The Economic Squeeze Play

As a baseball fan, I have witnessed the squeeze play in action. For those unfamiliar with it, it occurs when there is a runner on third base. The batter bunts the ball while the runner runs home and avoids the tag at home. They call it a squeeze play because the ball is not that far away from home plate and the runner must run as fast as he can to get home before being thrown out.

Unfortunately, the stagnant economy, stagnant wages, and the second round of quantitative easing (QE) proposed by the Federal Reserve might result in an economic squeeze play that could affect everyone. In addition, the tax increase set to occur on January 1, 2011 will make it even more difficult for many.

The nature of the economic squeeze play is simple. The stagnant economy means that many, including myself, are not getting raises or bonuses from our employers. In fact, many have seen their incomes decrease due to furloughs, having to seek part-time employment due to downsizing, or being underemployed. Tax increases scheduled for 2011 will only further decrease the income individuals have available.

As far as the role of QE in the squeeze play, I will need to take a minute to explain what QE is. QE is when the central bank (i.e., The Federal Reserve Bank in the United States) injects money into the economy by buying back some of its own debt from entities in the private sector, primarily banks (Benford, Berry, Nikolov, Young, & Robson, 2009; Ganley, 2010). The theory is that this injection of money into the economy will increase economic activity and growth.

This injection of money into the economy effectively increases the supply of money. However, as we learned in economics 101, when the supply of a commodity increases in the market, its value in the market decreases. If we look at money as a commodity in the global market, this injection of dollars into the U.S. economy will devalue the dollar. We are already seeing this devaluation before any additional dollars have actually found their way into the economy due to the anticipated increase in supply through QE.

A devalued dollar means that it will require more of them to purchase goods and services, especially goods and services imported into the U.S. With oil being one of our nation’s greatest imports, QE will result in higher prices for crude oil simply due to the devaluation of the dollar against currencies in countries where the U.S. purchases crude oil. This will not only result in higher gas prices at the pump, but higher prices for other goods and services since the cost of shipping them to retailers will also increase.

The squeeze play for consumers will be that they will have to deal with higher prices and taxes while they see their incomes remain the same or even decrease. Instead of using QE to increase economic activity, policymakers need to consider reductions in government spending coupled with tax cuts. The reduction in government spending will result in additional capital being available for the private sector. Tax cuts will place more discretionary income into the hands of consumers so they will be able to purchase products and services produced in the private sector. Increased activity in the private sector will mean more jobs, less unemployment, and even a return of pay raises and bonuses. What we have to ask ourselves is why people we elect to office, who claim to be so smart, cannot figure out this simple concept. Instead, we want to try gimmicks like QE and endanger the financial future of individuals by squeezing them economically.

Our newly elected congress needs to call up officials in the Federal Reserve and question them as to why they believe in even trying the dangerous gimmick of QE. They need to expose their ignorance. Then, they need to truly stimulate the economy using tax cuts and responsible government spending. When they do, they will unleash the power of the free market and real economic growth will be the result.

References:

Benford, J., Berry, S., Nikolov, K., Young, C., & Robson, M. (2009). Quantitative easing. Bank of England Quarterly Bulletin, 49(1), 90-100. doi:175268231 ProQuest Database

Ganley, J. (2010). Quantitative easing: injecting money into the economy. Teaching Business & Economics, 14(2), 21-23. doi:2079122171 ProQuest Database