Federal Reserve Protects Wealthy At Poor’s Expense

By renegadetrader

Ever have the feeling you just can’t get ahead no matter what you do and how much you save? That might be because your money is constantly losing purchasing power thanks to the Federal Reserve and decades of inflationary monetary policy. It’s about to get much worse because central banks around the world are using the Covid-19 pandemic as an excuse to take their market interventions to an even more extreme level. Unfortunately what this means for the every day American is that the little cash they do have will lose most of its value over time. Those in the upper levels of society who own real assets will do much better in the coming inflationary environment and the wealth gap will widen even more just as it has during years of quantitative easing by the Fed. Holding interest rates near zero since the great financial crisis was supposed to incentivize companies to borrow money cheaply and they would then raise wages and hire more workers. Instead most of the extra liquidity made its way into raising stock prices and paying dividends to people who already owned stock. Unemployment numbers did go down, partly because people who finally gave up on looking for work weren’t officially counted as unemployed, but wages stagnated. If free markets had been allowed to function properly without massive interventions, we would of never been in this position.

What is the Federal Reserve doing now exactly? In just the past few weeks, the Federal Reserve has tried to fight the virus by printing an absurd amount of money. They are not literally turning on printing presses, but they are simply changing balances in a computer to create money. They are using this new money to buy everything they can buy in an attempt to prop up the economy and the capital markets, including corporate bonds, exchange traded funds, commercial paper, local and state government bonds, and asset backed securities. By law the Fed isn’t technically allowed to buy most of these assets, so they are exploiting a loophole and using the US Treasury and so called special purpose vehicles (SPV). Basically, the Treasury is doing the actual buying and assuming the risk and the Fed is providing the financing. A major problem with this is the Trump administration is in charge of the Treasury, and because of these SPVs, the administration now has more control over the Fed and it’s printing presses.

The Fed’s balance sheet was at a record level of 6.36 trillion dollars as of April 15, an increase of 1.7 trillion dollars from March 18. The entire US economy is only about 21.5 trillion dollars, so the Fed owns assets equivalent in size to more than 29% of our entire GDP. How much is a trillion dollars? One trillion dollars would take up more then two acres of land, with hundred dollar bills stacked seven feet tall. Our money supply is increasing exponentially, and this is going to have serious inflationary effects down the road. The Fed has announced so called “unlimited” quantitative easing, meaning they will continue pumping money into buying debt until they feel like they don’t need to anymore. In a normal free market economy, businesses are allowed to fail during a recession, which helps eliminate the bad businesses and the economy eventually recovers on its own with the sound businesses remaining. In our interventionist economy, almost nobody is allowed to fail because the Fed comes to the rescue every time, leading to “zombie companies” that make just enough money to pay the interest on their debt and aren’t able pay any of the debt itself, let alone make any profits. In 2018, 12% of non-financial companies were already zombies and the number was growing. Also contrary to popular belief, allowing a company to go bankrupt doesn’t necessarily mean the company will cease to exist and the employees will lose their jobs. Oftentimes it simply results in a restructuring of the company under new owners.

Unfortunately when the Fed buys assets with dollars that didn’t exist before, the drastic increase in the money supply will in time decrease the value of each dollar. This is a problem because a large percentage of Americans have all their wealth in cash while wealthy Americans own real assets that are less susceptible to inflation. Forty percent of Americans don’t even have $400 for an emergency let alone any assets, while 84% of all stocks are owned by the top 10% of households Because so much money is being pumped into the markets, normal market signals that help investors decide what to invest in are being obscured by all the intervention. Bad behavior is rewarded, because companies know they will just get bailed out if anything goes wrong. For example why do the airlines need a bailout after a very short time of reduced air travel? Don’t these multi-billion dollar companies have some money saved for a rainy day? The answer is, no, they spent most their extra money on buying their own stock at inflated prices to raise those prices even more. They didn’t use that money to invest in their companies, to create jobs, to pay down their debt, or to save for that rainy day that has now arrived. Now because they spent all those revenues on stock buy backs, they are getting bailed out by the Fed. A question that should be asked is if the Fed and the Treasury are allowed to just create the money to bail out these companies, why are we required to pay income taxes? Companies just aren’t allowed to fail anymore, no matter what they do or don’t do. As a result risk has been removed from capitalism, and instead of free markets we have de facto socialism for corporations and capitalism for the average American. Free markets work if you let them, and right now they are not being allowed to function properly in order to enrich the wealthiest at the expense of the lower class. Have you ever heard of the depression of 1921? Probably not, not many people have because it cured itself without any government intervention. Interest rates were not lowered, public money was not spent, and debt was actually paid down instead of created. By not intervening, the normal cycle was allowed to play out, bad businesses were eliminated, and healthy ones took their place. The whole thing was over and done with before it even had the chance to reach the history books. In contrast, the next depression to come along, the Great Depression, was both caused by and met with massive amounts of government intervention that prolonged it.

A majority of Americans don’t know how fiat money and the banking system works, and the Federal Reserve takes advantage of this to do whatever it wants without fear of widespread public backlash, hiding money printing and corporate bailouts behind fancy acronyms. The dollar used to have intrinsic value, it could be redeemed for an set amount in gold if one wished to do so. President Nixon removed the gold standard completely in 1972 and the dollar has slowly bled value ever since. $100 dollars in 1971 would be worth $638 today because of this. Now your dollars are redeemable for nothing, they simply represent debt. Let’s say you make a deposit into a bank account, what happens to those dollars? The banks used to be required to hold a certain percentage of your deposits, and could use the rest to make loans to earn interest. It was called fractional reserve lending and the Federal Reserve required the banks hold 10% in reserves, which was down from the 20% that was the standard for decades. This meant that for every 100 dollars you deposit into a bank, it could loan out 90 dollars of it. If everyone who holds an account at the bank decided they wanted their money in cash, the bank simply wouldn’t be able to return all their money without requesting emergency funds. As of March 15 however, even that fractional reserve requirement no longer exists. There is now a zero percent reserve requirement for depository institutions. That’s right, banks are no longer required to hold any reserves if they don’t want to, yet can still loan out as much of depositors money as they want.

What is the final result of all this central bank intervention? After an initial deflationary period caused by the virus’s simultaneous supply and demand shocks, there will be massive inflation as the increase in the money supply works its way through the system. There is no way to tell for sure how long we will have deflation before the inflation, It’s hard to use history as a guide because the trillions of dollars of central bank intervention has never been seen before, neither has negative interest rates all over the world. What has been seen before though, is what happens when you devalue your currency, a main cause of the collapse of the Roman Empire. Another cause just happened to be a plague.

What can you do to protect yourself from inflation? If you can, buy real assets with a limited supply like physical gold, silver, farmland, and maybe even some Bitcoin. Because of interest rate cuts, the interest earned in a standard savings account is just not enough to keep up with real inflation. With no limits on dollar creation and nothing backing the dollar since the removal of the gold standard, the only value in dollars lies within the knowledge that others will accept it for goods and services. If this faith in the dollar is ever shattered, then you are simply stuck with a bunch of worthless paper.

It didn’t have to be this way, a normalization of interest rates was supposed to occur after the recovery from the financial crisis, but never happened. Quantitative easing was supposed to be a temporary measure to get the economy back on track during the Great Financial Crisis, yet the mere mention of turning off the printing press sent markets into a free fall back in December 2018, a fall that was only stopped by a complete reversal by the Fed. Instead of tightening while the economy was strong, they said they would take a so called “wait and see approach”. This wait and see approach was the Fed’s way of telling Wall Street it still had their backs. Despite record low unemployment and a supposedly strong economy, the Fed then went from “wait and see” to actively cutting interest rates in 2019. The fed was willing to do anything to keep the economic expansion going and not allow a recession to take place. Because of this irresponsible monetary policy, we were in an even worse position to deal with a black swan event, which arrived in the form of a deadly pandemic sweeping the globe. If a garden variety recession had been allowed to happen years ago, maybe the United States economy could of survived this pandemic. Instead the Fed will have to print more and more money to keep everything from collapsing, but they are simply prolonging the inevitable at this point. Perhaps if they begin to show restraint and let free markets be free again, we can survive this, if not then it’s only a matter of time before the entire economy is centrally planned and controlled, which as history shows us, never works over the long term. The Federal Reserve’s true mandate has always been to enrich and protect the wealthy at any cost, and the cost has become too high to sustain.

Sources

https://fred.stlouisfed.org/series/WALCL

https://finance.yahoo.com/news/feds-cure-risks-being-worse-110052807.html

https://www.bis.org/publ/qtrpdf/r_qt1809g.pdf

https://www.marketwatch.com/story/fed-balance-sheet-expands-to-record-581-trillion-in-latest-week-2020-04-02?siteid=yhoof2&yptr=yahoo

https://www.in2013dollars.com/us/inflation/1971?amount=100

https://en.wikipedia.org/wiki/Economy_of_the_United_States

https://www.forbes.com/sites/bobhaber/2020/03/16/the-fed-fires-the-big-one/#7c30c6416aa8

https://money.cnn.com/2018/05/22/pf/emergency-expenses-household-finances/index.html

https://money.visualcapitalist.com/currency-and-the-collapse-of-the-roman-empire/

This article was also published on my Publish0x account

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