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A Principle for Peter in the 21st Century November 13, 2010

Posted by Dr. Robert Owens in Uncategorized.
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The world is lining up to not buy our debt so we are buying it ourselves in a move we call by the innocuous acronym QE2, which is short for Quantitative Easing two.  More traditional, or verbally honest, economists are calling this what it is: monetizing our debt.  This is a move which has our creditors heading for the doors and our enemies smiling as poor old Uncle Sugar stands with his pockets turned inside out, a bewildered look on his face as he wonders, “Where did all flowers go?”

Quantitative Easing is a type of monetary policy central banks use to pump money into their respective economic systems.  This policy is only used when the central bank has already reduced interest rates to or near to zero.  In other words, they have tried to encourage lending but they’ve failed.   What the central bank does next is create money with a printing press, using that money to purchase bonds from its parent government and from banks and corporations within the nation’s banking system.  The second and third tier banks then increase the money supply even further through another process known as deposit multiplication wherein they receive 100 dollars but are only required to keep $20 on hand, so they loan $80.  The person who borrowed the $80 deposits it in their bank, and then that bank keeps 20% and loans the rest, and so on and so on until the increased money primes the pump and the stalled economy sputters to life.  At least that’s the strategy.

No strategy survives contact with the enemy.  And in this case the enemy is a financial system still reeling from government produced or instigated shocks: the housing bubble, the credit crunch, the escalating costs associated with Obamacare, and now the threat of a foreclosure moratorium.  The dangers of the QE2 strategy lie in two directions.  One it could be too successful igniting inflation and maybe even hyperinflation or two it could fail to re-ignite the economy and then the uncertainty of future tax rates, what new regulations might cost and the prospect of irretrievable assets locked up in a foreclosure freeze causing banks to hold the additional cash as a hedge against the government caused uncertainty.   This would put us right back where we started: a frozen economy which opens the door for QE3, QE4, and eventually the dollar won’t be worth the paper it’s printed on.

If you rob Peter to pay Paul you can usually count on Paul’s vote in the next election cycle.  This has been going on since FDR’s political genius discovered the magic formula of spend, spend, spend, tax, tax, tax, elect, elect, elect.  Years of getting Paul addicted to lying in the hammock of government safety nets and swilling a brewsky as the game dulls his senses haven’t worked.   Likewise, years of socialist education teaches Paul he isn’t a parasite he’s a victim with an entitlement haven’t worked.   At the end of the day even Paul is starting to see that this can’t go on forever.

The free trade policies of both parties may have brought in cheap consumer goods to make Paul with his diminishing buying power think things are getting better all the time, but these same policies have also destroyed the manufacturing base that once provided Peter with enough income to carry Paul on his back and still live a good life.  Today the average Paul is obese and the average Peter hasn’t had a raise in years, has watched his friends get laid-off, and wonders how he’s going to send Paul’s kids to college on burger-flipping money.

This brings us back to the world not lining up to buy our debt and to the definition of monetizing our debt.  This is the government version of paying your MasterCard with your Visa.  It may relieve current stress, but it portends future catastrophe.  Debtors may appreciate moving their debt around, but creditors want to get paid.  At a minimum they want to know their investment is secure.  If we owe someone 100 dollars they want to know that the 100 dollars they receive in payment will have the same buying power as the 100 dollars they originally lent out.  If the money they receive in payment is only worth half as much, they have lost half their initial investment.  This is why China is reacting negatively to the Fed’s plan to pump more money into an economic system strangled by red tape and bleeding red ink.

It’s just not that hard to recognize a ponzi scheme.  The smart bet is to walk away as soon as you see the shill starting to move the shells around on the table and this is just what the rest of the world is beginning to do.  But poor old Uncle Sugar still thinks he has magic in his hands and more than a smile to hide his motives.  What happens if you have a bond sale and nobody comes?  I guess you buy the bonds yourself.

Will the end of American preeminence come not with a Bang: not with a whimper but instead with a “cha-ching!”   If America, once the engine of the world’s economy and the seedbed of innovation crashes due to unsustainable debt will this validate the 20th Century concept of the Peter Principle? This principle states that within a bureaucracy people tend to get promoted due to their competence until they reach a level of incompetence remaining there until over time incompetence fills every level.   Or is it time for a Peter Principle for the 21st Century?

Now is the time for Peter to rise up and say enough is too much already!  In the coming Tea Party Congress the father and son Paul Team plan to offer twin bills in the House and the Senate to dissolve the Federal Reserve and reassert congressional control of America’s economic destiny.  The howls will be loud, the fight will be hard, but either those who want to see a second American Century will usher in a return to limited government and free enterprise or the national motto may soon be, “Help I’ve fallen and I can’t get up.”  To avoid this I urge every Peter who’s tired of being taxed to support the Pauls, contact you congressional representatives asking them to support the Paul Team as they fulfill their promises and strike a blow for freedom.   If all the Peters follow these Pauls maybe we can put Humpty Dumpty back together again.

Dr. Owens teaches History, Political Science, and Religion for Southside Virginia Community College and History for the American Public University Systemhttp://drrobertowens.com © 2010 Robert R. Owens dr.owens@comcast.net Follow Dr. Robert Owens on Facebook.

Comments»

1. A Principle for Peter in the 21st Century (via The History of the Future) « Pilant's Business Ethics Blog - November 13, 2010

[...] The world is lining up to not buy our debt so we are buying it ourselves in a move we call by the innocuous acronym QE2, which is short for Quantitative Easing two.  More traditional, or verbally honest, economists are calling this what it is: monetizing our debt.  This is a move which has our creditors heading for the doors and our enemies smiling as poor old Uncle Sugar stands with his pockets turned inside out, a bewildered look on his face as … Read More [...]

2. Ethics Sage - November 14, 2010

Dr. Owens does a masterful job explaining and criticizing QE2 and monetizing our debt and the resulting buy back of government debt from banks by the Federal Reserve in order to stimulate bank lending. However, I do not agree that the answer is to “dissolve the Federal Reserve and reassert congressional control of America’s economic destiny.” Let’s not forget it was the Congress that gave us the $787 billion American Recovery and Reinvestment Act in 2009 that was supposed to stimulate the economy and create jobs. That didn’t work very well. We also have the 2009 Home Affordability and Mortgage Program that cost $75 billion to stave off foreclosures and help homeowners pay down their mortgage debt. This is another program that hasn’t worked and may have contributed to declining home prices. I don’t think turning anything over to Congress is the answer to our financial mess. After all, it was Congress that, during the Carter administration in 1971, gave us the Community Reinvestment Act that opened the doors to home ownership by low income Americans many of whom could not meet lending standards. The program was liberalized in 1995 in the Clinton administration when it reduced the bank compliance process and costs to make these loans. The result was to usher in the subprime loans that triggered the economic recession. Let’s not forget the Gramm-Leach Bliley Act that repealed the Glass-Steagall Act that had prohibited a bank from offering a full range of investment, commercial, bank, and insurance services. The result was to create mega-financial institutions such as Citigroup and others that are to blame for more than a decade of greed and the economic recession. Finally, aren’t the Rands (and the Tea Party) supposed to be against big government and government intrusion in our lives? How does that square with the plan to offer twin bills in the House and the Senate to dissolve the Federal Reserve and increase Congressional power over monetary policy? Let’s not throw out the baby with the bath water. Congress should hold hearings on the Fed’s program that aims to drive down interest rates on mortgages, corporate debt and other loans to spur Americans to boost spending, which would strengthen the economy and ultimately chip away at the stubbornly high unemployment rate. There are legitimate concerns about the wisdom of the Fed’s actions that may lead to greater inflation in the future.


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