Copied from http://hvac-talk.com/vbb/showthread....g-market/page2 and slightly modified:
This side effect of cash injection and subsidized homeownership can be summarized simply:Let's say you are a one-man country. You live on a very small island you own in the North Pacific. Other people live on the island, but they are residents, not citizens. They live by your rules. Some of them work for you.
You make a living by building widgets and selling them to small companies in various Pacific Rim nations. You import the raw materials. You borrow money from Singapore from time to time to keep your operation running smoothly. You make a profit after expenses of 10%. You plow half of your profit back into the company. You put the other half in the bank.
You have started your own small bank. You take deposits from and make loans to the residents of your island. This is the bank where you put your own money.
You started your bank with a $100,000 deposit. This is money you generated from your business. This is real money.
Now let's say you go into the computer and add a zero to the 100,000, making it 1,000,000. Have you increased your wealth? No. You have injected $900,000 of phony money. You have devalued your currency.
You have made yourself appear to be wealthier than you are. You have taken the first step in building a house of cards.
You are a Bernanke.
Can you get wealthy this way? Yes, of course. You can loan more money and collect more interest. You can invest your bank profits in assets that appreciate in value.
Not only that, you can help your residents buy nice houses. [With all this new money, you can provide cheap loans for everyone who wants to buy a house. You are happy to help them, so you encourage them to buy.]
But what else happens to the residents? Over a period of time, prices go up and buying power goes down. Their money is now only worth one tenth of what it was before the injection. So are their retirement accounts. Soon, all their money goes to food and clothing. They have nothing left to pay the mortgage with.
If your intention was to help your residents buy nice houses in which to live out their lives, you have accomplished the exact opposite.
They would have been better off renting from you.
Inflation is the wedge that drives the split between rich and poor.
People blame the greed of large corporations and rich businessmen for their accumulation of a disproportionate amount of wealth. Some even believe that the accumulation of wealth by rich people is responsible for their own relative lack of wealth. But poor people stay poor because all their assets are in cash. Rich people get richer because they convert their excess cash into assets that hold their value and assets that appreciate in value.
But when government pours more cash into the economy, it does two things:
It allows people who make a profit to invest more cash in goods that hold their value.
It depletes the resources of people whose assets are only in cash and assets which are not easily converted into cash, especially when those non-liquid assets are not paid for.
So when the government decides to “boost the economy” with subsidies and cash injections, with the proclaimed intention of improving the unemployment rate and enabling small businesses to survive, it is in fact making the economic situation worse. It causes temporary relief from economic pressure; it causes people to believe the economy is improving; it buys votes for the ruling political party; but it destroys the economy in the process.
Instead of injecting more cash and subsidizing the disadvantaged with cash, government needs to cut spending.
This is the only way to reduce inflation and its disastrous effects.
This is the only way to level the playing field between rich and poor.
Unfortunately, it's a painful process, and it's a good way for the ruling political party to lose popularity.