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August 10, 2011 / 74

Why is Bernanke So Stupid?

ON the TV this morning, I hear that Bernanke (Bungling Ben Bernanke – aka BBB) plans to keep the Federal Funds Rate (FFR) at .25% for at least two more years. And unlike so many TV pundits, I can tell you WHY he’s doing this. He’s doing this because it’s the only trick in his bag. ie he’s not overly bright. He’s just  a monkey-on-a-stick. Boing – boing – boing.

He learned his job from Greenspaz. All Greenspaz knew how to do was to lower interest rates to create bubbles. When you create bubbles, the economy LOOKS like it’s roaring along… as during the Clintoon years… but what you must understand is that it’s NOT roaring along. It just LOOKS that way. Creating bubbles is BAD for an economy.

Okay… calm down, Mike. Get a grip – and explain to the people WHY it’s bad. Bubbles are bad for the economy – because sooner or later they have to POP!!!

Here’s how a healthy economy works.

People work. They make or sell some product (or sell skills) that other people want. ie they rent out their time. The workers make a “profit”. Some of that profit pays for the worker’s basic necessities like food & housing. But the rest of it goes for either “extras” (luxuries) or the worker SAVES the left-over money.

If the worker sees that he can earn more money by saving the left-over money then the worker is likely to save. (The workers earn more money by charging borrowers interest – interest is the fee that a saver/lender gets for NOT spending the money himself – ie a “delayed gratification” fee).

If the worker figures out that he will NOT make more money by saving, or that he will actually LOSE money by saving ( through inflation/taxes/etc) then the worker will NOT save money.

IF the worker saves money his savings combine with the savings of other people and CREATES A CAPITAL POOL from which others can borrow to build stores, offices, factories, etc. – ie the savers build up the available capital in the economy which the borrowers use to build up the infrastructure of the economy, which creates jobs which lead to more capital, more work, more savings, etc. So a healthy economy is built on SAVINGS, not spending.

IF the worker sees no gain from saving, he will spend the money as fast as he earns it and there will be no capital pool, no infrastructure development, etc.

If there is no capital pool, one of two things happens.

1. There is no investment in new infrastructure. Or

2. The money to loan to borrowers must be created by some authority, ie in the present case, the FED must print up more fiat currency. (Simplifying somewhat here. Fiat currency is just money that is money because the government SAYS it is – money that has no intrinsic value.)

Then it gets a bit more complicated… if #1 happens, the economy stagnates (not necessarily a bad thing – it’s sometimes called “stability” or “equilibrium”. Think of the 1950’s)

If #2 happens, you get inflation because new money is being created with no value behind it – the value of a nation’s currency comes from the workers working and saving. When you create money with no value, you get “inflation” which is when the value of the money goes down because you just made it up. Unrestrained printing of more money encourages the workers to spend their money instead of saving it, because inflation is a form of taxation – the government prints up more money which lowers the VALUE of the money, which also lowers the VALUE of the worker’s pay, which means the government has stolen part of the worker’s pay.

If you need a visualization of this process and where it leads, I’ll just say “picture a snake eating it’s own tail.” The snake is “nourished” by consuming itself – which temporarily gives the illusion of health, but ends up killing the snake. (In a healthy economy, the snake eats other creatures instead of itself… ie it ADDS to the protein pool that is its body rather than consuming it.)

So – what BBB is doing is killing the snake.

So what BBB is doing is making certain that the economy will decline, and the value of the Dollar via inflation will decline also. So prices will go up, jobs will disappear, the government will borrow and borrow and borrow most likely from the FED because no one else will be dumb enough to lend to the Government, and the FED will get the money by creating more, and inflation will increase… etc… and we all get a ring side seat to watching our economic snake eat itself.

One of the things I keep hearing is we need another “stimulus” package – only a bigger one. This is telling the snake that it must take bigger bites.

What is the answer? It’s really not that hard to figure out – it’s just REALLY unpleasant. The answer is for the FED to RAISE interest rates. The effect of this would be to encourage saving, which creates capital, which stabilizes the value of the currency, and creates jobs as the economy expands instead of expanding a bubble.

Side effects? Well… the government is so far in debt, if interest rates go up, it will have to make larger payments – which reduces the amount that the government can spend on other things – like entitlements. So things like “Medicaid” (which is really NOT a proper function of the Federal Government) will have to be cut… maybe even eliminated… which all comes back to the baseline truth that if you want something, you have to be able to PAY for it!

The US government can only pay for things by taking the money away from the people – which reduces the amount of capital available for business which reduces the amount of taxes paid, which requires the government to raise taxes more… etc…

It’s all really very simple. The government has to break out copies of the US Constitution, and LOOK at it, and READ it (read for understanding), and ONLY DO the things that the Constitution says it should do… and don’t read extra things into it. (The “general welfare” is NOT “individual welfare”!!!)

The government has to return to doing ONLY what the proper function of a government is – which is to govern – not to be the mommy and daddy of the people. Let ’em grow up and get a job – because if the government stops feeding them, there WILL be jobs a-plenty.

Discussion? Questions?

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