What Has the Government Done to Our Money?

What Has the Government Done to Our Money?

# 4 March 3, 2009

There’s interesting news from all over today. HSBC, the world’s biggest bank and owner of Household Finance has stated it is closing down its entire U.S. consumer finance business. They have over 600 U.S. locations.

AIG is getting another $30 Billion dollars from the USG. Fannie Mae is getting another $15 Billion.

But on a brighter note, if you’ve been worried about the top level executives at Wachovia (you know, the ones who succeeded in driving the bank into the ground) since the buyout by Wells Fargo, don’t worry. David Carroll, the highest ranking Wachovia executive to remain with the bank will receive a base salary in 2009 of $700,000 and a minimum retainage bonus of $8 million, and a performance related bonus of as much as $4.2 Million. That’s great news, I was really worried that Wells Fargo would not take care of the poor displaced Wachovia executives. By the way, on Saturday I closed my Wachovia account because they raised the monthly fees to $15! Gotta pay those execs!

Not all banks are in the hole… according to the Wall Street Journal, Northern Trust recorded record profits in 2008 of $795 Million, and has a solid balance sheet. In the interest of fairness, they did accept $1.8 Billion in Troubled Asset Relief Funds (TARP) from the USG. Why? According to a letter to shareholders this week the bank didn’t seek the funds but accepted them to accommodate “the government’s goal of gaining the participation of all the major banks in the United States.” How comforting. I’m feeling better already.

The U.S. Treasury and the Federal Reserve announced today the Term Asset Backed Facility Program (TALF) to generate up to $1 Trillion (yes, trillion) in small business and consumer loans. Wow. Get in line, requests for funding will be accepted March 17th. Happy St. Patrick’s Day! GMAC, a company that has already received $5 Billion through TARP has stated that the impact may be muted because of the required rating level of the securities. What? You mean the participants (read: Borrowers) will have to show the credit and ability to pay the money back? There’s always a catch!

My concern is with the unmitigated continued growth of the federal government. Our government already consumes one third to one half (depending upon which statistics you read) of the recorded output of the economy. How will we be able to grow enough over the next several years to pay back this debt? One word: Inflation. This is the only answer.

A 1964 U.S. quarter is 90% silver. Today, that quarter can be traded for over 11 times face value. Do the math, 25 cents in 1964 is worth $2.75 in today’s dollars. If you spent a quarter to buy a loaf of bread in 1964, that same quarter will buy a loaf of bread today. However, in today’s devalued monetary system you have to have 11 (or more) of today’s quarters to buy a loaf of bread. This leads us to the question of the day: What has the government done to our money?

There is an excellent book by the same title written by Murray Rothbard (prior to the Carter Administration). To summarize Rothbard (paraphrased by me):

Money can’t be used up like other commodities. Money is only a medium of exchange, you can use gold bars, iron bars or bars of soap. Money can’t be used up, only transferred. The governments create inflation by creating the supply of money. This can be used for additional tax receipts, payment of debt, etc. When there is an increase in the supply of money long-term creditors suffer. If you loan money at 5%, but the value of money goes down (inflation), the monthly payment you receive will not be worth as much. This is another way of controlling the economy, trade and people. We have seen that, over the centuries, government has, step by step, invaded the free market and seized complete control over the monetary system.

The more money the government prints, the less buying power you have. Does it not seem odd to you that a person needs to make upwards of $20 per hour just to make ends meet? With a standard 40 hour work week, $20 per hour is $800 week x 52 weeks equals $41,600 per year.
According to the US Health and Human Services 2009 poverty guidelines, a four person family making less than $22,050 is poverty level.

http://aspe.hhs.gov/poverty/figures-fed-reg.shtmlm

Let’s break this down to basic per hour income. If you are the main wage earner in a family, and you make $10.60 per hour (40 hour work week) with a family of four, you are at the poverty level. $10.60 per hour! I ask again, what has the government done to our money? I wrote the other day that we can expect deflation of assets and inflation of consumer goods (read: items of necessity). It’s coming. But, be of good cheer, TALF is coming on March 17 and we can get new loans for cars and stuff…

Of course, don’t worry, [because] if you only make $10.60 an hour, or even $20.60 an hour, President Obama is going to cut your taxes. This, in and of itself is good news and I applaud the move. As far as I’m concerned, any tax cut is a good tax cut. What we fail to notice (and what I’ve tried to explain above) is that we are being taxed even more onerously by the increase in the money supply (read: Inflation). Within the next year or so we’ll be lucky if $10.60 will have the purchasing power of $5.30 today. I ask again, what has the government done to our money?

In his book “Planned Chaos” Ludwig von Mises discusses the “mixed economy”, an economy with a large amount of government control and intervention. Mises shows that this type of economy is not really mixed, the government controls exist in the middle of freedom, confusing pricing and creating false economies. Government intervention in the economy causes all sorts of problems which inevitably result in chaos (as we are seeing today). A truly socialist economy is impossible, as there is no way to calculate prices. If the government creates scarcity of goods and services, then subsidizes the payments for these goods and services, how can you calculate a realistic cost?

The choice is between a free economy and statism. Central planning destroys the economy and creates economic uncertainty by short circuiting the pricing mechanisms (supply and demand), forcing people into economic positions contrary to their own choosing. What is the ultimate result? The end of prosperity for the middle class. Yes, you will still have your super rich, but you lose the middle class.

The biggest problem with government intervention in the economy is that the government, when faced with the failures of previous interventions, is not prepared (or willing) to undo its previous interferences within the market economy. It (the government) adds to its first measures with more regulations and more restrictions (and more taxes). Step by step these intrusions increase until the point is finally reached where all economic freedom of individuals has disappeared.

If you don’t believe me… just look at what the government has done to your money!

With warmth and regards (as always),
Allen

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