The Federal Reserve Is Why You Can’t Afford Food And Gas

The Federal Reserve is supposed to promote full employment and stable prices, yet its actions cause jobs to disappear and prices to rise. This should come as no big surprise, at least it shouldn’t if you’re not inclined to think government intervention is either desirable or productive. The Fed is government intervention at its purest: the central bank with the legal monopoly on the creation of new money.

The Fed has essentially one trick. It can legally conjure new money whenever it wants. With this one trick it manages to force interest rates down. Mainly it lends the new money to the U.S. government. That is to say, it buys government bonds.

The artificial demand the Fed creates by throwing billions of dollars at government bonds has a depressive effect on interest rates. But these lower interest rates are not a result of those free market forces we champion at the Whiskey Bar. Rather, they are the result of the machinations of a government-chartered bank with a monopoly on the issuance of currency.

The Federal Reserve’s goal is to make borrowing more attractive because of the lower interest rates…but the boom that results is one built on debt that must eventually be serviced…and inevitably at higher rates.

The Fed also loves it when lower rates make lending money or putting it in interest bearing savings accounts less attractive to investors. People instead seek returns in other markets…like stocks. This is supposed to be a good thing. Notice Ben Bernanke points to a rising stock market as proof that his orchestrations were masterful.

But all he really did—all central bankers really ever do—is create new money and shovel it into circulation. Creating money to encourage mass indebtedness and speculative investing, however, isn’t exactly a winning strategy. It’s like taking up smoking so the nicotine will help your concentration when you’re picking the ponies. Or something like that.

You’ll notice that the stock market is responding less and less to the byzantine stimulus of lower bond yields. And people are up to their eyeballs in debt, and interest rates are rising despite the Fed’s efforts. This is your classic “pushing on a string” scenario. It’s rather like the point at which more alcohol starts shutting down the imbiber’s autonomic functions instead of producing more drunken bliss.

The stimulus of treasury-buying with new money is now having the opposite of the intended effect. After the initial euphoric response, things are getting worse.

And then there’s the matter of all that new money…

We’re not sure why central bankers and so many economists believe that new money can be created out of thin air—without any corresponding increase in economic activity or actual wealth—and inflationary results somehow be avoided…as if the new money will conveniently behave itself and keep from being used to bid up general price levels!

There wouldn’t be much of a problem if the Fed had only created just a few hundred new dollars…even thousands. Enough, say, to buy the legal counterfeiters cool new cars and some snazzy threads. But we’re talking about the creation of billions upon billions of new dollars here. Those dollars are sloshing their way through the economy and they’re going to show up more and more in the general price levels. (Their very creation also makes some of the other big holders of U.S. debt—like the governments in Asia—worried about being paid back with money that’s worth far less in real terms.)

Those new dollars have to get spent into circulation to do their damage, but that’s never a problem. Whoever gets them first will get to benefit before prices go up (and those prices go up at all because the new money is being spent in the first place!)

Cui bono? Why, those to whom the Fed hands the dough first. Traditionally that’s meant the government whose debt the Fed buys with the money it wills into existence, but lately the Fed has seen fit to hand new money straight to banks, because after all this is a crisis. Apparently you fix crises you engineered in the first place by bailing out your cronies in the big banks.

The government uses that money to pay the staff in its countless departments, contractors, military and others counting on a government check. The banks use the money to pay their senior members enough to keep them in million-dollar Manhattan apartments.

The rest of us get to beg our employers to give us raises that keep up with this mysterious price inflation. But it’s really not so mysterious. It happens as the first-users of new money drive up the prices on the things we all need…like food and energy.

The new money doesn’t simply go into the prices that the Fed would like it to, like stocks. It gets all over the place. The least connected, the very poorest farthest away from the new money feel the effects first. In our modern global system, that means that a family in a “developing country” will find themselves paying around half of their meager daily income for the food that used to take only a quarter of it. Eventually they may find that they can’t afford much food at all.

The typical middle class American is only just barely feeling the pinch now, but there’s a lot more pain to be felt. In 2010 Americans spent around 5% of their incomes on food. Things could be a lot worse. In fact, they likely will be soon enough. Increased food and energy prices are currently only a drag on consumer spending. Eventually, however, the essentials could get costly enough to cause serious privation.

The threat of mass starvation tends to lead to all sorts of unpleasantness. Individuals can do prepare by saving in real money (gold and silver and copper-nickel), but that does nothing to remedy the discontent and likely rioting from the millions of others who will not be so prepared.

We can’t say how much of this future woe is already baked in. We do know that more quantitative easing will just make a bad situation worse. It’s not idle speculation. History shows again and again that unbacked money creation by governments and central banks only leads to misery.

The pundits are debating whether or not QE3 will follow anytime soon or if will even follow at all. Let them hash it out. In the meantime, if you can’t or won’t get out of the U.S. entirely, you might want to consider at least not being in the middle of any large population centers.

Regards,

Gary Gibson
Managing editor, Whiskey & Gunpowder

The Federal Reserve Is Why You Can’t Afford Food And Gas was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

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One Response to The Federal Reserve Is Why You Can’t Afford Food And Gas

  1. Tom Osenton says:

    $1 Million Challenge

    It’s as simple as this: the U.S. economy is mature and rapidly losing steam. And economists and politicians must get their collective minds around that fact. This doesn’t mean we are doomed. But it does mean that sustained GDP growth of 3 percent is pure folly. Can US GDP grow at 3 percent in a given quarter or even year. Certainly it can. But it will never ever grow at 3 percent – or even 2 percent – for an entire decade.

    Let’s review:

    Average rates of growth for US Real GDP by decade:
    1940s: 5.99%
    1950s: 4.17%
    1960s: 4.44%
    1970s: 3.26%
    1980s: 3.05%
    1990s: 3.20%
    2000s: 1.82%

    The rate of US GDP growth peaked in the 1960s – and has been trending down ever since. The minor exception was the 1990s when Personal Consumption Expenditures (PCEs) were driven by a) an unnatural increase in income in 1998 and 1999 at nearly double the rate of all other years in the 1990s, coinciding with the dot-com bubble; b) a concurrent increase in access to goods in the form of mind-numbing and unsustainable retail expansion in the 1990s; and c) consumer individuation – a narcissistic shift in consumer behavior that supported the move toward individually-owned products (my car, my cell phone, my laptop, my television, my iPod, etc.). PCEs were effectively juiced – like an aging Major League Baseball player – fueled by folly and increasing by 5.2% in 1998 and 5.5% in 1999 when PCEs increased at an average of only 2.85% for the balance of the decade (1990-1997).

    The fact is that the US economy today is a 1% economy. That’s it. What are the implications? What are the implications for an aging 75-year old golfer? They can still play and compete – just not to the levels that they once used to enjoy. In effect, they have to deal with the fact that they can’t reach most par-fours in two anymore. So they become creative and find workarounds. That’s the US economy today. And if we are to survive, we have to accept that fact and find new and unconventional ways to create jobs rather than continually BS ourselves into thinking that we can grow our way out of this monumental mess. We can’t.

    Anyone who thinks that US GDP will grow at 2 percent or more for the decade 2010-2019 is delusional. I will wager $1 million with anyone who is willing to bet that the US economy will grow at 2 percent or more for the current decade. It will not. Deal with it.

    Tom Osenton
    tosenton@customershare.com
    Author of:
    The Death of Demand (Financial Times Prentice Hall 2004)

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