Saturday, August 27, 2016

How the FED is Hurting The Middle Class, Making The Rich Richer, And Protecting The President

I wish people paid more attention to economics. I still think Economics 101 should be a high school course, not college. But, be that as it may. Economics is complicated. Cause and effect might not be perfectly obvious. If it seems obvious, it is probably wrong.

Here is an example. To some, it seems obvious that, if taxes are cut, the government gets less money. Actually, when taxes are cut, business increases, profits go up, and tax revenue increases. This actually works in spite of denials by those on the left.

Here is another example. Some (liberals) believe that if interest rates are low it will improve the business climate. This is mostly not so. If the tax level is reasonable and people have confidence in their government, a short term lowering of the interest rates can give a shot in the arm to a lagging economy, ala John Maynard Keynes. But as a long term strategy, it does not work.

There are , however, a number of effects from long term low interest rates. The worst is that it picks the pocket of the middle class and the elderly. I saw a big sign in a bank window yesterday, touting a great interest rate on eleven month CDs. That rate was 1.25%. In other words, give the bank $1000.00 of your money for 11 months and they will give you back 1012.50. What a great investment.

Interest rates on regular savings, which the elderly and middle class rely on, runs around a quarter of a percent. That is the FED putting their hand in our pocket for all the wrong reasons.

With low interest rates stocks go up. That is where the rich store their money. Business is slow. The economy is not growing. So businesses cut back. They lay off people. Close unprofitable facilities. Sell off marginal lines. So those businesses remain profitable and remain a good investment, so the rich get richer.

So why does the FED do this in the first place? They do it to protect the administration. Our government is spending cash that they don't have like it is free. But it is not free. They have to pay interest on the national debt. If rates were high the payments would bankrupt the country. So they either lower interest rates or decrease spending. 

Since they seem to have about as much fiscal responsibility as a five year old in a candy store, they get the fed to lower interest rates. Now they are trapped. They have a weak economy, and low interest. To get the economy going they must raise rates. But if they do that, the stock market may crash. They are in a trap inside an economic bubble. 

In the meantime the poor, the middle class, the elderly, and the economy as a whole, suffer just to benefit politicians and the rich.

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