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Politics : President Barack Obama -- Ignore unavailable to you. Want to Upgrade?

To: ChinuSFO who wrote (102868)	10/7/2011 8:45:36 AM
From: RetiredNow	Respond to of 149317

It's pretty simple really. Back then, the US still had plenty of wealth to squander and we had a phenomenal growth rate average that papered over a lot of bad decisions. But here's what happened. Ever recession was met with borrowing from the future (classic Keynes theory), which meant that the future growth was going to be slower and our debt and deficits increased. During boom times, the GOP cut taxes cut taxes cut taxes, which unfortunately made our deficits even worse (against the advice of Keynes). Keynes would have said to take your surplus and pay down debt to save for a rainy day. We never did that. Now the rainy day has arrived yet again and we have squandered everything. So there are no nuts left for winter. Here's a metaphorical story to illustrate my point about how the last 30 years played out. A man is wealthy and living beyond his means. The first 20 years are great in terms of his outward show of wealth. He has fine cars, houses, and other things. During the first 10 years, he has low debt. The next 10 years his debt soars has he struggles to keep his standard of living high as his income doesn't keep pace. The last ten years, his income was hit pretty hard and his expenses vastly exceeds his income, causing his debt to balloon. Eventually, the banks cut off his lines of credit and start taking his assets away to pay for his debt. The end game has arrived. The only difference between this man and our gov't is that we can forestall the end game by printing money to cover more stimulus and deficit spending. But this is an insidious stealth from the masses. It is directly leading to high unemployment and high prices. It is a poverty generator. It's insidious because it gives the politicians perfect cover, because they can claim they are DOING SOMETHING, but that something results in the opposite of what they sell the masses. How is the Fed involved? They are enablers of this disaster. If the Fed didn't exist, then investors would have already driven up interest rates to the moon in the US and we would have seen failed Treasury Bond auctions, meaning investors would have refused to buy them or they would have charged enormous interest rates for those bonds. Don't believe me? Look at the rates on Greek bonds right now. They are extraordinarly high and are pricing in a default. That "bond vigilante" action would have forced Congress to make some hard decisions about what we can afford, because interest payments on our debt would have skyrocketed crowding out other gov't spending. This would have forced Congress to tighten the belt and pay down debt quickly. Freely floating rates are the self-correcting mechanism that is absolutely necessary in a free market economy. However, the Fed has short circuited that in the false belief that a Centrally Planned Economy works better. If you have studied Operations Theory in MBA school then you know of something called the "Bull Whip Effect". This is when small distortions in the beginning of the process, create massive perturbations farther down the line of the process. This is EXACTLY what the Fed does. They create small perturbations by trying to dampen the impact of recessions. They distort the corrective process of a recession. In so doing, they create massive purturbations and dislocations in the future, especially because they NEVER get the timing of their actions correct. They are notoriously behind the eighball and they are the direct cause of malinvestment in the economy. All they end up doing is creating more unemployment, more debt, more pain. The best approach is to END THE FED. Let rates float freely and let the self correcting mechanism of bond rates reign in the profligacy of Congress. That will lead to a country that lives within its means, allocates capital to areas of the economy that offer the highest reward to risk ratio, and maximizes employment. None of this is rocket science. It is simply the way things work.