The U.S. economy finished 2011 with a growth rate of 1.8%, a low level, but not a complete disaster. Economies need to grow at certain rates to accommodate more people living, which means the need for more jobs and more goods. At 1.8%, which many economists forecast the U.S. to return in 2012 as well, this is not an optimal level. We can see this from the continued high level of unemployment.
But things are worse than they appear. If we look at the top three central banks, the Federal Reserve, Bank of Japan, and the European Central Bank, since 2008, these institutions have added $8.0 trillion to the economy. In addition, they now make up almost 25% of GDP. What this means is that the main driver of economic stimulus since 2008 has been the Federal Reserve and other central banks adding liquidity into the system. Without that additional $8.0 trillion, the world economy would be in far worse shape than we currently are today; most likely a Great Depression worse than the 1930s.
But that’s not the end of the story; far from it. With so much money tied up, the Federal Reserve and other central banks can’t just pull the money back out of the system. It would collapse the entire economic structure, like a house built from paper. The only solution for them is to print money and increase the inflation rate to grow their way out of this mess artificially.
The danger is that the inflation rate is notoriously hard to control. Once the horse has left the barn, it’s tough to get it back in. The Federal Reserve doesn’t have much of a choice except to hope that the inflation rate can stay manageable without getting out of control.
We are also hearing about countries going through austerity programs and cutting services and jobs. This is money being pulled out of the system; something the Federal Reserve doesn’t want to see happening, as it will slow economic growth. The Federal Reserve will continue on its course of adding more money into the financial system, which will end up spilling into a higher inflation rate, as history has proven time and time again.
The Federal Reserve is doing what it can to save the economy, but most of this mess is to be put on the politicians who have gotten us here by decades of overspending and poor policy decisions. The Federal Reserve can’t control fiscal policy, what the government spends; that’s the job of politicians. The Federal Reserve is trying to mop up the mess, while politicians continue to bicker and fight in their attempts to gain favor and votes.
The sad part of the story is that this will erode a lot of savings that citizens have worked hard for. Looking at this whole mess, it makes you scratch your head and realize that you can’t really trust anything the government does these days. That’s why people have been investing in gold over the last decade.
If we look over the last several thousand years, anytime the government fools around with the inflation rate, playing games with your money, people have lost faith and bought gold. I certainly don’t think the Federal Reserve can perfectly thread this needle and I don’t want to lose my hard-earned money because of a high inflation rate and a complete loss of faith in the U.S. dollar. I’ll stick to gold and I know many other people will, too.