Saturday, December 18, 2010

The Federal Reserve recently announced that it will print and additional 600 BILLION dollars in an effort to stimulate the economy. The general thrust of their argument for doing so is that printing money reduces the value of the US dollar relative to other currencies. This makes our exports cheaper and imports more expensive which is supposed to help US companies compete abroad.

There are two major problems with the Feds plan:

1.) Printing money decreases the value of the dollar by causing inflation. Think of all the money in an economy as a loaf of bread. Say after eating three slices you are fully nourished. Then one day the flour producer decides to cut the flour he sells by adding an equal portion of sawdust. You buy the same amount of flour at the same price (your labor) but now you have to eat twice as many slices to get the same amount of nourishment. Inflation decreases the value of money which hurts people who have saved money, and people living on a fixed income.

2.) At present, the most critical import of the United States is oil. Our entire transportation system runs on it and it is also a critical feedstock for the production of food, plastics, chemicals and pharmaceuticals. If oil costs more, the US companies that use it to produce things will have to pay more. It is possible thoise companies may pass on those costs to the consumer. Either way it reduces their competitiveness. This is the opposite effect of the one stated as the reason for printing money.

A more constructive approach would be to reduce government spending. I advocate doing so by significantly reducing spending on offense- as opposed to defense, which might include better inspections of incoming cargo for WMD, invasive species and doing a better job of border security. Since inflation does seem inevitable at this point, I also advocate a freeze in spending increases for all government agencies without exception. This would result in a gradual cut to spending in nominal terms and would force government to prioritize which spending is the most important and to cut waste. The final result of the savings should be to reduce taxes on businesses- provided that they HAVE NOT OUTSOURCED any jobs during the tax year in question.

This article also explains the situation:

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