I’m not expert on the fed, but I’ve heard a position put forward that says: “Printing money = Inflation = Bad.” I would say that yes it is bad, but do we have a choice? If I understand the system correctly the currency in existence is loaned to us at interest and therefore the fed either has to print money (the bailout) or have property transfered to it by the debtor when he can no longer pay on his loan. Can someone clear any misconceptions I have and tell me is the bailout required? Will no bailout cause a complete collapse?
Wow. You have just unraveled the mysterious purpose of the Federal Reserve. Ownership of all property in the hands of it’s shareholders(in the form of collateral). Good job! [:P]
To answer your question, NO.
Prices will adjust to reflect the total money supply. During that adjusting some interesting things happen. With an increase of the money supply, there is higher consumption which creates scarcity for goods and services and raises their prices(inflation). With decrease of the money supply, there is more conservation and goods and services become abundant and decrease in prices. With a stable money supply there is neither inflation or deflation. Prices come down due to increased efficiency and everyone’s standard of living rises with no harm to our resource supplies or spending.
So we see all three ways things can happen. Now let’s look at our current situation:
Bernanke flooded the market with easy credit along with Congress that was appropriated to housing development for lower income individuals. I mean it’s an ‘inalienable right to own a house’, isn’t it? [;)] So these credit unworthy people now have free access to excessive spending of that credit on our limited resources. (Ben Bernanke printing money didn’t make more steel come out of the ground, or wood get cut down and refined, or oil out of the ground, etc.) So while the prices were still reflecting a lower total money supply, the masses of credit criminals were consuming our resources. This made the economy look great according to the government’s measurements of consumption. But then the suppliers of all sorts of things were running dangerously low on their supply. If demand is high but supply is dangerously low, what happens to prices? They shoot way up! And that’s what happened. First building materials shot way up. Then everything else followed. Oil included. So now those suppliers are replenishing their reserves and prices are coming back down to reflect the new higher total money supply.
So now credit is tight for a very good reason: replenish our dangerously low resources. If we try to undo this affect with a bail out, and try to keep on course with the same spending, we will put those already low resources even lower causing their prices to shoot way, way up like we’ve never seen. We have to work hard now and lower our standard of living until the free market can replenish our resource reserves and fill up these empty houses. That’s going to be uncomfortable but is not the end of the world like they try and say.
What would be far more uncomfortable would be to keep the course and fall off the edge of the cliff with the dollar. Then inflation WILL come back with a vengeance. Can’t defy gravity(maybe they will make gravity illegal? :-P).
So it’s important that we let the free market make the corrections to these problems created by Congress. What’s funny is that the very same guys telling us a while back that the economy is just great and everything is rosy, even though main street was in a recession, are the same ones pushing for this bail out. The economists telling us years ago that this would happen are being ignored in all of this.
A very complete answer thanks. Could you see any case where the fed would like to suck up all the currency it could and collect as much property as possible?
It has most all the property as collateral already. However, there certainly are some stubborn people and companies like Toyota that don’t use debt to finance growth. They instead save and purchase. I’m sure they have plans for those people in the future at the force of government, to plunder their wealth or make there be virtually no incentive for taking that approach.
Actually, when true inflation is taken into consideration, there is incentive to take out debt, virtually making money on what you borrow if you buy commodities, stocks(avoiding the bubble bursts), or something else with it.