Dear Mr. Berko:
Your article comparing the University of Phoenix to the University of Florida and other colleges helped show me why big colleges are inefficient learning centers and could easily reduce their costs. But you did not discuss salaries. A recent Washington Post article told of 30 college presidents who are paid over $1 million per year and most earn between $600,000 and $999,000. That’s immoral. My other reason for writing concerns the new $600 billion (QE2) of money to be issued by the Fed. Can you explain in simple English how this new $600 billion will create jobs, how it devalues the dollar and causes inflation?
M.S., Joliet, Ill.
Dear M.S.:
Yep, there are more than 30 college presidents earning more than $1 million per year. But I don’t think that’s immoral. There are more than 30 college football coaches earning more than $1 million, and I think that’s immoral. It’s all a matter of value.
QE2 will be modestly inflationary, and the Fed wants modest inflation. Now, if we really believe the administration’s claim that inflation is running about 1.5 percent, then there’s real concern the economy could experience some nasty deflation. So here’s how QE2 is supposed to rescue the economy from deflation:
The Fed will buy $600 million of new Treasury bonds over the next eight months (printing new money), enormously increasing the amount of cash banks keep in their reserves. QE1 lowered short-term rates via the purchase of short-term Treasuries, and QE2 hopes to lower medium- to long-term rates via the purchase of medium- and long-term Treasuries. The Fed figures this will force medium- to long-term rates close to zero.
As their vaults burst with thousands and millions of hundred-dollar bills earning bupkes, banks will supposedly shovel this cash out of their vaults lending it to productive users. The administration believes that this “flood” of cash will encourage new business investment, generate consumer demand and create new jobs.
Expansion and contraction of the money supply has been the Fed’s hammer and anvil since it was created in l913. And it worked in the past because our economy was the growth engine for the world. Much has changed, our economic engine has lost its power and now our main exports are defense technology and entertainment.
Today, we need a new calculus to cope with the unexpected economic variables that the Fed has never confronted before. Many economists believe that QE2 will fail miserably. And I suspect that Chairman Bernanke now agrees QE2 will have costly consequences because the Fed and the administration don’t understand structural and social changes in the dynamics of our economy and society.
Inflation and devaluation for our purposes are one and the same. All those thousands and millions of pretty hundred-dollar bills swamping the economy will devalue the dollar. So when the Fed is told to triple the dollars in circulation, those dollars will become worth less: like what would happen to the value of gold if the world supply doubles every year?
Our dollar is supposed to be a storehouse of value – meaning that $1 should buy two loaves of bread this Tuesday, whether you live in Utah, Illinois or New York. And that same dollar ideally should also buy two loaves in 2012 or 2014, give or take a 2 percent to 3 percent cost increase. So when the market is flooded with dollars, those dollars lose value and purchase fewer goods and services. And next year, the dollar may only buy one loaf of bread.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
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