The story of the week, in my opinion, was the Federal Reserve announcing that it will engage in on-going and essentially unlimited quantitative easing (ie. printing of money to stimulate the economy).
I figured I'd write a post on this for those that are interested in understand what all this means. It has implications for PR in the sense that he very nature of how our society and monetary system works (not just in the US but anywhere in the world) has changed drastically.
But before I begin, I thought I'd precis this with a recent video on Yahoo's Daily Ticker. David Stockman gives a great explanation of why quantitative easing (especially at this point) is bad.
Ok, so now my views on Bernanke and QE3+Infinity for those that want to understand what the heck all this money printing really means (and I'll toss in some PR implications at the end).
Lenders and Borrowers
So basically, the core thing to remember is that the economy has two components to it: the lender and the borrower (there's more to it than just those two components, but let's keep it simple as they are two main ones).
Lenders (most often the bank) lend money to people so they can buy things that they can't afford today or in one lump sum payment. To regulate borrowers activities they charge an interest rate on any loans they give out.
The interest rate is what stops people from borrowing irresponsibly.
For instance, imagine the following situation. You go to borrow money and the bank tells you that interest rates are zero per cent over 100 years. This is an absurd example, but it helps make a point.
So how much money would you borrow? A million? A billion? A trillion? Since you aren't going to live 100 years, and since the bank isn't asking for any kind of interest payments annually, you would take as much as they would give you since you'd have no plans of ever paying it back.
Now, in a normal functioning economy, the bank would never do that. They would make you loan, but at say five per cent interest. So now if you borrowed a million dollars, you'd better take that million and use it to create a business that allows you to pay the bank $50,000 a year.
As you can see, no one in their right mind would take the loan unless they had a plan to make significant income from putting the loan to use. Even if you have a plan though, the bank still wouldn't loan you that much without some guarantee that if you pissed it all away they'd get (at least some of) their money back (ie. your assets - house, car, savings, etc. - were north of $500,000).
As you can imagine, loans of a million dollars generally go only to businesses who are growing and require up-front capital to take the next step. So a start-up sells shoes, they market loves their product, sales increase 1000 per cent over two years, they want to start opening franchises and they need money to do so. The bank would probably give them the loan since their business looks like it's on a growth trajectory and they have assets to back the loan (ie. their existing business).
So pretty simple right? We don't give people loans at zero per cent for 100 years because then everyone would take a billion dollar loan, piss the money away over the course of their life, never pay it back, and declare bankruptcy when they are dead.
In a normal economy, average folks can only borrow in relation to their salary or their net worth. So the bank will only give you what they can hope to recoup should you go bankrupt and have to sell your assets to pay off your debts.
The Lenders
So who are the lenders? Well, the banks obviously.
But where do the banks get their money?
They can get it from you in the form of deposits. So when you put money in your chequeing account, it doesn't actually sit in an account. The bank gives your money to someone else as a loan. The same logic applies to corporations who park millions or billions in bank accounts. When you think about it, money never really leaves the bank.
The bank may lend you 400k to buy a house, money which is then used to pay the people who own the house, but they take that money and put it right back in the bank under their name. They go buy another house, move the money from their account to pay the seller, who then puts the money back in the bank under their name.
So really, money never really leaves the bank, it merely moves around inside the bank (and between various banks).
So where does the bank get MORE money when its deposits aren't enough to cover the loans it wants to make?
They can get it from a central bank like the Federal Reserve, who simply prints up the money and gives it to the bank. Under normal circumstances though, the Fed charges the bank an interest rate. Just like people would borrow irresponsibly if they didn't pay interest, the same goes for a bank. (When you give the bank money at zero per cent, they might actually use it to speculate in the stock market instead of loaning it out... oh wait, they did do that!... but I digress).
So if the bank pays the Fed two per cent for new money, it then has to charge people four per cent if it wants to make a two per cent profit on the loan. Sure, YOU pay four per cent, but the bank is kicking back two per cent to the fed, leaving it with only a two per cent profit on the loan.
The thing with the fed though is that it won't give banks whatever they want. There is a cap and restrictions on how much they can borrow.
So where do loans come from when the bank doesn't have the money (in the form of deposits)and the Fed won't print new money for them?
The answer is bonds. Federal bonds, corporate bonds, etc.
I tend to think of a bond as loan in reverse. Instead of a corporation asking if they can borrow money, what they do is simply issue debt in to the market. So instead of borrowing from the bank at say five per cent a year, they may issue corporate bonds (ie. sell their debt) to people and institutions, who will buy the debt for only three per cent a year. Governments do this also.
So ACME company has 100 million of debt at five per cent a year with the bank. That's costing them five million dollars in interest. The CFO says, forget this, let's issue this debt as corporate bonds at three per cent. People buy the bonds and instead of paying the bank five per cent, they now are paying investors three per cent (saving the company two million a year).
Keep Following, We're Almost There
So you can basically finance debt three ways: from the bank (whose money comes from deposits), from the Fed (who prints the money and gives it to the bank), and from investors (ie. savers).
Now, in all these scenarios, what makes the system work is the interest people get on loaning the money.
So if you have 100k, you could party like it's 1999 and go on the best vacation ever. But if I have a 100k, I might decide to forgo such pleasures and instead make three per cent a year (ie. $3,000) by loaning my 100k to the government or some corporation (I would do this by buying bonds).
But what happens when the Fed decides to flood the market with cheap money?
Bernanke Goes to War With Savers
So the banks, who take in money and then lend it back out, obviously set interest rates on loans. After all, if the bank is willing to give a corporation a loan at three per cent say, then that corporation is not going to sell you its debt (ie. bond) for more than that right? They will give you the privilege of buying their debt for say two per cent.
Similarly, if the bank borrows from the Fed at two per cent, they aren't going to give you a loan at two per cent, as they would make no profit.
So what happens when Bernanke floods the market with cheap money?
Currently, with quantitative easing one, two and now three, Bernanke basically gives the banks money (collectively in the trillions) at zero per cent interest rates. Which means, it costs the banks nothing to borrow the money.
They in turn loan the money out at a lower interest rate than they otherwise would. This encourages businesses and people to take loans and take advantage of lower interest rates. So the housing bubble in Canada is in large part due to low mortgage rates NOT because people are making more money.
This strategy is designed to stimulate the economy and get economic activity going again. With it being cheaper to borrow money, business and people should obviously borrow more and use it to buy stuff right?
We'll get to why that is wrong in a bit, but let's turn to savers for a moment.
When you stimulate the economy, and banks lend at lower interest rates, then investors obviously will get much lower returns when purchasing fixed assets like bonds. Which is why today when you buy government bonds (ie. government debt) you can expect to get a 1.5 per cent annual return. Back before the crash you would be getting four, five or six per cent annual return.
So if you have a million dollars that you've saved over the course of your life you are expecting to get $40,000-60,000 a year return from that money. This is what most people plan their retirements around.
But at 1.5 per cent, you are now only getting $15,000 a year. It's not hard to understand why governments are extending the retirement age under this scenario is it? Most people simply cannot afford to retire in this economic environment.
But what about equities?
So you might be thinking, ok, so printing money destroys fixed assets like bonds. But can't people invest in stocks instead?
Yes, you can. In fact, some argue, it's your only hope of getting more than a two per cent return annually. But the flip side is that stocks are far riskier than bonds. Stocks can go up or down, whereas a bond is a fixed return. I lend you 100k, you give me 3k a year, and in two years you give me my 100k back. With a stock anything can happen. I invest 100k in RIM, and a year later it might be worth only 10k.
So what about just staying in cash?
So Bernanke destroys bond returns. Stocks are still an option, but very high risk. What about just staying in cash until all this blows over?
If this blew over in a couple years, cash would be fine. But what if Bernanke, as he indicates, is willing to print money and keep interest rates low for a decade?
You have a five dollar bill in your pocket today that will buy you three bags of milk. But in five years, that same five dollar bill will only buy you two bags of milk. So it loses its value as time goes on.
So if bonds don't return anything. If stocks are too risky. If cash loses its value. What can people do?
The answer, or so Bernanke is hoping, is that people will SPEND. Forget saving, because there's no reward any more for saving. Instead, spend spend spend.
Bernanke's plan is that if enough people do this, the economy will recover and then he can undo everything he has done. He can raise interest rates and return the system to how it use to be, where lenders and borrowers existed in a symbiotic relationship and the Fed isn't printing money and artificially lowering interest rates.
Inflation
Before we get to the meat-and-potatoes conclusion, let's talk quickly about inflation.
When the Fed prints money, and when borrowing money becomes super cheap, prices for things go up.
Think of it like this. You have a house worth 100k and a mortgage of four per cent, which means you are paying 4k a year to own you house. But if the mortgage rate is only two per cent, then you could borrow 200k and still only be paying 4k a year.
Now, in an environment where mortgage rates are two per cent, this does not mean that you can suddenly sell your 100k house and go buy a 200k house. Instead, what happens, is that the 100k house simply becomes worth 200k (so for those that bought it at 100k they suddenly feel rich and those buying for the first time don't notice the cost because the mortgage is still only 4k a year). So its price INFLATES despite the fact that its the exact same house and the annual costs to own the house are still the same.
Cheap money = cheap interest rates = INFLATION.
Now, once again, this isn't a problem as long as your salary is rising to match inflation (which it doesn't now-a-days). And it's not a major problem as long as interest rates stay low.
But you can imagine what happens when the house that is now 200k at two per cent a year, suddenly experiences rising interest rates back to normal levels. Now the 200k house has a four per cent mortgage rate again, or 8k a year! And remember, this is still the 100k house, which INFLATED to 200k due to low interest rates.
This is what happened in the sub-prime mortgage crisis. People were able to pay the 4k, but when the rates changes, BAM, they went bankrupt. As people go bankrupt on their mortgages, housing prices fall. How far? Well in this example, they end up falling 50% back down to 100k, which at four per brings annual payments back down to 4k a year.
But until rates rise, inflation will continue. The 100k house will be worth 200k. The car that should sell for 20k (as that's what people can actually afford), will sell for 25k because it will be offered with a seven year, zero per cent loan. Cheap loans merely increase the price of the item being purchased, they INFLATE the price.
So when you see the price of gas going up, and milk, and bread, and cars, and houses, and you wonder how can all these things go UP in price during a recession, it's because of cheap money from the Fed!
When a society moves from a model where you save money and then buy things, to one where you don't save things and buy things anyway with cheap debt, then the price of things goes up because demand goes up.
Another way of saying this is that the value of money declines (ie. people value it less).
So to buy a house you need 100,000 dollar bills. But if the money supply is watered down by money the Fed prints out of thin air, it loses its value. As a result, now to buy the exact same house, you need to produce 200,000 dollar bills.
When your salary isn't rising, this obviously becomes a problem.
The Real Problem in all this!
So what's the real problem in all this, aside from the fact that it hasn't work over the past four years? That cheap money (ie. stimulus) has not solved unemployment.
The real problem is that it everyone gets screwed (except the rich and corporations).
There You Have It
So there you have it. Bernanke is turning the world in to a total mess with cheap money. It's why this recession will never end. It's also why we are going to be looking at new norms for decades to come.
Retirement? Hah! Most people will never be able to fund their retirement. Only those who save enough to live on will retire. Those counting on returns from investments will not have enough to retire.
Savings? Hah! It use to only be irresponsible people who were deeply in debt. In the future it will be the norm for everyone!
But realistically, this cannot go on for decades. At some point the system will implode because this is not how money was meant to be used. You are not suppose to be able to 'print' money out of thin air. You are suppose to have to work for it. It's suppose to reflect the value of labour.
If everyone started printing dollar bills on their HP printer what would happen? Well, exactly what is happening now. With fake money out there, the value of money would decline. Eventually it would become so valueless that a loaf of bread would cost 100 (fake) dollars. When it gets really bad, they won't even accept money for bread... instead you'd have to 'trade' something of tangible value.
But as stated earlier, this ponzi scheme, which is essentially what is going on, can last as long as:
1) Interest rates stay low for a long long time
2) Inflation doesn't get out of control
Bernanke's Defence
Bernanke's defence is simple. Low interest rates and cheap money make it easier for people to borrow money. This increases borrowing and therefore increases buying. The more people buy things, the stronger the economy gets. Hence, stimulus = spur to the economy.
In addition, and this is the big one, Bernanke argues that there is no inflation currently. So he is saying that all this cheap money he is giving the banks is not causing the price of things to go up.
Now you might disagree with him if you notice the things I've notice. Over the past few years, gas has gone from 80 cents a litre to $1.30 a litre. Bread has gone from $1.99 to $2.99 and higher.
And while some items haven't changed in price, their quantity has. So a bag of chips may still cost two bucks, but you get 30-40% less chips in the bag.
Inflation can be measured not just by the cost of something, but by the quantity you get (if you pay the same for half the quantity, that's inflation).
And let's not even get in to things that people say haven't inflated, because how can you really tell? Maybe an electronic item has even gone down in price, from $300 to $250... but perhaps it should have actually gone down to $200 under normal commoditization trends. Even though the price went down, you could still say the price is inflated.
But worry not, Bernanke doesn't count gas or food or housing when calculating inflation. So as far as Bernanke is concerned, inflation is not a concern.
Personally I think he's living in La-La Land.
So there you have it, if you were wondering what all this stimulus stuff was about, there's my take on it.
Fair disclosure: To understand this stuff, read multiple sources. I'm not an economist, so take what I say as opinion more so than fact. And obviously there are many more variables at play in all this - money supply, money velocity, currency wars, precious metals, high frequency trading, futures, facism, etc. - but I don't have time to get in to everything that's in play, just the core paradigm of what is happening.
PR Implications
The implications for PR are perhaps not immediately evident, but they are game changing.
Any PR person views the world through a stakeholder / audience lens. So you have customers, employees, investors, the general public, executives, etc.
And for decades we've all shared a common reality, and from that common reality we make assumptions about how various stakeholders view the world. So we know customers think a certain way, investors think a certain way, etc.
However, how people think about the world we live in is changing and it's going to keep changing as a result of this transition we are making away from traditional capitalism and towards an economy controlled and manipulated by central bankers and which runs on debt (not savings).
So concepts like 'hard earned money' won't hold the same meaning in 10 years as they do today.
A phrase like 'money doesn't grow on trees' will seem alien and foreign to youth who today may be five years old, but in 10 years will be 15 years old. To them money will grow on trees, or rather, will be 'printed' by the Fed.
'A penny saved is a penny earned' will be seen as stupid and will probably be replaced with the saying 'A penny saved is a penny wasted.'
My point is PR folks should think about the implications of what is happening to the global financial / economic system right now.
It has already changed how some people see the world and by the time it is all done, it will change how everyone sees the world.
It's also possible that as life gets tougher economically, that communities will change as people turn to each other to get by. So we could have a resurgence in ideologies that value the 'greater good' type thinking.
Ultimately though, as people change (and this recession will change people) PR will have to change as well.
I think of the parent's of the baby boomer generation, those who went through the Great Depression. They had a completely different way of looking at the world than their baby-boomer kids did. As a PR person you cannot message to those two different demographics the same way.
That kind of paradigm shift is in the works as we speak, thanks to Bernanke and Obama and the method they've chosen to 'clean up' Bush's mess (which is basically let's make an even bigger mess so no one even remembers what the original mess looked like).
I figured I'd write a post on this for those that are interested in understand what all this means. It has implications for PR in the sense that he very nature of how our society and monetary system works (not just in the US but anywhere in the world) has changed drastically.
But before I begin, I thought I'd precis this with a recent video on Yahoo's Daily Ticker. David Stockman gives a great explanation of why quantitative easing (especially at this point) is bad.
Ok, so now my views on Bernanke and QE3+Infinity for those that want to understand what the heck all this money printing really means (and I'll toss in some PR implications at the end).
Lenders and Borrowers
So basically, the core thing to remember is that the economy has two components to it: the lender and the borrower (there's more to it than just those two components, but let's keep it simple as they are two main ones).
Lenders (most often the bank) lend money to people so they can buy things that they can't afford today or in one lump sum payment. To regulate borrowers activities they charge an interest rate on any loans they give out.
The interest rate is what stops people from borrowing irresponsibly.
For instance, imagine the following situation. You go to borrow money and the bank tells you that interest rates are zero per cent over 100 years. This is an absurd example, but it helps make a point.
So how much money would you borrow? A million? A billion? A trillion? Since you aren't going to live 100 years, and since the bank isn't asking for any kind of interest payments annually, you would take as much as they would give you since you'd have no plans of ever paying it back.
Now, in a normal functioning economy, the bank would never do that. They would make you loan, but at say five per cent interest. So now if you borrowed a million dollars, you'd better take that million and use it to create a business that allows you to pay the bank $50,000 a year.
As you can see, no one in their right mind would take the loan unless they had a plan to make significant income from putting the loan to use. Even if you have a plan though, the bank still wouldn't loan you that much without some guarantee that if you pissed it all away they'd get (at least some of) their money back (ie. your assets - house, car, savings, etc. - were north of $500,000).
As you can imagine, loans of a million dollars generally go only to businesses who are growing and require up-front capital to take the next step. So a start-up sells shoes, they market loves their product, sales increase 1000 per cent over two years, they want to start opening franchises and they need money to do so. The bank would probably give them the loan since their business looks like it's on a growth trajectory and they have assets to back the loan (ie. their existing business).
So pretty simple right? We don't give people loans at zero per cent for 100 years because then everyone would take a billion dollar loan, piss the money away over the course of their life, never pay it back, and declare bankruptcy when they are dead.
In a normal economy, average folks can only borrow in relation to their salary or their net worth. So the bank will only give you what they can hope to recoup should you go bankrupt and have to sell your assets to pay off your debts.
The Lenders
So who are the lenders? Well, the banks obviously.
But where do the banks get their money?
The bank may lend you 400k to buy a house, money which is then used to pay the people who own the house, but they take that money and put it right back in the bank under their name. They go buy another house, move the money from their account to pay the seller, who then puts the money back in the bank under their name.
So really, money never really leaves the bank, it merely moves around inside the bank (and between various banks).
So where does the bank get MORE money when its deposits aren't enough to cover the loans it wants to make?
They can get it from a central bank like the Federal Reserve, who simply prints up the money and gives it to the bank. Under normal circumstances though, the Fed charges the bank an interest rate. Just like people would borrow irresponsibly if they didn't pay interest, the same goes for a bank. (When you give the bank money at zero per cent, they might actually use it to speculate in the stock market instead of loaning it out... oh wait, they did do that!... but I digress).
So if the bank pays the Fed two per cent for new money, it then has to charge people four per cent if it wants to make a two per cent profit on the loan. Sure, YOU pay four per cent, but the bank is kicking back two per cent to the fed, leaving it with only a two per cent profit on the loan.
The thing with the fed though is that it won't give banks whatever they want. There is a cap and restrictions on how much they can borrow.
So where do loans come from when the bank doesn't have the money (in the form of deposits)and the Fed won't print new money for them?
The answer is bonds. Federal bonds, corporate bonds, etc.
I tend to think of a bond as loan in reverse. Instead of a corporation asking if they can borrow money, what they do is simply issue debt in to the market. So instead of borrowing from the bank at say five per cent a year, they may issue corporate bonds (ie. sell their debt) to people and institutions, who will buy the debt for only three per cent a year. Governments do this also.
So ACME company has 100 million of debt at five per cent a year with the bank. That's costing them five million dollars in interest. The CFO says, forget this, let's issue this debt as corporate bonds at three per cent. People buy the bonds and instead of paying the bank five per cent, they now are paying investors three per cent (saving the company two million a year).
Keep Following, We're Almost There
So you can basically finance debt three ways: from the bank (whose money comes from deposits), from the Fed (who prints the money and gives it to the bank), and from investors (ie. savers).
Now, in all these scenarios, what makes the system work is the interest people get on loaning the money.
So if you have 100k, you could party like it's 1999 and go on the best vacation ever. But if I have a 100k, I might decide to forgo such pleasures and instead make three per cent a year (ie. $3,000) by loaning my 100k to the government or some corporation (I would do this by buying bonds).
But what happens when the Fed decides to flood the market with cheap money?
Bernanke Goes to War With Savers
Similarly, if the bank borrows from the Fed at two per cent, they aren't going to give you a loan at two per cent, as they would make no profit.
So what happens when Bernanke floods the market with cheap money?
Currently, with quantitative easing one, two and now three, Bernanke basically gives the banks money (collectively in the trillions) at zero per cent interest rates. Which means, it costs the banks nothing to borrow the money.
They in turn loan the money out at a lower interest rate than they otherwise would. This encourages businesses and people to take loans and take advantage of lower interest rates. So the housing bubble in Canada is in large part due to low mortgage rates NOT because people are making more money.
This strategy is designed to stimulate the economy and get economic activity going again. With it being cheaper to borrow money, business and people should obviously borrow more and use it to buy stuff right?
We'll get to why that is wrong in a bit, but let's turn to savers for a moment.
When you stimulate the economy, and banks lend at lower interest rates, then investors obviously will get much lower returns when purchasing fixed assets like bonds. Which is why today when you buy government bonds (ie. government debt) you can expect to get a 1.5 per cent annual return. Back before the crash you would be getting four, five or six per cent annual return.
So if you have a million dollars that you've saved over the course of your life you are expecting to get $40,000-60,000 a year return from that money. This is what most people plan their retirements around.
But at 1.5 per cent, you are now only getting $15,000 a year. It's not hard to understand why governments are extending the retirement age under this scenario is it? Most people simply cannot afford to retire in this economic environment.
But what about equities?
So you might be thinking, ok, so printing money destroys fixed assets like bonds. But can't people invest in stocks instead?
Yes, you can. In fact, some argue, it's your only hope of getting more than a two per cent return annually. But the flip side is that stocks are far riskier than bonds. Stocks can go up or down, whereas a bond is a fixed return. I lend you 100k, you give me 3k a year, and in two years you give me my 100k back. With a stock anything can happen. I invest 100k in RIM, and a year later it might be worth only 10k.
So what about just staying in cash?
So Bernanke destroys bond returns. Stocks are still an option, but very high risk. What about just staying in cash until all this blows over?
If this blew over in a couple years, cash would be fine. But what if Bernanke, as he indicates, is willing to print money and keep interest rates low for a decade?
You have a five dollar bill in your pocket today that will buy you three bags of milk. But in five years, that same five dollar bill will only buy you two bags of milk. So it loses its value as time goes on.
So if bonds don't return anything. If stocks are too risky. If cash loses its value. What can people do?
The answer, or so Bernanke is hoping, is that people will SPEND. Forget saving, because there's no reward any more for saving. Instead, spend spend spend.
Bernanke's plan is that if enough people do this, the economy will recover and then he can undo everything he has done. He can raise interest rates and return the system to how it use to be, where lenders and borrowers existed in a symbiotic relationship and the Fed isn't printing money and artificially lowering interest rates.
Inflation
Before we get to the meat-and-potatoes conclusion, let's talk quickly about inflation.
When the Fed prints money, and when borrowing money becomes super cheap, prices for things go up.
Think of it like this. You have a house worth 100k and a mortgage of four per cent, which means you are paying 4k a year to own you house. But if the mortgage rate is only two per cent, then you could borrow 200k and still only be paying 4k a year.
Now, in an environment where mortgage rates are two per cent, this does not mean that you can suddenly sell your 100k house and go buy a 200k house. Instead, what happens, is that the 100k house simply becomes worth 200k (so for those that bought it at 100k they suddenly feel rich and those buying for the first time don't notice the cost because the mortgage is still only 4k a year). So its price INFLATES despite the fact that its the exact same house and the annual costs to own the house are still the same.
Cheap money = cheap interest rates = INFLATION.
Now, once again, this isn't a problem as long as your salary is rising to match inflation (which it doesn't now-a-days). And it's not a major problem as long as interest rates stay low.
But you can imagine what happens when the house that is now 200k at two per cent a year, suddenly experiences rising interest rates back to normal levels. Now the 200k house has a four per cent mortgage rate again, or 8k a year! And remember, this is still the 100k house, which INFLATED to 200k due to low interest rates.
This is what happened in the sub-prime mortgage crisis. People were able to pay the 4k, but when the rates changes, BAM, they went bankrupt. As people go bankrupt on their mortgages, housing prices fall. How far? Well in this example, they end up falling 50% back down to 100k, which at four per brings annual payments back down to 4k a year.
So when you see the price of gas going up, and milk, and bread, and cars, and houses, and you wonder how can all these things go UP in price during a recession, it's because of cheap money from the Fed!
When a society moves from a model where you save money and then buy things, to one where you don't save things and buy things anyway with cheap debt, then the price of things goes up because demand goes up.
Another way of saying this is that the value of money declines (ie. people value it less).
So to buy a house you need 100,000 dollar bills. But if the money supply is watered down by money the Fed prints out of thin air, it loses its value. As a result, now to buy the exact same house, you need to produce 200,000 dollar bills.
When your salary isn't rising, this obviously becomes a problem.
The Real Problem in all this!
So what's the real problem in all this, aside from the fact that it hasn't work over the past four years? That cheap money (ie. stimulus) has not solved unemployment.
The real problem is that it everyone gets screwed (except the rich and corporations).
- Young people
- Cheap money raises the cost of tuition. So instead of 10k a year, it becomes 15k, or 20k, or 30k. The lower the interest rates on those debts, the higher the tuition amount rises. Hence why we're seeing people graduate with 30-40k of debt after university.
- Cheap money doesn't create jobs, it merely makes debt cheaper. So while it DOES cause tuition to go up, when the students graduate there are no jobs for them.
- Poor people
- So let's say you are on welfare. You get X amount per month on which you live. But then the cost of things starts to go up while the amount you get per month stays the same. What do you do?
- Simple, you make choices. Maybe you don't buy nutritious food for your kids. Maybe you skip the medication the doctor says you need to take. Point is, you have to find a way to get by with the same amount of money, but in a world where everything costs more.
- Seniors
- So you've saved your money throughout your life. Or you're getting payments from the government now that you are a senior. Like the person on welfare, you are on a 'fixed income' model. However, unlike the person on welfare, you're fix income was counting on five per cent returns from bonds. Now that bonds only return 1.5 per cent, your entire budget is shot.
- So now you've got to make some really hard choices. You've got to down size your life so your costs are way less than before. Maybe that means selling the nice apartment and buying a smaller one. Maybe it means not getting the medical care you need. Maybe it means not turning on the heat to save on the heating bill. Anyway, you get the point I'm making... as inflation hits seniors can't pay for their lifestyle off their existing monies.
- Middle Class
- So surely the middle class benefits right? Wrong. While they aren't priced out of their lifestyle like the poor or seniors are, they are still hit by inflation. Whereas before the middle class might have had 10k savings at the end of the year, now they have nothing.
- As gas goes up, food goes up, heating goes up, services go up, etc., suddenly 100% of their income is going to cost of living. Which means their retirement hopes are DESTROYED.
- The Rich and Corporations
- So how do the rich and corporations benefit? Simple, low interest rates. They have the assets to borrow against, hence they get super cheap loans. The bank isn't going to lend the senior, poor person or even the middle class person much money because they know they don't have the ability to pay it back.
- But they will take the money the Fed gives them at zero per cent and give Mark Zuckerberg (CEO of Facebook) a multi-million dollar mortgage at one percent! (yes they actually did this). So Mark can then take his 10 million he was going to use to buy the house and instead invest it in a bond that pays 1.5 per cent annually. He's still turning a profit of .5 per cent on his money and essentially living in a giant mansion for free!
- Same thing with corporations. If before it was costing them five million a year in interest charges to carry 100 million dollars of debt, it's now costing them only two or three million. That means they pocket two million dollars they otherwise wouldn't. Does that money go to the workers? Nope, it goes to the balance sheet and investors (or in some cases to pay for executive bonuses).
- Furthermore, the biggest benefit the rich have is that they are already rich! So as things get more and more expensive, it's no skin off their back as it's still only a fraction of their wealth (whether milk costs 4 or 5 bucks means nothing to them). The ability of the rich to maintain their wealth during inflationary periods (and during deflationary periods) is how the rich get richer. Because while others get weaker financially, they still remain strong. Combine that with their access to cheap debt, and their financial power grows exponentially relative to the financial power others have.
There You Have It
So there you have it. Bernanke is turning the world in to a total mess with cheap money. It's why this recession will never end. It's also why we are going to be looking at new norms for decades to come.
Retirement? Hah! Most people will never be able to fund their retirement. Only those who save enough to live on will retire. Those counting on returns from investments will not have enough to retire.
Savings? Hah! It use to only be irresponsible people who were deeply in debt. In the future it will be the norm for everyone!
But realistically, this cannot go on for decades. At some point the system will implode because this is not how money was meant to be used. You are not suppose to be able to 'print' money out of thin air. You are suppose to have to work for it. It's suppose to reflect the value of labour.
If everyone started printing dollar bills on their HP printer what would happen? Well, exactly what is happening now. With fake money out there, the value of money would decline. Eventually it would become so valueless that a loaf of bread would cost 100 (fake) dollars. When it gets really bad, they won't even accept money for bread... instead you'd have to 'trade' something of tangible value.
But as stated earlier, this ponzi scheme, which is essentially what is going on, can last as long as:
1) Interest rates stay low for a long long time
2) Inflation doesn't get out of control
Bernanke's Defence
Bernanke's defence is simple. Low interest rates and cheap money make it easier for people to borrow money. This increases borrowing and therefore increases buying. The more people buy things, the stronger the economy gets. Hence, stimulus = spur to the economy.
In addition, and this is the big one, Bernanke argues that there is no inflation currently. So he is saying that all this cheap money he is giving the banks is not causing the price of things to go up.
Now you might disagree with him if you notice the things I've notice. Over the past few years, gas has gone from 80 cents a litre to $1.30 a litre. Bread has gone from $1.99 to $2.99 and higher.
And while some items haven't changed in price, their quantity has. So a bag of chips may still cost two bucks, but you get 30-40% less chips in the bag.
Inflation can be measured not just by the cost of something, but by the quantity you get (if you pay the same for half the quantity, that's inflation).
And let's not even get in to things that people say haven't inflated, because how can you really tell? Maybe an electronic item has even gone down in price, from $300 to $250... but perhaps it should have actually gone down to $200 under normal commoditization trends. Even though the price went down, you could still say the price is inflated.
But worry not, Bernanke doesn't count gas or food or housing when calculating inflation. So as far as Bernanke is concerned, inflation is not a concern.
Personally I think he's living in La-La Land.
So there you have it, if you were wondering what all this stimulus stuff was about, there's my take on it.
Fair disclosure: To understand this stuff, read multiple sources. I'm not an economist, so take what I say as opinion more so than fact. And obviously there are many more variables at play in all this - money supply, money velocity, currency wars, precious metals, high frequency trading, futures, facism, etc. - but I don't have time to get in to everything that's in play, just the core paradigm of what is happening.
PR Implications
The implications for PR are perhaps not immediately evident, but they are game changing.
Any PR person views the world through a stakeholder / audience lens. So you have customers, employees, investors, the general public, executives, etc.
And for decades we've all shared a common reality, and from that common reality we make assumptions about how various stakeholders view the world. So we know customers think a certain way, investors think a certain way, etc.
However, how people think about the world we live in is changing and it's going to keep changing as a result of this transition we are making away from traditional capitalism and towards an economy controlled and manipulated by central bankers and which runs on debt (not savings).
So concepts like 'hard earned money' won't hold the same meaning in 10 years as they do today.
A phrase like 'money doesn't grow on trees' will seem alien and foreign to youth who today may be five years old, but in 10 years will be 15 years old. To them money will grow on trees, or rather, will be 'printed' by the Fed.
'A penny saved is a penny earned' will be seen as stupid and will probably be replaced with the saying 'A penny saved is a penny wasted.'
My point is PR folks should think about the implications of what is happening to the global financial / economic system right now.
It has already changed how some people see the world and by the time it is all done, it will change how everyone sees the world.
It's also possible that as life gets tougher economically, that communities will change as people turn to each other to get by. So we could have a resurgence in ideologies that value the 'greater good' type thinking.
Ultimately though, as people change (and this recession will change people) PR will have to change as well.
I think of the parent's of the baby boomer generation, those who went through the Great Depression. They had a completely different way of looking at the world than their baby-boomer kids did. As a PR person you cannot message to those two different demographics the same way.
That kind of paradigm shift is in the works as we speak, thanks to Bernanke and Obama and the method they've chosen to 'clean up' Bush's mess (which is basically let's make an even bigger mess so no one even remembers what the original mess looked like).
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