December 3, 2022

The Fed Is Confiscating The Wealth Of The Middle Class By Destroying The Value Of The Dollar

Americans need to take a serious look at how the purchasing power of the dollar is being destroyed.  Rampant poverty, declining real incomes and higher prices are all the guaranteed results of a Federal Reserve that remains committed to destroying the value of the dollar.   A dollar saved today that has less purchasing power a year from now equates to the “silent” destruction of the dollar, an event which has gone virtually unnoticed and unprotested by the American public.

Act #4 of the Fed’s endless money printing campaign directly monetizes over a half a trillion dollars of U.S. deficit spending annually.  In addition to financing the Federal debt with printed dollars, the Fed has also explicitly endorsed  an inflation rate of 2.5% as being “acceptable.”

Impact Of 2.5% Inflation

Even a relatively “benign” inflation rate of 2.5% rapidly erodes the purchasing power of savings. Over a short 5 years, the purchasing power of $100,000 in savings is reduced to $88,110 at an inflation rate of 2.5%.  At a 5% inflation rate, the value after 5 years is only $77,378.  We don’t even want to look at how much purchasing power would be lost over a decade.

Both consumers and especially savers need to become aware of the wealth depletion caused by purchasing power loss.  From my experience, most people find it conceptually difficult to see a real loss (in purchasing power) when there has been no change in the principal amount of savings.  As John Maynard Keynes wrote in 1920, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.  By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some.  And not one man in a million will detect the theft.”

Incredibly, the desperate attempts of central banks to prop up the over-indebted financial system via inflation and money printing is viewed as beneficial by some misguided economists.  Japan’s decision to go all in with “unlimited quantitative easing” was applauded in a recent Slate commentary.

That’s because Shinzo Abe, the overwhelming favorite to lead the Liberal Democratic Party to victory, is running on a bold platform of unlimited quantitative easing and more inflation. If this works—and the odds are that it will—Abe will not only cure a great deal of what ails Japan, he’ll light a path forward for the rest of the developed world.

But if he (Abe) does manage to stick to his guns, the odds are good that it will work. Monetary expansion should reduce the price of the yen and goose exports. More importantly, it will push domestic real interest rates down and spur investment. Creating firm expectations that yen-denominated prices will be higher in the future than they are today should encourage firms and households alike to acquire real goods sooner rather than later. And all this ought to encourage everyone to be investing and spending more.

Bernanke said Japan’s central bankers needed Rooseveltian resolve, but the moral of the story may be that it takes a politician—a Roosevelt—to have the clout and legitimacy to make central banks act decisively when an economy gets firmly mired at the lower bound. If Abe can be that Roosevelt, he’ll not only be a hero of Japan but possibly of the whole world economy. After all, if America’s old advice to Japan turns out to work in practice as well as in theory, then maybe we’ll finally get around to taking our own advice for ourselves.

Does anyone think that Japan’s temporary benefit of a lower currency will not be met with competitive devaluations by other nations?  Exactly how will Japanese consumers be able to spend more if prices increase and wages remain stagnant due to the limiting effects of wage globalization?  The Slate author firmly espouses the lunacy of currency debasement as a wealth enabler despite the fact that no nation in history has ever printed its way to prosperity.

The fact that central banks have firmly committed themselves to money printing on an unimaginable scale is not a cause for hope but rather a clear signal of desperation.  Policy makers have run out of options and in an attempt to forestall the collapse of the financial system, have turned to the last resort option of unlimited money printing.

Gold and Stocks Diverge As Central Banks Pledge Unlimited Money Printing

Both the Federal Reserve and the Bank of Japan have gone all in with their attempts to revive weak, debt burdened economies with a pledge of unlimited money printing.

Japan’s incoming Liberal Democratic Party Prime Minister Shinzo Abe, who ran on a platform of unlimited quantitative easing and higher inflation, has quickly forced capitulation by the Bank of Japan to surrender its independence from political influence.

The Bank of Japan pledged Thursday to review its price stability goal, admitting that the move was partly in response to incoming Prime Minister Shinzo Abe’s aggressive calls for the central bank to step up its fight against deflation.

At its two-day policy board meeting, the BOJ decided to expand the size of its asset-purchase program—the main tool of monetary easing with interest rates near zero—and promised to review next month its current inflation goal, something Mr. Abe demanded during Japan’s parliamentary campaign.

Countering speculation that the board’s decision-making process is being driven by politicians, Gov. Masaaki Shirakawa said the bank reviews its price goal every year. But he acknowledged that the policy board had taken Mr. Abe’s request into account.

The Bank of Japan’s quick surrender of monetary policy independence reflected the fact that they had little choice in the matter.  Mr. Abe had previously threatened a  “law revision to take away the BOJ’s independence if it didn’t comply with his demands.  Mr. Abe said the election shows that his views have the support of the people, and, on the night of his victory, he specifically said he expected the BOJ to do something at this week’s meeting.”

The policy of unlimited money printing by Japan came shortly after similar actions were announced by the U.S. Federal Reserve in early December.  Fed Chairman Ben Bernanke, architect of the U.S. “economic recovery” announced that the Fed would purchase $45 billion of US Treasuries every month in addition to the open ended monthly purchase of $40 billion of mortgage backed securities.  The Fed’s expanded “asset purchase programs” will be monetizing over $1 trillion of assets annually, effectively funding a large portion of the U.S. government’s annual deficit with printed money.

The impact of blatantly unlimited money printing by two of the world’s largest economies surprised many gold investors as the price of stocks and gold quickly diverged, with gold selling off and stocks (especially in Japan) gaining.

Why would gold, the only currency with intrinsic value that cannot be debased by governments, sell off as governments pledged to flood the world with freshly printed paper currencies?  Here’s one insight from John Mauldin.

When you reduce the amount of leverage in the system, you’re actually reducing the total money supply. So the Fed can come in and print money, and the money supply – the total amount of credit and leverage and material that’s going through the system – really hasn’t increased.

A lot of monetary economic theories say “the money supply is directly related to inflation.”

It is, but the amount of leverage and credit in the system is also directly related to inflation. It becomes a much more complicated mix. What happens at the end of the debt supercycle, as you’re reducing that leverage, you’re actually in a deflationary world. That is the whole debate between deflation and inflation.

If you read the polls in the United States, we’re just totally dysfunctional. We want to pay less taxes and we want more health care – that doesn’t work. We are going to have to be adults and recognize that problem.

The reason is the Fed is going to do everything they can to fight deflation. The only thing they can do is to print money. They’re going to be able to print more money than any of us can possibly imagine and get away with it without having inflation.

Mr. Mauldin may have a valid point, but a more likely explanation is the suppression of gold prices by governments and central banks as voluminously documented by GATA.

“Those who follow GATA may not be surprised when the monetary metals markets don’t make sense, since they really aren’t markets at all but the targets of constant intervention by governments.”

Why There Is No Upside Limit for Gold and Silver Prices

The past decade has seen a virtually nonstop advance in the price of gold.  Silver, which lagged gold until last year,  recently hit a 31 year price high.  Gold and silver, both used as currency for thousands of years, have gained broad investor appeal as a hedge against paper currencies.

The increase in the value of gold and silver is due to the fiscal and monetary policies of nations struggling to deal with massive levels of debt – policies that virtually guarantee a continued rise in the price of gold and silver.

Central banks, having exhausted all conventional means of monetary easing, have moved on to the last resort option of quantitative easing and currency debasement.  Federal Reserve Chairman Bernanke has twice resorted to the printing presses, and then shamelessly explained the “virtues” of his money printing policy (in convoluted terms) to a gullible public on national television.  The subsequent absence of broad public opposition to a policy that is certain to ultimately destroy the financial well being of most Americans seems based on ignorance and/or indifference.

One American who is not ignorant or indifferent to the Fed’s policy of printing money issued a dire warning this week on the dangerous path the Federal Reserve has taken.  The reason we should all pay great attention to this warning is because it was issued by a powerful policy maker at the Federal Reserve.

According to Reuters, Richard Fisher, President of the Dallas Federal Reserve stated in a speech that the debt situation in the U.S. is at a “tipping point.” He is quoted as saying, “If we continue down on the path on which the fiscal authorities put us, we will become insolvent.  The question is when”.   Bank President Fisher further said that no additional extraordinary measures should be taken when the current round of money printing ends in June of this year.

We shall see what happens comes mid year when QE2 is scheduled to end.  The problem facing the Fed is that they are out of conventional policy bullets to ease credit conditions with rates already at zero.  The ease and apparent lack of consequences in printing money has made additional quantitative easing a very seductive method of  allowing huge deficit spending by the government.  QE2 is a thinly disguised monetization of the Federal deficit in which the Federal Reserve purchases government debt from the primary dealers after they purchase the debt at Treasury auctions.

Government officials argue that unprecedented deficit spending and quantitative easing are necessary to stimulate economic  growth, but this theory has not worked in the real world.  Despite trillions in stimulus spending,  job creation and economic growth have been extremely weak and are likely to remain so according to economists Kenneth Rogoff and Carmen Reinhart who wrote This Time Is Different: Eight Centuries of Financial Folly.  According to Rogoff and Reinhart, economic growth is subpar when public sector debt exceeds 90% of GPD which the U.S. and many other developed nations have already surpassed.  In addition, a recovery of the job and housing markets after a financial crisis take many years due to the burden of excessive levels of debt.  Ultimately, Rogoff and Reinhart predict that austerity measures will need to be imposed along with some type of debt restructuring.

Is the U.S. capable of reducing spending and  instituting austerity measures? Cutting deficits means cutting payments to a long list of incomeless recipients who really don’t care where the entitlement money comes from.  Those still actually paying taxes will object strongly to any proposed tax increase to fund government spending.  Unable to cut spending or raise taxes leaves the Government with one bad option – print more money.

Politicians, who value getting elected above all else, are likely to strong arm the reliably compliant Federal Reserve Chairman Ben Bernanke to “come to the rescue” again with QE3.   In the minds of politicians and Federal Reserve officials, there will always be very compelling reasons to continue borrowing and money printing.  With the expected retirement of Federal Reserve Bank of Kansas President Thomas Hoenig this October, the Federal Reserve will be dominated by dovish members who favor the easy money policies of Fed Chairman Bernanke.  President Hoenig is one of the few Fed members who oppose continued zero interest rates and quantitative easing.

The correlation between parabolic increases in government debt and the price of gold is clear.   Since 2000 both government borrowing and the price of gold have been closely correlated as seen below.  The increased value of gold directly reflects the decreasing value of paper money.

A nation that has reached the limits on taxation and borrowing has few viable policy options other than a continuing series of quantitative easing programs.  Current government policies, if left unchanged, virtually guarantee a continued increase in the price of precious metals.

TOTAL PUBLIC DEBT

GOLD PRICE - COURTESY KITCO.COM