Saturday, September 15, 2012

Spending, Wealth and Income

In discussing the new QE3 plans by the Fed, Ben Bernanke says that it
will help reduce unemployment because if people see their 401K plans becoming more healthy and their home values increasing they will feel better about resuming their spending habits again. As Bill Clinton said, “that’s how we got into this mess in the first place.” Bernanke apparently does not understand that you cannot spend wealth without either liquidating the asset or assuming an equal and offsetting debt against it. In either case, you no longer have the wealth.

So Bernanke’s case is that QE3 will presumably create an increase in people’s wealth and that people will feel so much better about that increase in their wealth that they will promptly get rid it. The sad part is, of course, that he may very well be right. That is, after all, precisely what the general public did with the wealth created by the housing bubble.

What you can spend is income, which is the result of people having jobs. This whole nonsense of creating a boom of consumer spending in order to create jobs is putting the cart before the horse. Carts don’t pull horses, and people without jobs don’t spend money. People who have jobs spend money, so we have to create the jobs first and an increase in consumer spending will result from that. What part of that is so hard to understand?

Daily Finance chimes in, saying that the Fed “also wants to make people feel wealthier — and more willing to spend.” It then proceeds to say that any feeling of increased wealth created by this move will be delusion, that stock price increases will benefit only the wealthiest 10% of the population, and that low interest rates on homes are pretty useless when people don’t have the 20% down payment that is required to obtain those rates. It does not say, but clearly implies, that any willingness to increase spending that comes out of this Fed action would be the result of insanity.

I’m glad somebody is living in reality these days.

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