Fire Up the Printing Presses

So this past week the government distributed tax rebate checks to the populace early, in order to attempt to jump start the ailing economy. The checks, part of an "economic stimulus plan," have made the whole of our citizenry unwitting participants in their own economic distress.

Before examining that statement closer, let's begin by firmly establishing the fact that any classical economist must surely be rolling over in his or her grave right now at the notion that an economy can be stimulated by the printing of fiat (paper-not-backed-by-anything-but-forced-to-be-accepted-by-government-decree) currency, thus adding to already staggeringly high levels of inflation. This illusion of wealth has consistently proven to be the downfall of once-vibrant economies and nations, yet our country remains in a halcyon state of economic perception.

Let's discuss inflation for a moment. Inflation is good...if you're one of the first entities to receive the freshly printed paper currency. This is because you have the transient opportunity to spend or invest that money before the effects of the inflation have seeped into the economy and prices have subsequently risen. A very good analogy here -- albeit one borrowed liberally from "The Creature from Jekyll Island" -- would be manifest in a game of Monopoly. Assume there were two participants in the game, and one of the participants opened a second Monopoly board game and took all the money from it for his own. By doing this he would immediately have magnified his purchasing and investing power. It's likely he could buy up all the real estate on the board before the other participant even had a chance to compete. Now consider what would result if both participants got their hands on the money simultaneously. Given the theoretical perfect timing of this event, all of the prices on the board for real estate and luxury items and whatnot would rise in unison. Thus, the extra money would have allowed for nothing but the payment of higher prices for the desired assets.

The problem with the second part of the analogy is that, in America, the average taxpayer doesn't even get that much of a break. You see, you and I are the last to receive the money on the financial totem pole in the form of our paychecks, and therefore, we are indeed left with the risen prices. But unlike the Monopoly analogy, we do not have the benefit of receiving a commensurate increase in wages to cope with the inflation. So each year, prices rise, goods become more expensive, and our wages fall further and further behind the price curve. Eventually, we turn to credit to be able to afford the things we want in life. When was the last time your friends, neighbors, or family members bought their car in cash? Or their plasma TV? New furniture? Vacation? Anything? The reality is, if you're anywhere near the median income in America, you buy necessities with your paycheck and finance almost everything else by loan or credit card. And now, with the latest financial debacle left steaming on middle America's doorstep, even the necessities like food and gas are rapidly cutting deeper and deeper into household budgets.

I'm sure by now most of you have seen the video clips on TV of US Treasury checks rolling hot off the printing presses in voluminous sheets. Those who save their check will soon regret it, as spiraling inflation will make the saved money increasingly worthless. The 2% the bank is giving you in your savings account will hardly make a dent in the 8-15+% inflation we're experiencing. Sure, the economic data like the Consumer Price Index (CPI) -- the official government barometer of inflation -- tells you that inflation is only 2-3%. (Isn't it amazing how the CPI is always either 2 or 3% every month? It hardly ever changes...in the context of a $14 trillion economy, shouldn't it fluctuate just a little bit?) The problem with this statistic is that it does not include the three things you care most about: food, gas, and the cost of your home. Interestingly enough, home prices died a recent death vis-a-vis the CPI...by 2006 they were going so high so fast the government just excised them from the CPI lest it end up skyrocketing. (They replaced them with rent prices.) Presto!...a little accounting adjustment here and there and we're right back at...2 to 3%.

Hopefully I've talked you out of saving the welfare check you just received. (If I haven't, save yourself the cost of an inflated postage stamp for mail-in deposits and just stuff the check under your mattress...same deal.) No, these checks are more likely to be spent by consumers on everything from the necessities to luxury items. And you might ask why I said earlier that these consumers are unwittingly participating in their own economic distress? The government printed this money with nothing of value backing it; therefore, the paper money will circulate into the economy, eventually raising prices and leaving cash-strapped consumers shaking their heads at the gas pumps and grocery aisles in 6 months, wondering how gas and food prices just jumped another 20%. The consumer has become the method of delivery for the inflation in this scenario: the government printed the worthless money, you spend it and inject it into the money supply.

Lastly, as if the above weren't bad enough, most of the items Americans will be buying with their checks at Wal-mart, electronics stores, and so forth are made in China or by other burgeoning economies. So not only will taxpayers be facilitating higher prices to be paid at a later date, but they will also aid in the enrichment of foreign countries. This is the reality within the US economy, one that is based 70% on consumer spending with a hollowed-out production base that has largely relocated to distant shores.