There are some things I just don’t know enough about to go into with any credibility.
But I do have friends who do!
The following post was a Facebook post. It was not written by me, and is being posted today with the permission of the author who has asked to remain anonymous.
I’ll say this. We’re not related, but he is related to folks to whom I’m related.
He’s a friend to whom I’ve always looked UP, respected, and appreciated.
A friend who’s a few years older, just a few, four to be exact.
He’s a dad, a grandpa, a brother, an uncle, and a friend.
He was not a jerk in high school, and he was not a bully, but he did get in a fight at the Burger Chef in Miamisburg after a church youth outing.
He didn’t start it.
Frankly, this is the kind of stuff I wish I could write!
Having said that, here’s what he had to say about the Fed.
I’m going to ramble a bit about the Federal Reserve (hereinafter the FR) and inflation. Some people think the FR is engaged in a grand economic experiment the outcome of which is uncertain. I think the outcome is certain, and that the outcome will ultimately be inflation.
First, the FR is the Central Bank of the U.S. It is authorized to exist by an act of Congress, but it is not part of the government. It operates independently, theoretically to be immune from political pressure. The FR is comprised of several banks, and operates like a private corporation with a Board of Directors. The FR has three responsibilities. One is to stabilize the prices of goods and services within the economy. A second is to establish policies to maximize employment.
Together, these are known as the “dual mandate.” A third goal is to moderate long-term interest rates. The FR believes that the economy operates on an equilibrium model.This means that if the economy is running too hot, they can dial it down by raising interest rates. If they think it is running too slowly, they can rev it up by lowering interest rates. In recent years, the FR has been trying to create inflation by various means.
The short-hand definition of inflation is “too much money chasing too few goods”, that inflation exists when there is a general increase in the price of goods and services while purchasing power of money is falling. This can happen for several reasons. It may happen because there is an increased demand for goods which causes prices to be bid up. It could be that the costs of production increases, so that producers must raise prices in order to maintain profit margins. Or inflation may arise because there was simply too much money created. This over-supply reduces the value of each dollar, so more money has to be spent to buy things.
In the last eight years or so, lots of money has been created out of thin air. Despite the huge injection of money, however, inflation has remained stubbornly below the FR’s target of 2%. This is because an increase in the money supply alone will not induce inflation.The money has to move around in the economy.The more times each dollar changes hands (is spent), the “velocity” of money increases.
Velocity of the money supply is essential to cause inflation. Say a bartender gets a $5 tip. She spends the $5 to take a cab home after work. The cab driver uses the $5 to buy gas for his cab. The gas station owner uses the $5 to buy more gas to sell. The more that $5 changes hands, the greater the velocity of the money. But say the bartender decides to walk home rather than to take a cab. Because her bills are paid up, she deposits the money in her bank. Because people are still recovering from the last financial crisis, no one wants to borrow money despite low interest rates. Because the banks are still recovering themselves, the bank doesn’t want to lend the money because that’s how they got in trouble before. So the $5 sits in the bank, creating no velocity. If this scenario occurs commonly, velocity is low, and despite the printing of money, there is no inflation, at least as measured by the government.
The U.S. economy is consumer-based, and its health depends on people spending money. The FR wants everyone to spend, not save, in order to create velocity and inflation. That’s one reason the FR has kept rates so low. They think that if people can’t earn bank interest, they may think they might as well spend it. Or, perhaps even better, the FR would like you to take your money out of the safety of the bank, and invest it in more risky assets like stocks. And people have done so, choosing risk over safety. As the value of stocks rises, the FR believes this creates a “wealth effect”, making people feel that as they become “richer”, they will be encouraged to spend.
The stock market is the main place in the current economy where inflation (of asset prices) is obvious. A second reason the FR wants to create inflation is to devalue the dollar. There are two advantages in this for the federal government. First, our exports become cheaper for foreigners to buy, and we gain competitive advantage over our trading partners. Also, imported goods become more expensive for U.S. citizens to buy, and the price increases are inflationary. In this way, if we can’t create our own inflation, we can import it. A third reason the FR wants to create inflation is so that the U.S. can make debt payments with cheaper dollars. This is a stealth default. Perhaps most importantly of all, it’s not that the FR wants to create inflation, it’s that they want to avoid deflation at all costs.
The short-hand definition of deflation is “too little money chasing too many goods.” In deflation, price levels fall, and they keep falling. This means the value of money increases.These are recessionary conditions that can become depressions. (There are almost no people alive that can remember living through The Great Depression.) In deflationary conditions, as prices fall, people will not spend their money today to buy something that will be cheaper tomorrow.People will hoard cash the value of which is creating more purchasing power. When people stop spending, corporate profits decline, there are lay-offs, and increased unemployment. (By the way, if the FR thinks we have now reached full employment, the unemployment rate has nowhere to go buy up.)
As people lose jobs, there is even less spending, and the economy goes into a downward spiral, perhaps into depression. Now, say that Employee A is living in conditions where inflation is absent. Prices are not increasing, He earns $100,000 per year.He gets a 10% raise up to $110,000 per year. His purchasing power has increased by 10%. Employee B is living in an economy where prices have fallen by 10%.He makes $100,000 per year, and he does not get a raise. His purchasing power has increased by 10%. Is either employee better off than the other in terms of purchasing power? No. They ended up in the same place. But the government likes Employee A’s circumstances better. They can tax his increased purchasing power. The government cannot tax Employee B’s incensed purchasing power. These are the reasons why the FR wants to create inflation slowly, so that it is almost imperceptible. In fact, until it gets out of control, inflation feels pretty good. The price of your house inflates.
You might get a decent return on bank deposits. You could even get a raise that will match the inflation rate, or maybe a little more. So, at first people don’t mind a little inflation. You can pay down your fixed rate mortgage with cheaper dollars. Right now, the economy is in the slowest, longest recovery on record, if we are in recovery at all. We are on a tightrope balanced between inflation and deflation. Even if we fall into deflation as some expect, in the end inflation will win. Even though the FR hasn’t been able to budge the inflation rate they will find a way, because inflation advantages the federal government. Deflation will destroy it.
Like I said, this what I wish I could write…