that it was going to drop another 800 billion dollars of liquidity in the markets. $200 billion will be going to back up small businesses, while nearly $600 billion will be going directly to purchase bad mortgage and assett backed securities.
This is in addition to the $700 billion bailout package that congress recently decided to bless the financial moguls with who both profited enormously from subprime lending and have likely caused a nationwide depression from their irresponsible lending practices.
The Auto industry figures that while they're handing out billions of our money over in Washington they ought to get a piece of the TARP as well. They probably will.
But where does all the billions of dollars come from? For congress the money comes from taxpayers and also from loans. In order to fund the extensive bailouts congress will be borrowing from 3 places:
1. Social Security - Ever since Ronald Reagan got creative with the budget (sort of like how Enron got creative with the budget) it's been a favorite practice of congress and the Presidents to raid the Social Security trust fund an write an IOU instead of cutting their bloated and inefficient programs. If you are less than 30 years old right now, you will likely not see any of your Social Security money when you retire.
2. Foreigners - The US govt. borrows trillions from China and many of the countries we've collectiviely labeled 'barbarians' or in today's terminology: terrorists, communists totalitarians or people otherwise opposed to freedom.
3. You and Me - In order to finance the massive debt snowball that congress is building, the US must pay hundreds of billions of dollars per year on the interest payment of the debt. This comes straight from the wallets of the US citizens. As we borrow more, this portion of the budget (and our taxes) will only increase. The US debt will be seen as more and more risky and eventually the usurious interest rates we've been giving to the poor nations of the world will be given to us.
But what about the Federal Reserve? With no power to tax, the Federal Reserve has decided to help out the economy by buying up toxic assets (in order to keep prices artificially high) with money created out of thin air. Technically the Federal Reserve is not taxing the American People. But unless the money dumped into the system is eventually taken out of the system (via higher interest rates) significant inflation will occur.
Significant inflation is like a hidden tax on the working citizens who see proportionally decreased wages while those with large amounts of capital are able to consolidate and amplify their holdings with cheaper loans.
The Federal Reserve policy to release money into the system via low interest loans enables those wealthy enough to qualify for the loans (big business and the like) to purchase at today's price with a low interest rate what will cost significantly more in the future due to the inflated supply and decreased value of money.
There's no doubt about it, the economy is quickly heading towards two outcomes:
1. A short term significant crash - 1930's style depression is more and more likely (I still don't quite believe it will happen, but...).
2. A long term two tier society made of a small number of ultra wealthy 20th century style robber barons, and a mass of working poor who have no health insurance, inadequate food quality and supply and are generally in debt for the remainder of their lives.
What can solve the financial and impending socio-economic crisis? Well the following would be a start.
1. A Hoarding tax. Real wealth should not be taxed, but money should be. Controlling the flow of money is like controlling the free market. All economic depressions come from a market in which money, and therefore trade, is locked up. Usually this this is the direct result of the irresponsible behaviour of the money owners. If we want the most amount of people to prosper we have to make it difficult for the money owners to control the free market via the control of the money supply.
2. Debt free living, debt free government. Short term this always hurts. Long term, a life lived debt free is a life lived with decreased financial risk, increased freedom and increased prosperity. Imagine if everything you bought was 25-50% off. What could you do with all your savings? Living debt free (100% debt free) is like getting a massive discount on everything.
3. A return to classical (liberal arts) education. The more you know, the more you have the ability to prosper. Knowing how the world, how nature and your fellow man works gives you the ability to produce real wealth. This means that along with specialization we must begin to really teach things like logic, philosophy, sociology/psychology, economics, history, literature and most importantly mathematics to everyone.
4. Socialized health care. The number one reason people don't start a small business is the financial risk. Most of the financial risk comes from the loss of health care benefits. Medical care is the number one cause of bankruptcy. Eliminate that risk by socializing it. It certainly wont cost near as much to bailout ailing Americans as it will to bailout the ailing banking business. More small businesses means more prosperity, independence and freedom.
- when money is dumped in the system it usually done via inexpensive loans form the central (Federal Reserve) bank [↩]
- like technology, innovation, houses etc. [↩]
- physical science like Chemistry, Biology and Physics are good too... but secondary to the classical foundations [↩]
- A few articles on the Federal Reserve and the bailout
- Bailout Sleuth
- Fed creates more money from thin air, gives to govt.