Its OK to be Paranoid

My old flying buddy Moose tells me its OK for me to be paranoid because the bastards really are out to get me. So it was with sullen suspicion I greeted the news that the Fed was going to pump another gazillion dollars into the U.S. economy by buying some of our own Treasury Bills. I immediately suspected that the Danes were letting their garbage pile up again, but since I am a complete pointy head when it comes to macro economics, I could not quite identify my unease. So I took to the kitchen table again, only to find that my $5.00 calculator did not handle numbers that large, so I had to create an analogy that made sense of it all. Here’s what I came up with.

Imagine there is a very large corporation that manufactures lots of “stuff.” This corporation sells their “stuff” to a super mega corporation and makes a ton of money doing so. Everything was going along just dandy until the management of the mega corporation made some bad decisions and they found they had a cash flow problem and were having trouble meeting their payroll. So they turned to the supplier corporation and asked them to loan the mega corporation some money so they could meet their payroll. Corporation number 1, not wanting to lose their best customer, loaned out the money and everyone was happy. Mega corporation then hired some new management but they made some decisions that only made things worse, so they turned to their supplier and asked for more loans. By this time, Corporation 1 was getting a little nervous, and thought the risk was going up, so figured it was about time that the Mega Corporation coughed up a little more in interest payments. Not so fast, said the Super Mega Corporation--you see, we can print our own currency and loan it to ourselves.

So China gets the message. If you want to keep selling “stuff” to us, we want you to buy our debt, but we are going to keep the interest rates low because we control the currency of trade. In fact, we can just print more of our currency any time we feel like it, since we are the biggest economy in the world.

The official reason for the Fed to buy our own debt is to keep the interest rates low so the economy can recover faster. But here is what is rotten in Denmark. We hear about trillions of dollars piling up in banks and corporations, waiting in reserve while the managers figure out if the U.S. mega corporate managers are going to get things right. If interest rates are kept artificially low, the banks and corporations will eventually have to invest that cash in capital improvements, goods, and services. Thats a good thing. The bad news is that I am getting shafted.

You see, I have reached “senior citizen” status and live on a fixed income. For years and years I sacrificed and saved my dollars so I could have a nice little nest egg for retirement. I figured that nice little nest egg would create some income in the form of interest. Last time I looked, I was getting a return of around a half a percent on all that hard saved money. So what am I to do for investments? Well, that will be the subject of my next blog. This one has grown a bit large.


One last observation. If the U.S. prints more money, doesn't that decrease the value of each dollar in circulation? I'll leave that question to someone who really understands macro economics.

JP   

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