Get ready for tomorrow and understand Ben Bernanke and QE-2

During a period which we should be saving, we have to spend. Americans don't have an incentive to save. Artificially low interest rates and a depreciating currency. Why should we save today when our buying power erodes each day we decide not to spend?

Inflation is a huge problem for this country down the road. Huge. Ben Bernanke said he would have combated the Great Depression by giving consumers a false impression that a recovery was underway giving people the confidence to spend, therefore leading to a real recovery. That theory is in practice today.

The Fed, the controller of the US Dollar, has been doing its best to devalue the dollar. We've seen this 85% of the time for the past year; dollar up-markets down and vice-versa. By dropping the dollar, you prop the market, you inflate the value of the DOW. True wealth is not being created only a trick to fool the retail investor that looks at 2% gain on the DOW as something good not knowingly that his/her buying power has also diminished by 2% off-setting any real gain.

This, I believe, is a major flaw in Bernanke's theory. If our purchasing power drops by 2%, meaning we pay 2% more for everything like food and energy, people's living wages will not be able to keep up with the increase cost of living. So to compensate for the differences in wages and costs, Americans will have to reach into their 401K and whatever savings they have to pay for the difference. This in turn depresses asset prices, and if asset prices fall too much too fast, we can always count on the Fed to print more money and inject it back into the economy. Sounds great except the economy will forever be in a range, 2% gain on the DOW is not a guarantee that your portfolio saw a 2% gain if any, jobs are long gone, taxes will rise, inflation will rise.

In inflationary environments, it is better to be the debtor rather than the creditor. Why? Would you loan me a million dollars today if I paid you back in 10 years plus 1% interest? No. Because if inflation is 5% a year, when you get your money back, it wouldn't be able to buy as much as it could have the day I asked for the loan.

And who makes those loans? Banks. Who needs those banks? Businesses. The chart below shows sources of funds for nonfinancial businesses.



94% of a business's funds comes from bank loans, bonds, and stocks. 62%, 30%, and 2% respectively. So we know banks won't loan to businesses, because its worse to be a creditor during times of inflation. People won't buy bonds, because if you buy a bond you become a creditor so that's no good. Asset prices are no good because people keep withdrawing money from stocks for the reason mentioned earlier.

The last resort for funds--Government. How will the Government issue loans to businesses with money it doesn't have? Print more money causing even more inflation! This also equates to government takeover of businesses.

I don't know if Conspiracy Theories are true or if our officials are downright stupid. I think it falls somewhere in between. I think officials know the consequences of QE-2 but refuse to address it, because they want to get re-elected, and its hard to get re-elected if you're dragging down the economy. At least with QE-2 you can fool the Average Joe that the economy is doing better. But somewhere down the road the effects of too much spending will become irreversible and money printing and market manipulation will no longer work.

The only thing that does work is Capitalism, but we aren't allowing it to work. Recessions are good for an economy. It flushes weak businesses out of the economy so that only the strong ones are left. The government really needs to let the market situate itself.