The true cost of fiscal stimulus

G20 leaders have decided to throw money at the current financial crisis. As political leaders, they cannot risk not doing anything. By throwing money at the problem, they hope that they can remain in power until the next election. It is politically sensible thing to do. But will it solve the problem? The answer is a simple no because what it means is that future generations will have to pay for the runaway spending of this generation.

Few people understand the concept of money. Money is stored energy and effort. When you work hard and earn money, the money is for the effort and energy you expended in some activity that is of commercial value. You in turn spend that money to obtain the fruits of someone's else effort. When you buy a loaf of bread, you are paying for the effort of the farmer who planted and harvested the wheat, the truck driver who brought the wheat to the factory and the workers who converted that wheat into bread. You exchange one form of labour for another.

There when money is created out of thin air, two things happen. First one either let the money depreciate or one has to pay it back with interest. Letting the money depreciate is a shrewd political move as consumers are often unaware of the effects of inflation. They are happy to learn their house has appreciated from $500,000 to $1,000,000 but does not know that a loaf of bread that used to cost $1 is now $3! The inflation does not happen overnight but fortunately for politicians a couple of years or more . By then who knows who is in the seat of power?

Paying back with interest is less palatable since someone has to work and expend energy and effort to repay the loan. When money is borrowed by the Government , it has to pay it back via taxation or otherwise. Money is created by the Central Bank or Federal Reserve Board ( out of thin air) and then loaned to the Government. This means energy and effort is borrowed and must be repaid from future energy and effort. So somewhere along the line, someone has to work harder to pay back what was spent earlier! If I am living in the UK or USA, I would consider migrating to a country that has less debts because somewhere, somehow , I need to pay it back. The Government does not work to pay back its debts. It taxes the people to redeem its debts.

It reminds me of past kings and emperor who builds magnificent monuments at a cost of losing their kingdom. There is only so much energy and effort and so it it is used to build monuments, it cannot be used to train and sustain an army, feed its people better and so forth. This borrowing or fiscal stimulus is akin to an emperor building a huge monument. The country will become poorer for sure. Its roads will show signs of wear , its schools will become shoddy, universities will not have the latest laboratory equipment and even its army will be less well equipped.

Leaders of those countries using financial stimulus will have to start cutting back on other programs. Fortunately for the USA it can and should cut down on its military expenditure. It can remain a world military power if the next 10 years it does not have new fighter planes, new stealth frigates and new aircraft carriers. It can bring its soldiers back from Germany and Japan. Goodness gracious World War Two is a thing of the past. Overall infrastructure will see signs of decay and wear. In the past Europe was the OLD Country and America was the NEW Country. In ten years time, China will be the NEW Country and America together with Europe will be the OLD continents.

Don't think of money in terms of share prices or jobs but in terms of energy and effort and one will be able to understand where it will eventually all leads to!