Thursday, November 4, 2010

Another attempt to kick-start the American economy: Watch for inflation!

In another attempt to kick-start the American economy, and in particular boost job numbers, the U.S. Fed is going to buy $600 billion in government bonds. It will do so by purchasing $75 billion each month. As expected, the stock markets soared on the news of this influx of cash into the economy. Where will this money to buy the debt come from.... while new debt funded by foreign enterprises and printed money of course : ) Companies most buoyed by this news were oil and other commodity priced securities where people often flee come any worry of inflation... which over time, this surely will cause. So please, stay away from abysmally priced, low interest bearing bonds and GIC's.

Benchmark interest rates will also be left unchanged between 0 and 0.25 per cent... so money will basically continue to be free from the government, which will cause more inflationary pressures on the economy, but it will at least give people the imaginary sense that they are making more, or at least the same, amount of money. When in fact, everyone will probably, on the whole, gradually earn much less.

So how exactly does buying bonds help the economy? This is a common question and the answer is really fairly simple. The government buys bonds from the banks and gives them cash in return. The banks then have excess cash that they can now lend out to consumers at low interest rates, and the consumers will use this newly minted money to go shopping for things that they probably never really needed in the first place : ) These purchases increase GDP and then the government can quote higher GDP figures as a sign of the program's success, regardless of whether or not the average American is doing any better. In the long-term, which should always be considered for those under fifty at least, this is not fixing the inherent problem within the American economy, which is that people simply do not make enough money to sustain their standard of living or the level of economic activity that the stock markets have come to expect. Printing money and accumulating more debt will not solve the problem, it will only give us a bigger issue to worry about when people start to discover the house of cards on which the American dollar, and the American government, is now resting.

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