U.S. Economy: Spending and Phantom Financing Will Only Lead to Ruin

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Includes: UDN, UUP
by: Brandon Pilzner

How is the U.S. going to pay for the financial bailout, the stimulus package, and the new proposed housing bill? Well, we know that the new administration will not increase taxes to fund these “last-resort” projects. So, the U.S will do what we do best: create money out of thin air. Every time I turn on the TV, I see a once great capitalistic nation turn even closer to a socialist nation.

Obama’s stimulus plan of creating jobs by building infrastructure cannot work because he is being poorly advised. The solutions proposed by his economic team are going to make this problem worse in the future. All of these bailouts and stimulus packages are just to perceive a cushion for the fall, when in reality the financing of these so-called lucrative projects are non-existent. The Fed is destroying the U.S. dollar by printing money to fund the ‘cushion’ for our economy. We are not going to be able to spend ourselves into prosperity like this administration thinks. They are trying to keep housing and stock prices high in order to retain the paper wealth of these assets, which has vanished from excessive credit, and poor allocation of investments from past administrations.

Now we are trying to get this credit going again, and the administration thinks that by bailing out the financials, fixing the mortgages, and providing stimulus to the nation with money and credit created from thin air that they are going to produce long-term growth for our nation. In reality, it is adding to our national debt in alarming amounts.

We see now that the Fed is trying to fix prices. In a recession, prices should go lower because obviously prices were inconsistent with the laws of supply and demand. When a nation manipulates prices, they become socialistic; socialism hasn’t done well as a way of government all throughout history. Bernanke’s argument based off the Federal Reserve Act is irrelevant in the fact that he is trying to find price stability.

Price stability is far different than price fixing; in actuality, price fixing doesn’t lead to price stability. Bernanke misunderstands this key difference. He is trying to keep the worth of illiquid assets perceivably higher, but for the most part an asset is illiquid because it isn’t worth much of anything anymore. Congressman Ron Paul has said that the reason why the Great Depression was prolonged was because of price fixing, and this is what we are now seeing. So, the government could be prolonging this economic catastrophe with the thought that they are actually fixing it.

Throwing money at the problem with no thought of how it will be funded could lead the U.S. down a road of debt that they may never dig themselves out of. With the current deficient and spending problems, our dollar will slowly become worthless unless major changes in economic policy occur. The whole reason that we are in this mess is from the government creating credit out of thin air. More of the same of this phantom-financing at exponential amounts will not create the growth needed by the United States in order to survive.

If the problem was all the debt accumulated from financing past and present projects, why is everyone blaming the housing market? As we have seen in the past, every economic bubble has eventually burst. We have seen it time and time again in foreign bonds, technology stocks, oil, and in the value of houses. The downturn in housing means that they were overpriced. This has led the government to fix prices, but the prices should come down because that is how a free market works. The market is saying that prices were too high, and to correct those high prices, a fall in prices is needed. By price fixing, the government is interfering with the laws of supply and demand. Fixing prices at a higher level then what they should be just ends up compounding the problem in the near future.

The problem has occurred because we borrowed too much, we spent too much, and we printed too much. This will eventually lead to inflation; inflation isn’t just an increase in prices from a fallen worth in real dollars. When money is created from thin air, when it is loaned out from the central bank, it increases the money supply without any corresponding increase in the goods and services of the economy. More paper chasing the same amount of goods means that each dollar is worth less. This is inflation and this is what will eventually destroy our economy.

It would be the same as if the Federal Reserve went into your bank account and took a percentage of your savings, say 2-3%. So in reality, inflation is a tax powered by the Fed, increasing it by increasing the money supply, which is what they are doing right now. Even though there hasn’t been a raise in taxes, inflation is the tax money taken from consumers to finance these projects. People need to get off their high horse and look at what is really happening in our economy and not just listening to what the neo-liberal media is telling us.

If people aren’t worried from the hidden Federal Reserve inflation tax, or the continued spending and increase in our national debt, then they should be worried of the one quadrillion held world wide in derivatives. Derivatives are basically a financial fantasy, phony wealth created by leveraging out real assets hundreds of times. This means that a small amount of assets can represent exponential amounts of money in a combined effort from major investment banks.

The bedlam in the mortgage-backed securities market is threatening an unfortunate series of events that could melt its way through this derivatives’ bubble and create a financial calamity with irreversible consequences. To put one quadrillion in perspective, the amount of assets combined in the entire world is worth around 100 trillion. So this derivative black-hole is ten-times greater than the entire wealth of assets on Earth.

The United States needs to go through a major change in economic policy in order to fix this mess. We can start by letting things fail and letting the market work itself out. If millions of jobs are lost, let it be; let them fail. The cost of propping up failing, poorly run companies is worth more than the ramifications of just letting the company fail with the corresponding job loss. We will eventually lead to create more efficient and technologically advanced products that are in demand, which will allow us to turn into a producing nation with other nations importing our products.

This will lead to an increase in our currency and start to level off the budget deficit. We also could sell off some of our public land reserves. Whatever it is, major changes are needed. If we keep going on this spending and phantom-financing course, it will surely lead to an even more fierce catastrophic collapse in our financial and economic system.

Disclosure: no positions

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