Punchinello’s Chronicles

April 20, 2009

The All-American Credit Card

Filed under: Surely a Jest? — Punchinello @ 9:00 am
Tags: , , ,

I was just reading an editorial in the New York Times, talking about an astonishing “idea” for stimulating the economy. This is from a presumed widely read news organization, so you’d think there might be a sort of rational basis. The proposition was put forth by a Harvard graduate student, and Harvard is supposedly a serious arena for the development of the nations leaders. Here’s what caught my eye:

“Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money – for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw – it’s a benefit.” (Read the full article…)

This is astounding!

Can you imagine what would happen if your money became worthless at random moments? Nobody in the world would be willing to hold cash or American dollars.

What’s deeply disturbing, the result of Keynesian economics, is that the “smart people” continue to believe that borrowing is the fundamental driver in economics. The whole reason for a Federal Reserve is to make the cost of borrowing money more or less expensive. When borrowing is expensive (high interest rates), the economy slows down (recessions).

When borrowing is cheap (low interest rates), the economy expands and grows (inflation).

What about producing more? Corporations love to announce higher profits by cutting costs. These are operational profits. They don’t talk about increasing market share, getting more customers, making new things, and selling more items for more money. Why not?

We’ve had about 100 years of recession-inflation cycles. It’s all been based on the principle that borrowing money is the only way to increase an economy. And yet, not a single family in the country used to believe this. Everyone except the government understood that if you want more money, you sell more stuff. You grow more food, plant more acres, build a bigger factory, speed up the manufacturing, get more customers, more clients, or invent something new to sell.

Only politicians believe that borrowing money can create jobs, create products, improve the world, make people happier, and create a stable nation. That is until the American public discovered credit cards!

After all those years of inflation-recession cycles, are we better off? No! Prices have gone up and up and up, never downward. Whatever you bought 30 years ago, you’d have to pay tens of times more today. Sure, your wages have gone up, and the relative difference seems about right. But in fact, the cost of living has slowly but surely gone up. And our quality of life has slowly but surely gone down. What a great theory! Our thanks to Mr. Keynes!

Nowadays, when a family needs more money or needs a new “thing,” they get a loan. It can be a credit card (or ten), a home equity loan, a car loan, a student loan, a mortgage. Loans and borrowing have become a way of life. If we can’t pay the electric bill or income taxes, that’s okay. Put it on a credit card.

The Federal Reserve announced that it would start lending money directly to private corporations. I’ll assume the next step is that everyone in America will be able to go to the Federal Reserve bank and get free money. After all, the Fed just prints whatever money we use, so why not?

What about making something new? What about selling what we produce? That’s called “productivity,” and the nation’s productivity has been dropping, dropping, dropping. We don’t make steel, we don’t grow crops, we’re not allowed to cut down lumber or drill for oil. We can’t fish, we can’t smoke, we’re not allowed to do much of anything that creates new products. We don’t make much of anything the rest of the world wants to buy.

Instead, we use credit cards to buy whatever we want from someone else. We got to work, shuffle paper, and get a paycheck at the end of the week. The corporation borrows the money for payroll from the bank. The bank borrows the money from the Federal Reserve. If there aren’t enough tax revenues, the Fed just prints the money from nothing.

And still we don’t have enough money from our paychecks. So we get a credit card and spend $3,000 on “stuff.” The credit card comes from a bank or a store. They lend us empty money, assuming we’ll pay it back. When they need real money each month, the store or bank borrows from a local bank or the Fed. And the Fed prints MORE money to cover the loans in credit cards.

You send your kid to school, and the price goes up and up and up and up. It’ll presumably cost $500,000 to send a kid to Harvard, ten years from now. For what? What’s using all that money? So your kid takes out a student loan. The Fed prints more money to cover that loan. Then the bank holding the actual loan, sells shares of that loan as “securities.”

Investors use a credit card to borrow money to buy into a Wall Street company. That company has a mutual fund that offers shares in student loans. Your kids’, other students, and years worth of student loans. The INTEREST paid on those loans (if they’re paid back) is the profit the investors expect to earn.

What happens when nobody can pay back the student loans? Or defaults on the credit cards? Or stops paying a mortgage, car loan, home-equity loan? What happens when nobody can pay back the thousands and thousands of dollars they’ve borrowed?

The Federal Reserve has created this problem. The politicians subscribing to Keynesian economics have created this problem. The corporations who run on borrowed millions each month have created this problem. And you and I, living on credit cards instead of debit cards, we’ve created this problem.

Why aren’t interest rates on savings accounts high? How about on certificates of deposit (CDs)? If people could earn money on real money, they’d stock up on real money. With more real money available, we’d borrow less. But who wants to save money? Who wants those CDs, unless they’ve got a lot of “extra” money? Even so, why not require bailed out banks to offer CD interest rates around 8%? Nah…it’s easier, faster, cheaper, and more fun to borrow. Always borrowing.

After the Fed loans money directly to AIG or IBM or DuPont or GM, what happens if those corporations can’t pay it back? The Federal Reserve then owns the collateral — the assets of the company. Who owns the Fed? Nobody knows. It’s a mystery! We, the people, for SURE don’t own the Federal Reserve! It’s a private bank, after all…!

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