A Quantitative Headache

I've never been so shocked by the actions of the Federal Reserve. On one hand, the Fed is trying to get people to spend more money in order to stimulate the economy. On the other hand, the Government is taking actions to cause prices to rapidly increase. Essentially, this economy is a sinking boat - in an attempt to save the ship, more holes are being drilled into the hull.

The problem with declining prices ("deflation") is a dilemma that causes great harm to the financial institutions, however, on the other hand is beneficial to consumers. If commodity prices decline, loans which were based upon higher prices lose their collateral and will cause borrowers to default on their obligations. Such is the case in the housing market - a decline in housing prices has affected loans that were previously issued at higher underlying prices.

The Government does not want to see further deflation as it threatens the banking establishment. They're making wild decisions in an effort to stop it - including buying up these mortgages with newly printed money. When you make more money, prices of everything in theory should increase. By buying bad mortgage portfolios off of the very institutions that issued these bad loans, it frees them up to reissue more. Unfortunately, these banks have learned a hard lesson and have ceased loaning.

Nevertheless, when you flood the economy with dollars, their will come a time when inflation will get out of control and our currency will lose its worth. The idea of quantitative easing is being floated - translation: printing money and circulating it around in an effort to induce inflation and cause economic activity which would set new pricing equilibriums.

Rather than allowing the market to correct itself - resulting in lower prices in the short term for us poor consumers like you and I, the government wants to jack prices back up. The current course will set us up for high Oil prices, high food prices and high real estate prices once again.

The whole precipitator of our current economic situation was the excessive credit issued to the markets which resulted in unnatural demand in the real estate market. When people could no longer afford these mortgages because they lose their job - they lost their job because no one could afford to buy the product or services they offer because they too are paying large sums of money to maintain their excessive house.

The bottom line is, we need prices to decline to whatever the market would sustain and remain at this level in order to encourage buying and establish equilibrium. The government shouldn't devalue your dollars by printing money freely. The people most effected by this are those which live within their means and do not borrow unnecessarily - Me.

I said it before and I said it again, the best thing the Government could do is nothing. But nothing is something I don't expect the Government to do.