The government is stealing your beer!

29 09 2008

I heard that the House voted against the bailout package and I was pretty shocked, as I think everyone was. Congressional leaders were hyping this up to be a done deal over the weekend and it seemed all but inevitable that it was going to pass. Wall Street was definitely caught off guard because the rescue that they thought they were going to get didn’t happen. That caused the Dow Jones to plunge almost 800 points. It’s fun time to like economics and a bad time for pretty much anything else.

After the initial shock wore off (having to teach 30 14 year olds Algebra will make you move on pretty quickly) I started thinking about whether or not this was a bad thing or a good thing. The bailout plan was created to clear out the illiquid securities that were clogging up the arteries of the financial sector (figuratively speaking of course, it’s just plain diner hamburger cholesterol if we’re speaking literally). By removing these assets, it was thought that banks would once again be willing to offer credit and thus help out “Main Street” (aka you and I). There was a possibility that maybe we’d break even or make a little money if we can resell these assets in a few years. Maybe it won’t be that bad, right?

Then I got to thinking. Would a recession really be such a bad thing? I know what you’re thinking. I’ve had one too many sniffs of those sweet smelling scented markers. I’m serious. I wrote earlier today about how we’ve all been living well beyond our means. We’ve been spending on credit for years both at the federal level and the personal level. Eventually, those bills always come due. Now is that eventually. So any way we look at it, we’re going to have a rough few years recovering from this. The way I see it, if we bailout all of these banks with tax payer dollars, it’s setting us up to repeat this cycle down the road. The financial institutions will be more likely to do this again if they knew that the government would be there to help them out when it all melts down. As long as these investors have their big bonuses and the government is going to help out, there’s no reason for this to stop. So let’s let them fail. Let’s suffer through slightly harder economic times right now and save the next generation the pain later. Let’s teach ourselves how to live within our means and stop relying on credit to purchase beyond our means. Ron Paul uses the metaphor in interviews that these bailouts are like another hit for an addict. The hit is going to make the addict feel good for a little while, but it doesn’t address the problem that he’s an addict. It’s a long and painful process for an addict to clean up.

If we let the government bail out these financial corporations, it’s going to be the middle class and the poor that suffer. Not only is $700 billion dollars (a conservative estimate) going to inflate the debt and cost us interest charges for years down the road, but it’s going to cause inflation in the short term. I don’t think that a lot of people have a firm grasp on exactly what inflation is or what it does in terms of the money you have. In essence, inflation is an accidental (or maybe not) tax on all the money you have. When we speak about inflation, what’s inflating is the amount of money in the system. It happens when we print money.

Let me give you a simplified example of how this, in essence, transfers wealth from you and I and into the hands of the corporations.

Let’s say for simplicity’s sake that there is $1 in all the world and you own it and that there are 5 of the exact same good, let’s say pints of beer (mmm, beer). Simple math would dictate that each of these beers (mmm, beer) has a value of 20 cents (that $1 divided into 5 parts) and you’d be able to buy all 5 beers (mmm, 5 beers). If I were to then inflate the money supply and create 4 new one dollar bills out of thin air and give them to other people, then the market is going to adjust to this increase in money supply by increasing the price for their beer (sometimes referred to as the end of happy hour). So now we have $5 in money and 5 beers in the world (a crisis all its own), so each beer has a value $1. You didn’t get any of that new money, so while your actual dollar holdings hasn’t changed, your purchasing power has. Instead of being able to buy all 5 beers, you can now only purchase one (insert sad face here). You kept the same amount of money, but now it buys less, which makes you poorer. The government has taken some of your purchasing power and handed it over to someone else. The government has taken your beer! I’m sure you hate inflation now.

Back to more serious, less beer related talk, inflation is a tax any way you look at it. The reason that this hurts the poor and middle class is because prices go up before salaries do. This means that you and I are going to pay for inflation adjusted prices for goods without inflation adjusted salaries.

So I say, let the banks fail. Let’s all suffer together and learn to adjust our spending habits for a few hard years. We’ll be better in the long term for letting it happen.

“Banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” Thomas Jefferson

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