Today I came across several posts that spoke very enthusiastically about the fed rate cuts and the stimulus package that the Politicos in Washington DC are working on right now.  And while I can understand people who work in an industry that has been beaten up as badly as the real estate and mortgage industries have been being enthusiastic about anything that might get buyers back out into this market, I'm going to ask you to stop and THINK ABOUT THIS!

Do we really want the government to crank up the presses? 

While it might seem like a good idea to "rebate" some of the taxes that people have paid in order to "stimulate" the economy, you have to remember that our government is already running in the red.  In order for the treasury to mail each of those checks out to all of us, they are going to have to borrow the money.  The problem with this is that our credit is already getting pretty stretched!  Not to mention that it's going to be our grand kids who are going to end up paying this money back.

Spending more money is not the answer here.  Over spending is part of what has gotten us in this situation in the first place!  Evidence of this is the historic low that the dollar now brings against other currencies.  In essence, people around the world are saying to us that they more faith in the just about all of the other major currencies than they have in the dollar.  

Another problem with this rebate plan is what is called the "Multiplier Effect".  That is, when they mail you your check, what are you going to do with it?  You're probably going to deposit it in your bank account.  Since banks are only required to keep a certain amount on deposit, they are then free to lend a much larger amount of money out.  When they make that loan and the borrower gets his/her check, what do you think that they do with it?  Right, they deposit it.

This in turn frees the bank up to lend even more money out.  Where does all this cash come from?  The truth of the matter is that it simply magically appears!  The government simply cranks up the presses and out comes more greenbacks.  As I'm sure that you're aware of, the laws of supply and demand require that if the supply of something increases and the demand stays the same, then the value of that item MUST come down.

It's not optional.  There is no magic way of doing it that can avert this LAW.  If the demand for greenbacks goes down, which very likely will be the case because investors are aware of how this works, then the dollar will slide even further.  If your dollars are worth less and you still want to buy something, say a barrel of oil, then you're simply going to have to spend more of your dollars to get it.  This is called inflation! 

What's the worst that can  happen?

The worst that can happen is that we find ourselves back where we were at in the 1970's.  If you remember back to the 70's (a lot of us don't, but that's another story), you might remember that inflation was running amok.  When OPEC raised oil prices by severely cutting back on the amount of oil that they were putting onto the market, prices skyrocketed.  

People started spending their money on gas instead of on other things.  In addition, the price of many other items started to go up due to the increased energy costs.  This led to a situation where even though the economy was stagnating, prices were still rising.  It was called  "Stagflation".  Remember the Win (Whip Inflation Now) buttons?

The sad fact is that "Stagflation" isn't the worst that could happen to us.  Worse than Stagflation would a depression.  Worse than a depression would be total economic collapse!

Do I think that we're going to experience total economic collapse?  No, I don't.  There are a number of self-correcting mechanisms that will come into play before this would happen (I hope), but why do we even need to risk it?

We Can Fix The Problem If We Truly Want To!

I won't go into my entire economic plan on fixing the economy here (if you want to read more about what I think that we should do, please read my blog "Four Concrete Steps That We Can Take To Fix Our Economy"), but suffice it to say that we're not going to spend our way out of this one.

It's time for the powers that be to recognize this and to take concrete steps to deal with the underlying problems that have led to us being in the pickle that we're in today.

As always, your comments are greatly appreciated.

R.B. "Bob" Mitchell

ValueList Real Estate Services, Inc. 

Bob Mitchell is the president of ValueList Real Estate Services, Inc., St. Louis' largest discount/full-service real estate and mortgage company.  To find out more about Bob, ValueList or our flat-fee listing program please feel free to visit our web page, valuelistre.com