I’m currently reading a book called Blink.  The book has taught me we aren’t always sure what places an idea in our head.  Instead of making up a good story about being inspired, I’ll simply state I have no idea where Freeconomy came from.  A quick Googling of the term did not spark my subconscious further.  The word is not mine, but the definition is.  We are in the middle of a huge freeconomy.

Were I to create a dictionary definition of a freeconomy, it might go something like this:

Noun; an economic environment in which the government has an increasing role of providing capital to citizens and businesses.

Were I to define it in terms we would understand:

A freeconomy is when the government does everything it possibly can to inject money into the economy with no regard for the future consequences of its actions.  The freeconomy includes additional welfare and unemployment benefits, company bailouts, stimulus packages, interest rate cuts, and other creative methods to get money back into the economy.  In a freeconomy, more people get more money for doing nothing. The potential consequences of a freeconomy can only be measured in hindsight.

The freeconomy is a dangerous circumstance to be in.  A years ago there was talk of money being too cheap.  Federal rates were low, which meant banks could loan to you on the great rates.  We bought up homes and borrowed too much money.  Eventually we couldn’t pay it back.  The freeconomy is doing the exact same thing, but in a less direct way.

I call it freeconomy, because we think it’s free.  Banks are borrowing money from the government at cheap rates.  Mortgage and car loans are cheap again.  We are giving out more in unemployment payments.  But every dollar is coming from the government now.  The government is not an endless piggybank. It’s not like our emergency oil reserves where we have a few months of backup in case the world cuts us off.  There is no cash reserve.

When the government wants to hand out money it does not have, they must raise it.  Governments don’t have investors, so they raise money by borrowing it from someone.  That money must be paid back.  The government will be forced to raise taxes at some point in order to pay off the debt.  Worse still, when a government gets ahead of itself in spending, hyperinflation is the result.  In Germany after the world wars, the people were burning their currency for warmth, because it was cheaper than buying wood. Can you imagine throwing a few hundred bucks into a fire because one log costs $1,000?

Inflation by itself isn’t actually bad.  If over the course of my life inflation is 3% a year and I get a 3% raise every year then I’ll be all right.  But most years I might not get a raise, so I feel the pinch.  And of course some years inflation might be 5% while my raise is only two.  When the two figures don’t move in tandem we are left to suffer.

So the freeconomy is not free at all.  It’s buy now pay later on a trillion dollar scale. The economy could no longer borrow money, so the only thing left with a decent credit rating was the government.  Once the government’s credit rating is exhausted (and at some point it would be) we’re all screwed.

I always tell people that are worried about losing their retirement funds and investments to not fret too much.  For you to lose everything in a diversified portfolio, the economy would have to collapse completely and the government with it.  Once that happens, how much money you have saved up for retirement will be the last thing on your mind anyway.  You’ll be more concerned with catching the damn mockingbird that lives in the holly bush so you can feed your children.

Weakonomics is not the type to incite fear in their hearts of its audience.  I’m merely pointing out that someday you’ll have to pay off that $600 you got from the government, those unemployment benefits, the drained FDIC fund, any TARP money that’s lost, and whatever stupid plan Obama unveils probably later this month.  It’s impossible to imagine an environment where the government can no longer raise money.  Three years ago, many economists would have said it’s impossible to imagine an environment where real estate would go down in value.  Keep your eyes peeled, and brush up on your fire-making skills.  The freeconomy is the last chance a capitalistic society has.

By The Weakonomist

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categories: economics, government, loans, personal