Something For Nothing?

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(August 2012)

Most of us know that in real life “something for nothing” just doesn’t happen; there is always a price.

Let’s say it differently:

  • There is no free lunch.
  • Someone always pays.
  • If it looks too good to be true, it probably is.

As individuals, we know we can’t get “something for nothing.” But, as a country, we seem to believe that “something for nothing” is real and inevitable. In fact, we act as if we are entitled to receive free money, inexpensive loans, food, and benefits that are purchased by the government or someone else, all at no cost to us. (I’m not talking about an entrepreneur who takes a brilliant idea, some great marketing, a lot of hard work, and creates a business empire from meager beginnings.)

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Examples

  • US government deficit spending. The government spends (fiscal policy) in excess of $1 Trillion more, every year, than it collects in revenue. The difference is borrowed or “printed” (liquidity is injected into the financial system), but we all know the national debt will never be paid down to zero, only rolled over, and the total debt will be increased each year. We act as if deficit spending provides “something for nothing,” as well as free money and free government giveaways. But, there is no free lunch.
  • Quantitative Easing (QE). This is the fancy term for “printing” (liquidity is injected into the financial system) or creating dollars (monetary policy) from nothing. To simplify, there is, say, $25 Trillion in financial assets and cash circulating in the economy today. Through the miracle of “something for nothing” QE, there could be $26 Trillion tomorrow. Eventually the economy adjusts, the value of the dollar goes down, and the cost of things we need for day to day survival goes up. We are told this “stimulus” is “something for nothing,” but somebody always pays.
  • Fractional Reserve Banking. In simple terms, person A deposits $1Million into a large commercial bank on day 1. The bank is then allowed to lend that $1M to person B, plus create and lend an additional $10M (or so) to other businesses and individuals. The extra $10M did not exist on day 1, but by day 2 (remember, this is the simple version) the extra $10M could be working its way into the economy. People spend more, governments collect more taxes, banks collect more interest on an extra $10M in loans based on dollars created “out of thin air,” and eventually the economy adjusts and the value of the dollar declines.

    When dollars are created from nothing, the money supply expands, people and businesses feel temporarily wealthier, and the “something for nothing” dollars are eventually paid for with higher prices throughout the economy. Debt and the interest burden continue increasing, the standard of living goes down, prices go up, and we find that more dollars were created, but no real wealth was created. Banks and politicians receive a generous share of the newly created dollars; and, therefore, they like and promote this process. If it looks too good to be true, it probably is.

  • The Political Process. Congress passes a new program (there have been many) that feeds extra dollars to some special interest group to buy votes or pay back favors and contributions. The special interest group appears to get “something for nothing,” but we all pay for it with higher prices, higher taxes, and more debt. There is no free lunch.
  • Welfare, unemployment, and food stamps. Without commenting on whether these programs are good or bad, the dollars that are provided to the recipients of these programs come from somewhere. The recipients may see it as “something for nothing,” but all those dollars are borrowed into existence (deficit spending) or are taken from others via taxes and price inflation. Someone always pays.
  • Other examples. “Daddy’s credit card,” federally guaranteed mortgages, housing loans at historically low interest rates, farm subsidies, Medicare fraud, and foreign aid. Regardless of whether these are necessary or good, we pay through price inflation, higher taxes, a declining standard of living, and more debt service. There is no free lunch.

Conclusion

There is no such thing as “something for nothing,” because we all pay through higher taxes and price inflation. As a country, our expectation of “something for nothing” seems embedded into fiscal policy (deficit spending), monetary policy (create more dollars rapidly), and many congressional subsidy programs. These policy decisions are most of the reason why gasoline no longer costs $0.15 per gallon, bread is more expensive than $0.10 per loaf, and a modest house no longer costs $10,000. Even though we know that “something for nothing” doesn’t exist, our leaders run a “something for nothing” government and economy because it benefits them.

Since there is little sign of fiscal or monetary responsibility or restraint on the horizon, ask yourself how you will take care of yourself and your family when the next wave of higher prices strikes your personal finances. I suggest inflation hedges and reading the Maintain Your Purchasing Power – How and Where Should You Invest article.

GE Christenson
aka Deviant Investor

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6 thoughts on “Something For Nothing?


  1. Gary,

    This is an excellent post. You’ve explained a lot of inter-relationships that are normally hard to identify. Good Job!

    I remember when my daughter was in college on the “Daddy Scholarship.” She appreciated it, but wasn’t really doing her best. I told here that I felt like I was a chump.

    There are a lot of us hard-working, responsible folks out here being played for chumps. This one is tired of it!

    P.S. My daughter heard the message and changed her ways. God bless her! I wish I knew how to get our government’s ear like I got hers!


    • Thanks for your comment. I wish I knew how to “get our government’s ear” also, but it seems to be a fact of life that we need to “own” a Congressperson or Senator in order to have a voice. Alternatively, take care of yourself financially, prepare for stormy economic weather, and do what you can to preserve your purchasing power.

       

      GE Christenson
      aka Deviant Investor


  2. This was very good for a beginner like me. My Granny raised me with the teaching that there is no free lunch and not to trust anyone who offers it. She was liberated before it was fashionable, she was a dump truck driver who owned her own sand and gravel company in West Texas in the 30’s and 40’s. SHE built it, not the government. She taught me a lot. I appreciate the plain English in your article without being condescending. Where does the Fed Reserve fit into this? and it’s controls or lack of. Thanks for the article.


    • Thanks for your comments, and bravo to your granny.

      The Federal Reserve (a government authorized monopoly of private banks in charge of the money supply) is the entity that “prints” more dollars through Quantitative Easing, and other means. They also make some of the rules that govern fractional reserve banking. They exercise some regulatory control along with other government agencies. In practice, we can depend upon the Fed to keep increasing the money supply – fast enough to try to avoid deflation, but not so fast as to create seriously high inflation. They will probably succeed. Do what you can to preserve your purchasing power.

       

      GE Christenson
      aka Deviant Investor


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