Paper Money Madness: Inflation-Fueled Economic Growth Does Not Indicate That An Economy Is Getting Stronger
If the U.S. economy “grows” by 4 percent in 2011, but by the end of the year we are paying $3.00 for a loaf of bread, $4.00 for a gallon of milk and $5.00 for a gallon of gasoline are the American people going to be better off economically or worse off? The answer is obvious, but most “experts” in the mainstream media continue to insist that as long as U.S. GDP is increasing and as long as the stock market is going up that our economy is improving. But that is just not the case. If the amount of money in circulation was relatively constant, those measurements would be helpful, but unfortunately the U.S. government and the Federal Reserve are dramatically pumping up the money supply right now. Just because larger amounts of paper money are changing hands does not mean that the economy is getting stronger. Of course GDP is going to rise when there is much more money in the system. But economic growth that is fueled by inflation is just an illusion and it is not an indicator of economic health at all.
A very basic example shows this very easily. Imagine if suddenly everyone in the United States had the amount of money they owned instantly doubled. Would the U.S. economy be twice as healthy? Of course not. Very quickly prices would rise to meet the new level of money.
Well, in the United States today our “authorities” are pumping massive amounts of new dollars into the system. That is one reason why so many people are so upset about the Federal Reserve’s “quantitative easing 2″ program. The Federal Reserve is creating money out of thin air and pumping it into the financial system. The first people that get their hands on this new money are Wall Street banks and major financial institutions. The idea is that eventually all of this new money will “trickle down” and will help average Americans, but that just does not seem to be happening.
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Technically, you’re right, but the point of QE2 is something else. Only a small portion of the real money printed is intended to enter the real economy. The FED would like the money to never enter the economy, but it will eventually, in that you’re right. But not all of it, because most of it will be tied in financial institutions which won’t borrow so easily, if they have self-preserving motives. The real desired impact of QE2 is to lower interest rates, and therefore motivate banks to give credit (which they probably won’t as much) and more importantly to lower interest on adjustable rate mortgages, so people will default less and have more money to spend on other thinks than financing their credit.