Posted on 11/03/2010 11:44:13 PM PDT by 11th_VA
Then let me be the first to support Ben on this decision. But QE also needs to be combined with a credible long-term deficit reduction plan, which is much more important for our economic future. Quantitative easing is effective short-term medicine for our economy, but our long term economic health depends on major spending reductions in Washington.
This is the part that destroys the middle class. Wages never catch up to prices...
No that does mean that companies can get less for the products they sell, which hurts businesses. But which businesses does it hurt? We import far more than we produce domestically. If we want to help businesses, and we definitely need to help businesses if we want our economy to recover, cut our insanely high corporate taxes by a bit.
A deflationary cycle of declining demand, declining inflation, declining interest rates, and declining interest income for savers all leading to even lower demand as consumers wait for lower prices and save more to offset lower interest rates, that kind of deflationary cycle could be disastrous for an economy like ours that has so much fixed-rate mortgage debt and government debt that must be serviced.
Deflation makes the money people have saved worth more. It increases their buying power. Inflation on the other had eats away at any returns on an investment. Even worse you still get taxed on the dollar gains even though inflation has made the dollar worse less. Deflation produces tax free gains in the value of savings. That's what the government really can't stand.
If we have 5% inflation, and you are earning 5% interest, you don't break even, because you end up paying taxes on that 5% interest you earned.
Prices of commodities will rise the most, but outside of food, gasoline, and natural gas, commodities are actually a very small part of the cost of all the other goods and services we buy. Except for food and energy, when you look all the way up the supply chain, personnel costs and corporate income taxes are more than 90% of the cost of everything we buy.
But the cost of living for those workers are highly dependent on those commodities, especially when their rent or mortgage are basically fixed costs, unless you think a lot of people are going to be refinancing mortgages at a lower rate some time soon.
The economy is bad. People are living from paycheck to paycheck. They need each paycheck to buy more. That is why they have been buying less. That is why demand is low. Deflation is the normal market correction. Government intervention that causes inflation might make borrowing money more attractive, but it might even help people pay back debt in the long term, but it increases their cost of living now, hurts people's savings, and devalues returns on investments.
What it increases are tax revenues, and makes it easier for our government to service it's debt. However it also makes it harder for the government to borrow more money at a low rate since lenders knows they are going to get paid back with money that we are intentionally devaluing.
That's why our government is having to keep borrowing money with a higher percentage of short term bonds. Lenders are losing faith in the long term strength of the dollar. That is a very bad thing, because we have a huge amount of national debt, and the cost of servicing it could easily balloon dramatically if the treasury can't continue to reissue bonds at low interest rates.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.