We need to get past America’s current economic system whereby assets, land and buildings, are acquired by borrowing money at an interest rate that can be serviced solely by rents and the ‘depreciation’ of the property. Why would a landlord be willing to rent a home or an office building for the amount of debt-service? They know that the property will continue to increase in value, and can either be flipped in a few years for a capital gain (taxed at special, lower rates rather than ordinary income rates), or swapped in a tax-free exchange for another, more lucrative, building. This is what is meant by ‘investment’: the owner is willing to wait for appreciation to occur before taking the profit.
The flooding of money into the economy by the Federal Reserve, by using US$600 billion over the next eleven months to buy up government debt, is meant to provide the funds necessary for the banks to make new mortgage loans, thereby fueling a bidding war for distressed, foreclosed properties, and to aid banks in raising the value of their reserves by increasing the price of housing. What’s not recognized is that by raising the price of housing, in a period when real wages are falling due to high unemployment, the amount of money a typical household has for purchasing goods, food and services decreases as their housing costs increase. Thus, this ‘quantitative easing’ will raise asset prices (inflation) while lowering demand and therefore prices, of commodities (deflation). Have you seen signs of deflation already? I have: signs have begun to appear on homes for sale in my neighborhood that advertise lower commissions for the realtor, “3% commission!” one declared, and “4.5% plus staging and virtual tour free!” said another, yesterday alone.
A secondary, and the Fed hopes, hidden from the awareness of the American public, result of this flooding of electronic money into the economy is the impact on the global marketplace. The reason European governments find themselves forced to install ‘austerity’ measures, which is code for ‘cutting spending’ (something the Tea Party and Republican party both insist is needed today) is that they don’t allow their central bank to buy government debt. The Federal Reserve wouldn’t be able to buy debt to the tune of $600 billion, if it weren’t for the fact that they can just create $600 billion with a keystroke on their computer. Creating money in America, dollars that are accepted as currency around the world, allows the U.S. banks to buy up properties overseas. They would have you believe that this is just being good capitalists, and harmless. What is not recognized are the externalities: the local people who are pushed off their ancestral lands by a new landlord, and the sucking of local money out of the country by the foreign bank/landlord, further impoverishing the national economy. This is what is driving the movement by China to begin to settle its trades with other nations in its own currency rather than US dollars. Oh, you hadn’t heard that? That is one reason why the dollar has begun to fall in value. The day is approaching when the dollar will not be the worldwide currency, and some countries are jumping ship already.
In future posts, I will begin to look at alternatives to this way of doing things. If you would like to hear a short discussion on Democracy Now about this topic, here’s the link: