Pending U.S. Economic Stimulus Disaster Explained in 10 Minutes

Money, Inflation, Lost Buying Power

Is Our Economy Circling the Drain?

Do you think you know why stuff is costing more? Probably not. We explain the pending economic stimulus disaster in 10 minutes.

For those of us who remember the collapse of the housing market and the resulting recession that began due to the collapse of the housing market in 2008, many of the memories may have faded. However, most of us remember the term Quantitative Easing. Many still give credit to the fast action of Ben Bernanke, the chairman of the Federal Reserve, for the quick thinking that saved the housing market

Quantitative Easing Explained

Quantitative Easing (QE) is defined as a form of unconventional monetary policy. The Federal Reserve purchases longer-term securities from the open market to increase the money supply and encourage lending and investment. Buying these securities adds new money to the economy and lowers interest rates by bidding up fixed-income securities. It also expands the central bank’s balance sheet. (Investopedia)  The bank creates the money out of thin air to pay for the inflated (bidded-up) securities. In effect, the bank offers to pay a lot more for securities the market has already valued much lower to justify new debt that they will then purchase at these inflated prices.

Readers should also keep in mind that these longer-term securities, like bonds and mortgages, at the time they were created caused the printing of new money. Every time a new debt is created in our current economy, the money to pay for it comes out of thin air.  And to make matters more complicated, banks are fractional reserve lenders.  Banks can create up to ten dollars of new money for every one dollar of new debt they take into their balance sheet.  So when the Fed is buying these longer-term securities, they had already increased the money supply ten times when the bond or mortgage was created.

Quantitative Easing Saved Our Economy – Or Did It?

While much of the media credit Quantitative Easing, or Stimulus, for saving our economy and saving the middle class, others do not believe this is true! Quantitative Easing, MMT, and Inflation/Deflation: A Primer Quantitative Easing Did Not Ease The Housing Crisis For The Neediest Households. ­Economists argue why the printing of baseless money (meaning it is not based on work or tangible value created) is not harmful.  Does Quantitative Easing automatically cause higher inflation? The Effects of Quantitative Easing  One can read all these arguments ad nauseum.  The main argument is that the Fed prints all this money but does not really put it into the economy.  Basic math skills and common sense soon dispel these arguments.

Common Sense

Can someone explain to me how giving money to people for doing nothing, an action that creates no tangible value to society, benefits society?  All this new money does is dilute the buying power of all of the U.S. dollars, making them worth proportionately less. After giving out this money, we create a situation where we need more money to buy the same thing we did before. It cost less, now it costs more, and nothing has changed except the amount of paper, printed, credit, and digital, that we need to hand over to get the same darn things.

The Setup

For this example, let’s keep everything very simple.  As background, there are only two people in the entire world, we only eat two things every day, bacon and eggs, and at the start, the product of one egg is worth $1.00, and the production of one serving of bacon is also worth $1.00. 

Before you write me, I agree no one wants to live in this world and only eat bacon and eggs once a day.  We all want other things in our lives, like houses, electricity, automobiles, and the internet. And most definitely, I am sure we will both want some other human being to interact with very quickly after finding us isolated and alone with each other, regardless of our compatibility. But, this example will illustrate the basic math of Quantitative Easing quickly.

A Simple Example – About Bacon and Eggs.

Bacon And Eggs

Here is an example of how this lunacy works. As is stated above, You and I are the only humans in this world. We each have a total of $7.00 in both paper dollars and coins. Dollar Bills are worth 1 dollar, and our only coin, the cent, is worth 1/100th of a dollar or 1 cent. We work seven days to produce the products, so we earn $7.00 each once a week to buy food for the one meal we eat each day. I can produce fourteen servings of bacon, and you produce 14 eggs. You sell eggs for $1.00 each (keeping seven for yourself), seven eggs to a pack; I sell bacon for $1.00 for each serving, seven servings to a pack (I keep seven for myself). We both shop one day each week, fifty-two weeks a year. We each earn $364.00 per year. We have no savings. We buy from each other because there is no one else in our world. All we eat is bacon and eggs, one meal each day.

I also own the printing press that made our dollar bills, and I own the mint that created the coins. I decide to print $7.00 more coins and bills, which I equally distribute because I am sad that we have been working for years, and we have never made any more money. Before this, there was $14.00 in total Currency in Circulation (CinC); now, there is $21.00 in total CinC.  You can still only make fourteen eggs each week and sell seven to me; I can still only produce fourteen servings of bacon and sell seven to you. These are the only things of value we produce—a total of 7 meals each week for each of us. 

Each week we each make $7.00 a week on what we sell; we can afford to buy the only things we need to buy; life is simple and good.

­The value of all the dollars is based on the value of all the products we create and sell. The value of each of the products in existence, when the total amount of currency in existence was $14.00, was $1.00 each. Since I decided to print $7.00 worth of more coins and bills for a total CinC of $21.00, each dollar bill is no longer worth 1 dollar, and the cent is no longer worth 1 cent. The underlying market value of our products did not change. We still produce the same number of eggs and servings of bacon. We now are simply arbitrarily dividing the value of all the bacon and eggs produced by a larger number of dollar bills and coins.

So after the addition of the $7.00 worth of new dollars and coins, the value of a single dollar is now $0.67, and 1 cent is actually worth 67/1000 of a cent. So, now, one egg or one serving of bacon costs $1.49. So, A package of bacon or eggs is now $10.43. We lost approximately 33 cents in buying power for every dollar. Neither the egg nor the serving of bacon increased in real production value. The dollar decreased in the number of products it could buy because we divided the actual production value into twenty-one increments, not fourteen.

We can fool ourselves and say now we make $542.36, a raise of $178.36 more each year, but in reality, we have not gained any additional purchasing power! We can say our eggs are worth more, and our work is worth more. But, if we think about it, we will understand it is really not worth anything more than before.  More eggs or bacon have not been created to increase the value.  The new dollars came from no increase in production or value. We are putting more money in our pockets, we are earning more money, we have a higher net worth, but we can’t buy one more thing than we could before.  It’s a shell game.

Maybe now we should be glad it is only the two of us in this world and only have two products we can buy or sell.  We do not have taxes and interest. Takes and interest are pure expenses; they do not derive from any created value. They take money out of the system to put back into the system for the sake of supporting the system.  If we had to pay taxes or interest, we might be earning more at the end of the year, but we would be able to purchase less and less. Now, If we printed more money to pay the taxes and interest, then the dollar would reduce again in value, our earnings would rise, our eggs and bacon would bring more dollars of lesser value, and we would be earning even less than before. Is this starting to feel a little bit real to you!

A Complicated Problem

Last year with QE and Stimulus, the government and Federal Reserve printed at least $10.135 trillion in new money that was not based on increased production value (baseless currency). Our combined economy last year totaled approximately $21.561 trillion. Divide the $3.7 trillion in new baseless money by the $21.561 trillion that was there before. Now you can see that we reduced each dollar’s purchasing power by 17.86 cents. Now, maybe it’s easier to understand why eggs, bacon, lumber, housing, gasoline, meat, electronics, and more have risen, in some cases, by as much as 89.5% in just one year.  The Federal Reserve data indicates the average increase in cost is 15%. In speaking to several ordinary people the past few weeks, most feel prices have risen closer to 20 – 30%.

This year the current administration wants to print and spend a lot more Stimulus, and the Fed is doing about $150 billion new QE each month.  As you now know, this ­­new baseless money, about $5.8 trillion at this point (June 27, 2021), will likely come at a heck of a hit to your purchasing power.­ As you are likely aware, they want to add another $4 – 5 trillion if they can get the proposed bills passed. A lot more inflation is coming. If they go with what is on the books now, we will lose another 26% of the value of each dollar.  That will mean that from before the pandemic to the end of 2022, we will have suffered a 43% reduction in purchasing power.

Stimulus Economic Disaster

This year the current administration wants to print and spend a lot more Stimulus, and the Fed is doing about $150 billion new QE each month.  As you now know, this ­­new baseless money, about $5.8 trillion at this point (June 27, 2021), will likely come at a heck of a hit to your purchasing power.­ As you are likely aware, they want to add another $4 – 5 trillion if they can get the proposed bills passed. A lot more inflation is coming. If they go with what is on the books now, we will lose another 26% of the value of each dollar.  That will mean that from before the pandemic to the end of 2022, we will have suffered a 43% reduction in purchasing power.

Loss Of Buying Power Analysis

Rich Man – Poor Man – Middle Class

If you are poor, our government gives you a bunch of the newly printed money as subsidies and other benefits so you can buy your eggs and bacon. You may still suffer, you might fare better, but you won’t notice much change either way.  If you are rich, you have excess money that may be invested in the stock market or other places that can help you offset or gain from inflation. As we have seen now for over a decade, QE’s new baseless money increases your cash holdings because the new money raises the stock market: a rising tide raises all boats syndrome.  If you are middle class, you get screwed because you don’t get subsidies. You make too much to qualify for subsidies, and you don’t have any extra money to invest to hedge against the dilution of the dollar’s buying power.  Systemically our economic system crushes the middle class.  The so-called targeted Stimulus does nothing more than taking hard-working middle-class families, like the two of us in the simple example, and makes it so we can no longer live on our own productivity and earnings. In effect, it moves significant numbers of the middle class like us directly into the poor class. I hope some of you now understand why you are making more money than you have in your entire life and find yourself with less money in the bank to pay your bills.

Congratulations, you now understand the disaster that is the U.S. economy, and you have a damn good idea whom to blame.  So, what are you going to do about it?

Tom Loker
Author: Tom Loker

Businessman, Author, Artist, Entrepreneur, Mentor, Advisor, Consultant

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