Trying to get the word out about what the Fed is doing to us has been very difficult. I keep getting remarks back about how the Fed can’t make us rich. My answer is yes, it can’t make us rich, but it sure can make us poor. People don’t seem to understand that the Fed is the master bi-directional wealth redirection machine in the country. They can grasp the inflation end of the arguments just fine, and they tell me about how inflation kills creditors and savers. But that isn’t really so, unless bouts of inflation are unexpected. In an environment where inflation is stable year over year, the expectations of inflation are baked into credit contracts. So it really isn’t the inflation itself that hands the raw deal to creditors, it’s when monetary conditions suddenly change.
What people don’t hear about much is that deflation is the reverse of that. Credit contracts appreciate in value. Suppose that in 2006, you took out a 10-year loan. If expected inflation was 3% per year over the course of those 10 years, you would have that added in to your interest rate as an automatic hedge against inflation for the creditor. Then, in 2008 we get slammed with a deflationary bout and inflation declines to 1.1% on average for the duration of the loan. Because the dollar is now worth more than when the contract was made, and will be worth more over the next years as a result, but you are required to pay the same nominal amount, in real terms you are paying more than you agreed to pay due to both the built in inflation hedge and increased real value of the dollar. You are getting a raw deal because you don’t get a hedge against deflation; and it happens with all debt contracts, mortgages, car loans, credit cards, government debts, &c.
That is why unexpected deflation is bad, just as unexpected inflation is bad. Some fight off the people who say that we need to have more monetary stimulus because they don’t want to pay more at the gas pump, and they are stressed out over worries about their employment stats or business conditions day after day, but don’t see how much more they are already paying for existing debt because it is in nominal terms, just feeling the extra burden of it with those worries. It forces some into bankruptcy, some lose their jobs, and it isn’t always so easy to hear that giant sucking sound of liquidity getting sucked out of the economy, but you see the effects everywhere. It is why your money doesn’t seem to go as far as it used to, and why your income is shrinking or growing at a snail’s pace.
This is the very thing the last major amendments to the mandates in the Federal Reserve Act were supposed to keep from happening. But the Fed failed its’ price stability mandate, just shrugged and then slapped a 2% ceiling on inflation that doesn’t have a floor; so not only did we go over that huge disinflationary cliff in 2008, we get to keep going through smaller versions of it as instability floats around the globe. Even if it did meet exactly the 2% target yoy, you would still be getting the raw deal.
When we say we want more monetary stimulus, we are saying we want to put things back the way they were so that no one is getting ripped off, and stabilize our economy and our markets. We don’t want any more than the 2.5-3% inflation expectations we had when all of those debt contracts were made. We don’t want the inflation rate left as low as it is now because the extra debt burden is causing the economic problems. We are getting no benefit from it, only heartache.
And this is where my frustration comes in. I see it; I’ve been bitten hard by it. I know the Fed purposely did this and refuses to put it back knowing full well what happened to the economy, and all I hear is excuses about why it can’t or shouldn’t be doing anything while good people who weren’t irresponsible are losing everything they’ve worked for all their lives. I am angry as hell about it. It is the reason my blog exists.
I want the Fed dealt with. I want every last SOB on the FOMC canned. I want free banking so that archaic government institution that should have been replaced with a computer decades ago can just go the way of the buggy whip and never be able to conduct economic warfare on American citizens again.
If it had been a foreign power that did this to us we would be kicking ass without bothering to take names, and by God, that is what our congress should be doing to those bastards at the Fed.
Unemployment (red) PCE inflation (blue) Can you tell where the interest lies?