The bailout is bad for us

Many have been claiming that the bailout is needed to keep the economy from melting down. The problem here is that we are giving money to the investment banks to keep them from failing. This ignores the fact that the money that was "lost" was not lost, but merely changed hands. This money is still circulating in the economy, having been acquired and spent by the people who sold their homes to the now defaulting borrowers.

The amount of cash that will be injected into the US economy is staggering. By some estimates, over $1 trillion dollars will be placed into circulation to bail out the banking industry. That is in addition to the $400 billion that has already been spent since Feb 5. The entire country only produces $14 trillion a year in goods and services, so this amount represents 10% of our annual productivity.

A currency becomes worth less when there is an increase in the amount of money which is not supported by growth in the output of goods and services. This devaluation is called inflation. The amount of goods and services being produced in this country is falling, therefore we should be needing LESS money in circulation, not more. As the demand for cash falls and the supply rises, the law of supply and demand dictates that the value of the cash will fall.

The Federal Reserve's normal response to inflation is to raise interest rates to constrict the money supply, thus forcing the supply and demand balance to increase the value of the money. This is not happening because it is an election year, and because increasing interest rates will only increase the default rates on the loans already out there. What does this mean for us as citizens? It means that everything you buy just got more expensive. Oil, gas, food, clothing.

Governments often hide true inflation, as I believe the United States is doing now. The methods for hiding inflation are:

• Outright lying in official statistics such as money supply, inflation or reserves. They have been telling us that inflation is lower than it is. What did gas, milk, and clothes cost last year? Gold is $900 an ounce and gasoline is $3.67 at the corner store as I write this. A year ago, an ounce of gold was $734 and a gallon of gasoline was $3.01, two years ago gold was $589. If those numbers are representative, inflation is really hovering around 20%.
  


• Suppression of publication of money supply statistics, or inflation indices. Maybe this is why the M3 money supply statistics are no longer published, and haven't been since 2006.
  


• Price and wage controls. This can be accomplished by Federalizing industries like oil, banking, or health care. This idea is being suggested already. One only has to look at the TSA to see what will happen there- costs will dramatically increase because of government inefficiency. These increased costs will inject even more cash into the system, and will create a black market where the real prices will drive sales.
  


• Forced savings schemes, designed to suck up excess liquidity. These savings schemes may be described as pensions schemes, emergency funds, war funds, or something similar.


• Adjusting the components of the Consumer price index, to remove those items whose prices are rising the fastest. Like publishing the "core inflation" rate- excluding food and energy from the calculation and trying to convince us that the core rate is more accurate.
  

Look next for the government to begin price and wage controls.

The cure of a bail out may well be worse than the disease it is supposed to fix.