What Will the Federal Reserve Do With Its Magic Money Bag?

     Previously we considered what would happen to our
money if someone with a magic money bag endlessly shook
money out of the bag and spent it.  The ending wasn't a happy
one.  The owner of the bag used his magic money to steal
wealth from those who produced it.  In the end all the money
was worthless.

     Next we saw that magic money bags aren't confined to
fairy tales.  Magic money bags exist in the real world.  The US
Federal Reserve (Fed) has one of those bags.  It can create and
spend unlimited amounts of money.  If it does, it will steal
wealth from everyone who has money.  In the end all dollars
will be worthless.

     So far the Fed has shown some restraint in reaching into
its magic bag.  Still, in less than one hundred years it has pulled
enough new money out of the magic bag to reduce the value of
our dollar to around 5 percent of its 1914 value.

     What does the future hold?  Will the Fed continue to
limit its use of magic money, or will it turn the bag upside down
and shake it?  If the Fed maxes out the magic bag, all US
dollars will be as worthless as the German mark was in 1923. 
How secure do you feel having the future value of your money
depend on political appointees in Washington, D.C. exercising
restraint in making and spending money?

     We can safely assume two things that are in our favor. 
The individuals who control the Fed and have custody of the
magic bag know that shaking too much money out of the bag
will destroy the dollar.  They have no desire to destroy the
dollar.

     They deliberately and endlessly weaken the dollar
decreasing its value.  They try to weaken the dollar without
killing it.  One great danger is that they will miscalculate and
inadvertently kill the dollar.  This isn't the greatest danger.

     Often events control people.  Sometimes our only option
it to choose among really bad alternatives.  The Fed might
decide that under such circumstances risking destruction of the
dollar is the best option among the bad alternatives.

     How might this happen?  Government doesn't have
unlimited ability to tax and borrow.  A government's credit
rating may become so bad that it can't borrow money.  Or,
perhaps it can borrow money only at interest rates it can't pay
through more borrowing and taxation.  Also, at some point
increased tax rates shrink the economy resulting in less tax
revenue.

     When this happens the government has two choices.  It
can cut spending or turn the magic bag upside down and shake
it.  Telling people that the gravy train has crashed and there will
be no more manna from Washington would have disastrous
political consequences.  It is the kind of event that sweeps away
politicians and governments.

     In the eyes of the political class the dangers of hyper
inflation and destroying the dollar in the future seem small
compared to the danger of losing power right now.  So, they
shake every dollar they can out of the magic bag.  As the money
loses its value, they try to compensate by shaking the magic bag
even harder.  They won't quit shaking the bag until the money is
worthless.

     Zimbabwe shook out so much new money that the value
of its money diminished to where Zimbabwe couldn't use its
money to buy paper and ink to print more money.

     The government of the USA is fast approaching the point
where it will be unable to borrow or raise more revenue through
taxation.  Unless government at all levels in the US drastically
cut spending, and take the harsh political consequences, soon the
only option left will be to shake the magic money bag.

     No one knows when we will reach that point.  I can't
imagine that it will take anywhere near another hundred years. 
Sooner or later the US dollar will be worthless.  Have a nice
day.

aldmccallum@gmail.com
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Copyright 2012
Albert D. McCallum
18440 29-1/2 Mile Road
Springport, Michigan 49284