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Fed Chairmen often speak of "accommodation" as if it's the magic needed to solve economic problems.
But what happens when the Fed “accommodates” us by increasing the
stock of money?
First, it reduces the value of the dollar. More dollars means
each one buys less, putting upward pressure on prices. Technology and
improvements in production tend to push prices downward, but because of
inflation fewer people can afford admission to the market’s bounty.
As a rough idea of how far the dollar has plummeted, $5,000 in 1913 had
greater buying power than $110,000 in 2011. [BLS inflation calculator]
Second, a depreciating dollar discourages savings. Why put money
away if it’s going to lose value? Instead, millions of investment
neophytes put their funds in the stock market in an attempt to protect
themselves against Fed printers. Has this been a successful hedge?
During the biggest bull market in history – 1984 to 2001 – the
S&P rose 14.5 percent a year. But frequent trading by fund managers
and high fees reduced the average rate of return to 4.2 percent
annually. According to Vanguard group founder John Bogle,
if you include the results of 2002, the average return from equities was
under 3 percent per year – less than the inflation rate. [Bonner and Wiggin, p. 245]
Third, new injections of money spur a
tinsel prosperity, and the Fed keeps injecting new money to feed the
boom. With so much borrowing and spending, prices may rise even faster
than the rate of currency inflation.
As the public broods over higher prices, a semantic shift takes place.
Inflation comes to mean not an increase in the money supply, but the rise in
prices itself. [Sennholz, p. 69
] Thus, businesses
that charge higher prices become the villains, while government officials that threaten price controls are the avenging angels.
Most people have no idea what the Fed does, so government can scapegoat
business and appear to be defenders of the public weal. Nor do most
people understand that price ceilings create shortages, by encouraging
consumption and retarding production. Shortages, in turn, bring on
government-imposed quotas, which foster corruption, black markets, and
violent crime.
Fourth, as the influx of dollars drives prices higher some industries
find themselves at a disadvantage with foreign competitors, tempting them to
lobby Washington for protection from imports. Protective tariffs and
quotas, of course, push prices up further, while sometimes sparking trade
wars as other countries retaliate on American exports. And trade wars
can lead to shooting wars.
On June 17, 1930, with the economy fighting the recession brought on by Fed
monetary policies, President Hoover signed the Smoot-Hawley Tariff Act, raising tariffs on over 20,000 imported goods to unprecedented levels.
Other countries immediately retaliated, markets shut down, and economic
conditions worsened worldwide.
Fifth, inflation raises nominal incomes, pushing people into higher
tax brackets, which increases government tax revenue. As people’s
wealth goes out the window in depreciating dollars, taxes consume more of
what remains.
Sixth, inflation shifts wealth from people who can’t or
don’t know how to defend themselves from monetary destruction to those
who can. As a simple example, a person living on a fixed income may
find his buying power so depleted he sells a family heirloom to pay for an
unanticipated expense. Or a bank that was part of the lending spree
that helped drive prices skyward may foreclose on the homes of some of its
borrowers, whose incomes were ravaged by monetary debauchery.
Seventh, the Fed’s “accommodative” measures keep
people working much later in their careers because they cannot afford to live
off their deteriorating pensions. Dollar depreciation is a huge reason
why both husband and wife work in many families.
Eighth, because government often gets the new money first, it can fund
controversial measures such as war and bailouts without drawing taxpayer
ire. Government simply puts the funding on its charge card, prompting
the alchemy of Fed debt monetization. We get the bill, of course, but this way it’s spread over everything else we buy, so we never
see it itemized.
Ninth, because inflation has an uneven affect
on prices, raising some faster or sooner than
others, people have a hard time distinguishing illusion from reality.
As cheap credit abounds, business people, investors, and cube dwellers hear the
siren call of can’t-miss profit opportunities. Fortunes are made
then lost, and companies that lose money find it harder to keep employees.
Tenth, government may pose as the savior of a group of voters
they’ve impoverished, such as the elderly, by subsidizing their medical
expenses. New entitlements create the need for more revenue, which
fuels more inflation, pushing the dollar closer to a complete collapse.
Eleventh, as Ludwig von Mises observed, “under inflationary
conditions, people acquire the habit of looking upon the government as an
institution with limitless means at its disposal: the state, the government,
can do anything.” [Mises, p. 66] Through deficit spending the state will devour limited
resources trying to maintain this illusion.
If gold is the barbarous relic its many detractors claim it is, we might
expect the Fed’s fiat currency to be a better deal. But
even former Fed Chairman Greenspan admits that it isn’t, telling a New York audience in
2002
that prices soared in the decades following the gold heist of 1933.
Lord Keynes, the 20th century’s guru of deficit spending, never spelled
out how deficits should be financed, admitting only that increased taxation
was not the answer. [Hazlitt, 1982] Perhaps he had pangs of conscience about
calling for inflation outright, since he knew it would destroy society in a
manner that “not one man in a million“ could
diagnose. [Keynes, 1919, Ch. 6]
Political issues dominate the news, but how little we hear about the policies
nurturing those issues, one of which is government’s power to
confiscate wealth with the Fed’s invisible hand.
George
F. Smith
Read
his book : The Flight of the Barbarous Relic
Visit his website
Read
his blog
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