Practical Dad

A Family Cruise on the QE2

Several decades ago, a family cruise on the QE2 was an event to be remembered and cherished.  Passage was booked well in advance in order to secure a cabin and it was sufficiently expensive that only the wealthier families could afford the trip.  But now, millions of American families - the great majority of whom wouldn't go because the expense - will most likely be peremptorily booked on a new QE2 adventure courtesy of the Federal Reserve System.  The excursion's cost will be ruinously expensive and for most families, savings will be wiped out long before the cruise is finished.  The only question is whether the soon-to-be-destitute will be jettisoned before the cruise ends.

Most older Americans identify QE2 as the famous Queen Elizabeth 2, symbol of a slower, more gracious age.  But the liner is now long out of service and the QE2 being referenced is what economists and business pundits call Quantitative Easing.  Because it's a repeat of what the Federal Reserve System did two years ago with massive infusions of cash to the financial sector, it's referred to as QE2.  With an economy loaded past the gunwales with debt, more than can be adequately serviced, the value of various asset classes have been dropping steadily for more than two years with a resultant wipeout of trillions of dollars in wealth - paper though it may be.  The intent of the experts at the Fed is to actually purchase huge amounts of various kinds of assets from holding banks and institutions, with the institutions and banks subsequently creating additional credit as the funds ripple from the financial sector throughout the economy.  These assets will go beyond just the debt to be issued by our Federal government - the government actually only needs a fraction of what's expected to come - and leech into other areas as well; this would possibly include corporate and municipal bonds and if they emulate Japan's central bank, could even include ETFs and Real Estate Investment Trusts. 

That's the intent and as the maxim goes, the road to hell is paved with good intentions.  The reality is different.  Since that time and despite all of the money pushed to the banks, credit available to the average consumer and small business has dropped, while the reserves held by the banking system has risen multi-fold.  Since short-term consumer debt rates - think credit cards - have never been decreased to Joe Six-Pack and credit limits for many have actually been slashed, the response has been to steadily pay off debt as much as possible so that the family debt load is lessened.  What has surprised financial authorities is that people in general have made greater efforts to stay current on the credit cards while letting the house payments fall behind; given that many now depend upon the credit card for essentials, this isn't surprising.  And this is where Joe Six-Pack's actions contribute to the Fed decision to launch the QE2 since many of the deteriorating financial assets are bonds backed by the mortgages that Joe's letting slip away.

That's hopefully a nice explanation, but what does it mean for me and my family?  How will it impact my kids? 

Let's start by considering the banks.  If the banking system is getting all of these funds - and stands to get hundreds of billions more commencing shortly - but isn't passing them through to everyone else, where is the money going?  Banks exist first and foremost as for-profit enterprises with the intent of making money.  If they can gain money by selling dodgy assets to or borrowing from the Fed at almost 0% rates, then they can take the almost free money and literally throw it at various investments; if everyone is throwing money at the same assets, the result is that the price is bid up and the asset becomes more expensive.  In this instance, the assets at which they're throwing the money are commodities and natural resources, assets that have a hard, tangible output and value.  Remember that ours is a fiat currency backed solely by the tax receipts of our country.  Bankers fully understand the concept of debt service and asset valuation and sense that our country has entered a phase in which the ability to cover our debt is seriously questionable.  In a grotesquely perverse act of selfishness, they're taking the money that flows from the increased debt and using it to profit by pushing up the prices of the resources of families and children need to survive - wheat for flour, sugar, corn for food and animal feed, cotton, oil.  The prices of these items will continue to rise out of proportion as the money released by QE2 flows further into commodities.

The result will be what the Federal Reserve wishes, inflation.  Inflation which not only profits the financial institutions via commodity investment, but also inflation which supposedly makes the country more competitive internationally  as the dollar is devalued and the cost of American labor decreases.  Joe Six-Pack will be making less, when he's employed, but will have to stretch the dollars to cover the cost of everyday items needed for his family's survival.  So what might we expect to see for the American family?

  • First, the birth rate will drop as fewer couples feel secure enough to take on the cost of raising a child.  Already, the US marriage rate is dropping as couples forego marriage until employment prospects improve and while marriage is no longer an automatic precursor to parenthood, many will avoid purposefully having children.
  • Second, there will be a continuing swell of the food support programs such as SNAP and WIC. 
  • Third, school attendance rates will continue strong and lunch program participation will rise.  Children who haven't enough to eat at home will be sent by parents in order to take advantage of subsidized and free meals and more of the three squares a day will come from the school districts.  God knows where that money will come from when the Federal Government is eventually forced to pare down spending.
  • Fourth, more men will take to the road for employment opportunities a la the Great Depression, further removing fathers from a frayed family structure and placing more stress on the family.
  • Fifth, the American retailing model will take a hit as a devalued dollar leads to higher finished goods prices.  Even the made-in-China clothing of Wal-mart will become more expensive and out of the reach of stretched families.  Clothing will increasingly be purchased or obtained via alternative sources as parents scramble to clothe growing children at church thrift shops, second-hand/consignment shops or even clothing distribution events.  In my small town, a reasonably prosperous school district sponsored a free clothing give-away for all ages on a recent Saturday morning.  In the longer term, expect handy skills such as sewing to make a comeback.
  • Sixth, expect families to take a greater hand in their own food growing, storage and preparation.  If food prices rise, more will return to gardening and the subsequent canning/drying.  In my own case, I've begun the process of turning a manicured hillside ornamental garden into a terraced vegetable garden.  I was also surprised to find that a daily chore performed by one of the third-graders in my cub scout den is to feed the chickens.  This child leaves in a classic suburban housing development built in the 1970s and the parents, both employed, built a chicken coop in the backyard to cut down on food costs.
  • Seventh, anticipate an uptick in juvenile crime and violence.  We've raised our children permissively and tended to spoil them and the resulting cut-off of the various goodies will probably lead to some level of increased thefts and violence as they steal from one another as well as others.
  • Eighth, expect that the standard housing arrangements will change as families move in with one another to keep costs down and still provide housing for the chlldren.  Children might also be more likely to share bedrooms as well as electronic devices within the household.  
  • Ninth, expect that in the longer-term, today's children become far more practical and hardnosed than we - their parents -  ever had to be.  I glimpsed this one day while talking with one of my son's friends, who was then in sixth grade.  His parents were delighted to be going on a trip to the Bahamas and when I asked about it, he responded The Bahamas?  I want them to get a new driveway.  Ours is a wreck.  Likewise, I spoke with a teenager who was being raised by his older sister.  We were discussing money with a group of teens and the question was what would each do with a windfall of $100,000.  While others talked of cars or trips, this boy simply said that he wanted to purchase health insurance and set aside the rest for a place of his own.

There's no guarantee that any of these will come true, but I wouldn't be surprised if some of them didn't.  Some of them are already happening and doing so before my eyes.

We parents are going to be stretched in ways that we never considered before.  Our priorities will change and we'll be forced to make choices and decisions that are new and painful to our generation.  The key will be to absorb the blows in such a way that even while our children have to adapt to a new reality, they don't find it as painful as we will.
 

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