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What Jerry Thinks: Don’t Fall For The Wealth Effect

November 10, 2010

    On Wednesday, the Federal Reserve announced a new round of quantitative easing designed to prop up the ailing U.S. economy. This promised new injection of capital into the financial markets by the Fed is expected to help maintain ultra low interest rates for the foreseeable future, to drive equity prices higher, and to encourage more borrowing by consumers. In the end, the Fed wants the current “disappointingly slow” economic recovery to develop into a more meaningful economic growth pattern.  But in their quest for a stronger pace of economic recovery, the Fed has led the nation to the edge of the cliff, financially speaking, by seeking to deliver national prosperity through the printing press. History stands against them as it is replete with failed attempts of nations who have tried in vain to create economic solutions with newly printed money. The morale of the story is rooted in solid economic principle and is clear to everyone who is not drinking from Washington’s punch bowl: Nations cannot print their way to prosperity. Those who ignore this critical lesson from history are quickly faced with the same predictable outcomes: currency destruction, loss of national economic confidence, and massively inflated commodity prices.

    Through their actions, Washington’s intentions are clear: They want to destroy the dollar. He hopes it will chase investors out of government bonds into corporate bonds and stocks, giving business a lift.

    What did the $1.7 trillion of bond buying in 2009 and 2010 accomplish for the economy? We got 10% unemployment out of it and virtually no growth.

    The Fed’s portfolio of Government debt, which has gone from $800 billion when Bernanke arrived in February 2006 to $2.2 trillion today, is so big the Fed won’t be able to sell it off without unsettling markets and shaking the economy.

    They want to leave interest rates at historic lows so that Americans can go create new asset bubbles. Do we learn nothing from history? Didn’t Washington and the Fed just get through apologize for inviting the sub-prime crisis which occurred when interest rates were left too low for too long. Now, they are at it again with low interest rates.

    This new round of QE is like giving crack cocaine to a drug addict. Instead of taking the time to detox and fix the system, the Fed’s mantra is the present must be the minimum. There are serious structural flaws in the U.S. economy that need to be addressed directly. But instead, the Fed has decided to just throw more credit to America’s credit addiction and our derelict government stands carelessly on the sidelines completely oblivious. We deserve a government that will protect the purchasing power of its currency.

    Other nations have already begun to express their concern. An adviser to the China’s central bank stated that unbridled printing of dollars is currently the biggest risk to the global economy. Germany expressed their concern as well.

    Friends, Washington is relying on something called “the wealth effect” to get you caught up in more borrowing and more debt. The “wealth effect” is defined as when your stock holdings increase and you feel richer so you go out and spend more money. This is a psychological war and many Americans are going to fall for the power of the “wealth effect.” Will the stock market continue to go up? Of course! More liquidity in the system ultimately leads to higher stock prices. But it also leads to higher prices everywhere else as well. Now, more than ever, you should be making plans to prepare for the potential fallout of hyperinflation. Do you have a 3 months supply of food and water? Have you bought some physical gold and silver? Do you have any variable debts?

    Friends, Washington has proven through their reckless actions that they are intent to take us down the same road that far too many nations in histories have travelled down. The result is always the same. Economic collapse and disaster.

    Printing more money is not going to solve America’s ongoing economic crisis. Instead, it will only serve to further aggravate our financial problems. The fundamental flaws within our economic system can only be healed through drastically reducing the size of government and lowering taxes on businesses and American families. But Washington is not going to do this. So if you want to protect yourself and your family, and if you want to a beacon of light to your community, it is up to you. This is your wake-up call. The time to act is right now. If you need help in getting started…

    About Jerry Robinson

    Jerry Robinson is an economist, published author, columnist, international conference speaker, and the editor of the financial website, In addition, Robinson hosts a weekly radio program entitled Follow the Money Weekly, an hour-long radio show dedicated to educating, equipping, and empowering individuals to better understand money and finance.

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