Tax Rebate

Yesterday the U.S. House of Representatives voted to approve a tax rebate as a stimulus package for the receding economy. I apparently will get $600 of my money back. I am all for the government giving me my money back, and I am even more for it not taking it in the first place. I would rather give money to the government than it take money from me, but that is a different topic.

President Bush said that tax rebate recipients are supposed to go out and spend the money. All told, we are supposed to flood the market with $1.5 billion as a boost to the economy. The problem with the rebate, however, is that it will certainly cause inflation and only possibly rescue the economy from recession. What we Americans do not yet fully understand is that America is operating under a deficit and has a nearly $10 trillion debt. The rebate money we are "getting back" does not really exist. It will come into existence only when the government writes our checks. This is, in effect, creating new money. And creating new money causes inflation. All past stimulus packages in U.S. history have caused inflation.

The long term result of the so-called tax rebate is that the buying power of the U.S. dollar will decline even more. If I take the newly created $600 and spend it this year, in the years to come the inflation caused by spending it will cost me more than $600 in today's buying power. That amounts to a net loss. For this reason, the smartest individual decision I can make is to invest the $600 in an interest-bearing account. The interest it makes over the years will offset the inflationary effect it causes in the first place. This will not serve the interests of a short-term economic boost, but I do not fall for Comcast's introductory rate advertisements, either.

The best long-term solution for an economy that is in recession due to unscrupulous overextension is to let it recede. We should take our losses, learn our lessons, and let the economy painfully adjust downward to its true value. Then, future growth would be real and well grounded. This tax rebate strategy, along with the lowering of interest rates by the Fed, on the other hand, serves only to perpetuate the conditions that got us into trouble in the first place. It is an easy-money-all-around strategy that both refuses to pay the price for past mistakes and encourages those same mistakes to be made again.

I am sure that our Democratic and Republican politicians will get brownie points at the election polls for handing out checks. But since they are handing out checks for money that does not exist until the check is written, in the long run they are hurting, not helping, the poor and middle class.