Archive for May, 2010

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I cannot, for the life of me, understand why we allow our government to keep large businesses from failing. Both Fannie Mae and Freddie Mac are examples of this…there is government oversight of these two corporations…yes, that’s right…corporations: they have shareholders. Government intervention in these “important” businesses seems to be a direct tie-in to bailout funds. For what? So they can pay their shareholders? As a taxpayer, why should I care? I don’t. You shouldn’t either.

This mismanagement and the “Great Auto & Bank Bailout of 2009″ make me want to vomit. Seriously. When did it become acceptable for large business to socialize losses and privatize gains? As a taxpayer, I am supposed to care when companies fail to achieve their goals, but when they turn a profit, I don’t see a dime? What’s in it for me? Where’s my dividend check? What’s more, what is the motivation for these large corporations to even balance their budgets if they know they can just crying to their Uncle Sam for a hand-out? Our current welfare state…handouts to the rich and greedy.

So why should you care about bailouts? Basic supply and demand. There is a considerable shortfall between income taxes levied and what the government spends on bailouts and programs (you’ve heard the terms “deficit” and “deficit spending,” right?) This year, the deficit is forecast to be $1.5 trillion dollars. The shorthand form is a little misleading (which is why they use it.) Let’s look at it in longhand. $1,500,000,000,000. That is the budget deficit for one year…that means this is how much more we’re spending than levying in taxes. So, where does this money come from? The Federal Reserve Bank creates it out of thin air, then sells treasury bonds to foreign investors to cover the debt (the premium is then paid first out of the budget before anything else is paid…which means that the deficit will continue).

Now, the supply and demand part is simple. Say I have an apple. A very delicious apple. You want the apple, and since there are no other apples around, you are willing to pay say $2 for that apple. Now suppose there are apples everywhere…you will want to pay less for the apple because you have options (competition.) Now, the value of the apple, barring any apple variation (specialization) has gone down and you can enjoy a much cheaper apple. The specialization could change things…if all of the apples were Granny Smiths, and I pulled out one Pink Lady and it was the only one around, I could probably charge more for the Pink Lady, since there are no others to be had.

Now, in the money example, there is no variation. We, as Americans, don’t accept much wampum or barter, so cash money is pretty much it. Gold, which used to be our standard for valuation of our currency, is also a coveted exchange medium, but it is no longer legal tender. In fact, if you look at the price of gold over the last five years, it has gone from around $400/ounce to over $1200/ounce. And the supply of gold stays pretty steady, which means that the value of our dollar compared to gold, has decreased threefold in 5 years.

What does this mean? It means that the increase in the money supply means has created significant inflation. In other terms, the sharp increase in the money supply has devalued your money significantly. This would be fine if your pay raises kept up with inflation. I don’t know of many people that get raises significant enough to keep up with this rampant inflation…I sure as hell don’t. So, quite simply, this degrades your quality of life. When the Federal Reserve Bank creates money to cover these businesses’ shortfalls, you pay by making less money…it is like an additional tax. It is across the board, though, right? Wrong. The time-value of money is significant in that the people who get the money first (bailouts, banks, insurance companies, etc.) have the money when it is worth more…over time, the value goes down as the market reacts a little slower than electronic transfers. So the people receiving the money first are getting preferential treatment even though they are the ones that are screwing things up because of their risky investments.

What is also interesting to note is these banks, through the practice of fractional reserve banking (too complicated for me to explain here, but it is some seriously insidious shit) can and do create their own money…so again the bailout money is mainly to cover shortfalls from their risky investments to be able to provide their investors a return.

So, if you are not a big investor (upper class) or receiving aid from some of the government programs (lower class) then you are paying for all of this (middle class).

So, who gets the money first in these transactions? No one knows…outside of the Federal Reserve. That is why Ron Paul and others want transparency in the Fed’s dealings (in a Fed audit.) Optimally, this country would abolish the central bank (Fed) return back to a gold standard, but the people who receive this preferential treatment want to keep getting this preferential treatment…and they have money to spread around to their politicians (Senator Dodd, et. al.)

So ultimately, we are doomed until our government gives up on preventing big business from failing by subsidizing their losses. F*** you, Freddie Mac. God bless our welfare state.