We have some potentially devastating financial problems right now and to fix them, our government is contemplating taking a chunk of your paycheck and savings accounts without asking you. I’m not talking about a new tax. I’m talking about “quantitative easing.” Sounds somewhat pleasant doesn’t it? Well, it’s not. What it means is creating massive amounts of money out of thin air with the hope of getting the economy back on track. By doing so, the Federal Reserve wants to flood banks with cash and hope they start lending again. The Fed is widely expected this month to purchase at least $500 billion of long-term securities in a bid to boost economic growth and lower unemployment.
What that means for you is inflation and diluted purchasing power.
The possible printing of money this month should be real big news, and if you are outside of the United States on vacation you will hear it everywhere. Unfortunately in the U.S. we have elections, and advertisements, as well as all kinds of crazy stuff going on that are far more important and this will pass unnoticed.
So, let me explain what monetizing our debt is about. If we print more dollars, all the dollars in your hands lose buying power. You see this has been done before in the world. The Argentine government is famous for this. They printed a bunch of money to pay debts. Overnight every savings account in the country was cut in half. They had 325 percent inflation per year, which means everything you purchase cost three times more every year. So if you saved money, when you go to use that money to buy something, you will pay three times the price.
A side effect of doing that is people do not like to lend money when they know it will be worth less when it is returned. Banks don’t like to get ripped off.
But I have a talent for seeing rainbows, sunshine and little fluffy clouds. We will have losers, but we will also have winners!
Winners will be everyone that owes money. If you are in college and taking out student loans, have at it. Borrow every cent you can, you will pay it back at a 50 percent discount in the end. Own a house you can’t afford, weather the storm and you will be paying a mortgage in 10 years that will be half the price since you will pay it back with these new inflated dollars. Federal, state, county and local government will all win big and be able to keep expanding their budgets.
Losers will be anyone that picks a job that pays a fixed government style wage. Anyone counting on that pension better plan on another job when they retire because those dollars will buy half as much in 20 years. Businesspeople, sorry but the people in Argentina learned that capital is scarce for you and your customers. Anyone with a 401(k) will learn that no investment in the market can keep up but it should bounce back since the rest of the world should still want to invest in that casino.
Imagine next year having to purchase gasoline for $10 per gallon and $30 per gallon the following year. Now I do not think we will run the printing presses that hard, but when they did this last year the price of gold went from $800 to $1,200 per ounce. So when the chairman of the Federal Reserve tells us that he expects to print more money this month, that sort of makes me a little nervous.
With every action there is an opposite and equal reaction. When you print money, anyone that owes money wins. Our state and federal government owes a great deal of money, so they’ll be big winners.
Your elected officials have decided they do not want to cut the pension programs or government spending. Instead they will make the dollar worth less over the next 20 years. Twenty years ago in 1990, the median price of a home in the U.S. was about $103,000 while the median home 20 years later is about $180,000. We stuck the Japanese with our debt last time, so I hope the Chinese are just as gracious this time around. Either the Chinese devalue the dollar voluntarily or we will keep printing more. Wars have been fought over less.
We will have winners and losers. Anyone that owns something and has a fixed interest rate loan will benefit. Anyone that has cash or money in a dollar-based investment such as a savings account will lose. So, will the drug dealers that keep dollars under their beds. Anyone with a salary that is based on a scale will make less money. If you have a pension, you will get the same number of dollars promised you, but they will buy half as much when you go to spend them.
Since we have more people that owe money in the U.S., we decided to take a chance and see if we can force everyone in the world to loan us money against their will. That is why we call it quantitative easing and not stealing money from hard working people that saved their pennies.
David Alsabery is wishing he had not paid off his student loan. He can be reached at alsabery@gmail.com.
