How The New U.S. $600 Billion Stimulus Will Impact You

Unless you are a bank, investment bank, hedge fund operator or money manager, it will mean very little at first and then it could have a major impact on you.

Over the next eight months, the U.S. Fed will buy $600 billion worth of new Treasury Bills, to flood the U.S. economy with money. In theory, this will encourage banks flush with cheap cash from the Treasury to loan to small businesses.

Those small businesses, America's job engine, will then expand and hire more employees. And with new jobs people will feel good about the economy and will go deeper into debt again buying everything in sight (most of it made overseas) and spurring economic growth.

With that economic growth, the massive pile of foreclosed homes waiting to hit the market will be absorbed at prices high enough to rescue Fannie and Freddie who are holding those foreclosures. Meanwhile, U.S. exports will boom because the dollar's value will fall and U.S. made products will be cheap in other nations.

Nice theory, but it won't happen. What will happen is the banks, hedge fund operators, etc. will take that nearly free money and invest it where they get higher rates of return. This means the world will soon be flooded with even more dollars chasing more assets like overseas bonds and real estate that pay far higher yields.

For example, if an investor views Australia, Brazil, Germany or South Korea as a safe place to buy bonds, or China and Hong Kong as safe places to make real estate investments, that money will move from the U.S. in the click of a computer keyboard.

Stock markets shot up anticipating a mountain of cheap cash. And Wall Street style money manipulators will make big fees moving that money around. In response, other major industrial nations are speaking of restricting the flow of dollars fearing bond and real estate bubbles exploding all over their economies.

In addition, these excess dollars will trigger speculation in commodities such as metals, including gold, and a wide range of foods from soybeans to pork bellies, pressuring manufacturers and distributors to raise prices.

But the situation gets worse. The U.S., the world's biggest debtor nation is already borrowing heavily just to pay its bills. So where will the Fed get the money to buy these new T-Bills? They will create it electronically out of thin air and therefore further undermine confidence in an already falling dollar.

As for selling U.S. exports overseas, try buying "made in America" even in America. It is hard to find U.S. made goods because U.S. companies have shifted production elsewhere. So what export boom is there?

In the last two years, the Fed has spent $1.7 trillion on U.S. bonds, taken trillions of dollars in toxic assets and kept interest rates at record low levels letting banks make big profits by paying savers near nothing for their money. None of this resurrected the U.S. economy. Why will $600 billion more make a difference?

How will it impact you? Brace yourself. Much of what you buy is either made overseas and/or is transported by truck. Foreign made goods will cost more, and although gas prices will fluctuate they will go up based upon rising oil prices. Higher oil prices mean you will pay more for food and electricity and many of the other products you buy. Yet with the falling dollar, your savings will decline in value.

What can you do to protect yourself? Lighten your load. Sell off assets you don't need, such as an extra car or a motorcycle gathering dust. Negotiate a reduction in your credit card debt or at least pay it down. And enhance your skills. If you can save people time or money, you have something valuable to offer.

Please understand, for the Fed this is an act of desperation to resurrect the economy. Since its announcement the Fed has been condemned by most of the industrialized world. But the U.S. is in crisis, with most of our industrial base gone, the military draining our resources and our economy based upon living on credit.

To solve these immense problems will be painful, requiring higher taxes, slashing of expenses, slashing our borrowings and restructuring our economy to become an industrial powerhouse as we used to be. It is a challenge much bigger than putting a man on the moon and will require sacrifice by all Americans.

There is no borrowing and spending our way out of this mess, nor should there be any tax cuts, nor will the Republican proposed cutting of $100 million in as yet unidentified expenses mean anything when we have a government deficit of $1.3 trillion and an equally nightmarish deficit in our trading account with other nations.

But take heart for America has faced worse and is capable of resurrecting itself once it acknowledges the depth of its problems. We just need leaders with the courage to be honest with us, who can envision bold solutions and have the will to act.

Dick