Here comes another stimulus plan

By DAVID MOON, Moon Capital Management, LLC
Ocotber 31, 2010

Did the President’s trillion dollar stimulus plan work? Did it save or create jobs? Was it too much expenditure for too little return? Or should it have been larger?

These are some of the questions being debated in the hotly contested congressional races that will be determined Tuesday.

What hasn’t been discussed on the campaign trail this season, however, is the other federal stimulus package. The real one – or at least the really big one. This quiet stimulus was twice as large as the one that gets all the publicity, yet few people understand it and it required the vote of only seven people.

And we are about to get another of these plans, whether you want it or not.

This stimulus package is courtesy of the seven governors at the Federal Reserve Board, a strange entity that can create or destroy money without any approval by Congress, the President or even Warren Buffett.

In its effort to stimulate the economy on Wednesday, the Fed is expected to announce a second round of bond purchases, otherwise known as quantitative easing. Even if economics isn’t your cup of tea, don’t give up. Keep reading. This is important stuff.

It sounds weird, but the Fed can create money out of thin air. It can do this without asking Congress or buying additional ink for a printing press.

The first round of quantitative easing – $2 trillion worth – did nothing but drive short-term rates to near zero. The largest beneficiaries have been investment banks who are now posting massive profits. It sure didn’t help savers or folks on fixed incomes.

The Fed now wants to drive down the cost of long-term money, as well.

If you create more dollars without any corresponding increase in the output of the economy, it is the equivalent of increasing the number of pizza slices without any corresponding increase in the size of the pizza. Each dollar becomes worth less, just as each piece of pizza becomes worth less.

That is called inflation.

Don’t be shocked. Creating some inflation is the Fed’s intentional goal. It reckons that a little inflation would actually be good for the economy right now.

Apparently Fed Chairman Ben Bernanke doesn’t go to the grocery store. Or buy insurance. Or get haircuts. Or purchase cotton or any of about a dozen other commodities.

I don’t care how the government or a group of do-little academic eggheads choose to miscalculate the cost of living. It is increasing for every consumer I know. Ask any of the Social Security recipients who are entering their second consecutive year with no cost-of-living increase. Other than money, the cost of most things continues to rise. And the cost of money has declined only in direct response to actions by the Federal Reserve.

Now the Fed wants to drive down the cost of money even further, in an attempt to intentionally create more price inflation in consumer products.

That sounds more like a bad trick-or-treat prank than sound economic policy.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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