Inflationomics

Nationalized Lending Leads to Inflation

Let’s review things. The Fed lowered interest rates to stimulate the economy. So much money was made available that banks were encouraged to lend money to anyone who could fog a glass. People borrowed cheap money and drove up housing prices (among other things). The high prices called out more supply; i.e., more houses were built. A glut ensued. Prices dropped. Loan defaults and foreclosures resulted when homeowners were unable to refinance their mortgages, make higher payments after their adjustable rate mortgages were adjusted, or sell their houses (banks don’t like to lend money while prices are dropping).

Fannie Mae and Freddie Mac were established by Congress as stockholder-owned entities for appearances only. Their purpose was to make below-market-rate financing available (they currently own or guarantee $5.3 trillion in mortgages and related securities). Unfortunately, they are under-capitalized due to the rise in mortgage defaults. The U.S. Treasury Department stepped in with its fiat currency (only backed by its ability to tax), and pledged up to $200 billion of taxpayers’ money to bail out Fannie and Freddie in the hopes of stabilizing an exhausted and over-stimulated economy (specifically the housing market). In effect, it nationalized Fannie and Freddie.

So what happens when an over-stimulated market is kept artificially high through further stimulation?

Obviously, the Fed and Treasury officials hope that a nationalized Fannie and Freddie with deep pockets will encourage lower mortgage rates than those currently offered by financially insecure banks, thus stimulating the housing market (or at least keeping housing prices from falling as far). And in the short run, they may be marginally successful in shoring up the financial markets, but what’s going to happen in the long run?

In my opinion, the potential losses to be suffered by U.S. taxpayers could be much greater than the $200 billion currently estimated. The total could easily become $1 trillion. And that doesn’t count other potential bail-out victims. But the more important question is: where will the money come from? Savings? Not U.S. savings. A purchase of Fannie Mae and Freddie Mac stock by some rich investor? There’s no one with enough money who is foolish enough to try to buy up Fannie and Freddie stock (other than the U.S. Treasury Department and Congress). But then, it’s always been understood that the U.S. Treasury stood behind Congress’ creations. In short, the only place a bailout could come from is the U.S. Treasury; i.e., taxpayers. But the taxpayers don’t have that kind of money (even with tax rebates). Their money has long ago been spent on destroying and rebuilding the Iraqi and Afghanistani economies, among other boondoggles. Perhaps Congress could borrow more money by issuing more IOUs (T-Bonds, T-Notes, and T-Bills), but that just delays the day of reckoning.

Nope. In the long run, the only politically expedient answer is more inflation; i.e., print more money and provide easier credit. Of course it will take more money and more credit to avert each successive crisis, but eventually the easy money and credit will stimulate the economy, encourage borrowing, raise prices, call out more supplies, create a glut, lower prices, etc. How long can this cycle continue? It’s hard to know. But, each time there is a financial crisis, government “rescues” more entities. As the U.S. government “rescues” more entities, it must print more money, which leads to more inflation.

Eventually, people become tired of losing value by using U.S. dollars. Watch for an ever greater shift away from dollars by traditionally eager dollar purchasers like China, Japan, and Great Britain. In time, this shift will reduce the Fed’s ability to stimulate the economy and “rescue” the politically favored. Yes, folks. The U.S. government (through the Fed and U.S. Treasury) is slowly sinking the world economy, one crisis at a time.

Robert Jackson Smith

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