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Why the Fed is banking on financial ignorance

The Latin poet, Juvenal, famously coined the term, "Give them bread and circuses and they will never revolt." This was his observation as the once mighty Roman Empire rushed toward chaos and economic collapse. His point: if people feel rich, the government can get away with anything.

As the old proverb goes, "There's nothing new under the sun." In this spirit, Fed chairman Ben Bernanke commented on the Fed's latest strategy to stoke the economy with another round of quantitative easing—this time open-ended with no end in site.

"If people feel that their financial situation is better because their 401(k) looks better or for whatever reason—their house is worth more—they're more willing to go out and spend. That's going to provide the demand that firms need in order to be willing to hire and to invest," said Bernanke.

Translation: If you feel richer, you'll spend more.

Bernanke and Co. are expecting that the bump in the stock market and lower interest rates resulting from the third round of quantitative easing will spur a "wealth effect" that will make people feel rich and spend more.

But as the Associated Press reports, "The combination of more refinancings and increased household wealth will help the economy quickly but only modestly...The Fed's moves should lower unemployment (8.1 percent in August) by up to 0.3 percentage point by the end of 2013...Many economists worry that the Fed is reaching a point of diminishing returns after nearly four years of aggressive efforts to help the economy. Bernanke himself urged everyone to keep expectations in check."

Translation: People will feel better, but things won't really be better with the economy. That is our version of bread and circuses.

If the Fed's policies work in the short-term, the chances are you might have a little more money. For instance, refinancing a mortgage from 6 percent to 3 percent can free up a lot of cash flow. Higher stock prices allows for more wealth. The question becomes, what will you do with your extra money?

For most people, more money means more liabilities. The average Joe will buy a new big screen TV, a new car or go on a vacation. Basically, people will hand over their money to the rich—those who profit from consumer spending.

My encouragement to you is to leverage your extra money into something truly valuable. Rather than buy more liabilities, invest. Invest in your financial education. Use the knowledge you gain from financial education to invest in assets that produce cash flow. And use your cash flow to fund your liabilities.

The key is to use your extra money to make more extra money. That's the financially intelligent thing to do. It's also the Rich Dad way.

Though things may feel better for a while in the economy, the reality is that things will get much worse in the long run. The dividing line between the rich and the poor will be drawn in how each responds to our worsening conditions. The rich use it to make more money. The poor use it to spend more money.

Do yourself a favor. Get rich by investing in financial education and in growing your assets to become financially-free. Don't get distracted by the bread and circuses, but do use them to your advantage.

So, what are you going to do?

To increase your financial literacy, check out our free, financial community here.

Original publish date: September 18, 2012

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