When it comes to economic policy, fiscal strategies are often more accessible to the average worker than monetary ones. Terms like income tax, budget deficits, and national debt can be grasped easily if one cares to look deeper.
In contrast, the implications of zero interest rate policies (ZIRP) and quantitative easing (QE) remain obscured for many individuals. While they may witness the turbulent financial cycles triggered by the central bank, they often fail to link these events back to the Federal Reserve, leading some to mistakenly criticize capitalism instead.
The dedicated wage earner, despite increasing their workload, might find their financial situation stagnant or even declining. Yet, many remain unaware that burdensome monetary policy could be contributing to their struggles.
Take, for instance, a recent college graduate struggling with a modest income at a franchise coffee shop and a staggering $50,000 in student loans. They might feel an unsettling disconnect between the escalating cost of education and its value. However, it’s unlikely they will associate the inflation of student loans or the construction boom on college campuses with the Federal Reserve’s expansive credit policies. Instead, they may be left pondering the unfulfilled promises that led them to such a discouraging situation.
Admittedly, it’s not fair to place the entire blame for the financial stagnation of the populace on the Fed. Personal attributes like laziness, ambition, hard work, and innovation all play crucial roles in determining individual financial paths. Numerous bright, enterprising individuals have found success despite the hurdles imposed by federal policies, showing that swimming against the current can indeed be fruitful.
Nonetheless, the Federal Reserve’s tendency to devalue the dollar has created significant chaos in the economy. Here’s how this plays out…
False Demand
Consider a diligent worker earning $6,000 a month. After taxes and various deductions, their take-home pay shrinks to $4,400. As they navigate expenses like rent, car payments, food, utilities, and other miscellaneous bills, they may find their funds often fall short before payday. What do they do then?
They turn to credit.
For example, they might use credit to purchase essential work boots, as well as an extra pair of trendy shoes for social outings—even if they don’t really need them. A promotion such as “buy one, get one half-off” makes it tempting to indulge.
What follows? The store owner records these sales, affecting their inventory and placing new orders with wholesalers.
Meanwhile, Federal Reserve Chairman Jerome Powell is busy creating $120 billion each month through QE. But from where does this money originate, and where does it go?
Essentially, this cash is conjured from thin air via the expansion of the Fed’s $8.3 trillion balance sheet. Roughly $40 billion is allocated to mortgage purchases, keeping mortgage rates artifically low, which in turn fuels a burgeoning housing market.
The remaining $80 billion is directed toward U.S. Treasury purchases, aiding in the financing of the federal government’s significant budget deficits while suppressing interest rates, leading to a demand that is not genuinely organic but rather deeply reliant on debt.
Pipe Dream Economics
Powell’s actions, without a doubt, distort the credit and housing markets, altering even the stock market. Some of this central bank liquidity flows into stocks, driving the market to unprecedented heights.
Moreover, the entirety of the economy is also skewed; inflated demand permeates the supply chain due to excessive credit extension.
Take the example of shoe manufacturers: the influx of cheap credit spurs increased purchases, depleting wholesale stock levels. In response, producers ramp up their output, primarily from overseas.
The Fed might celebrate apparent GDP growth, but this success comes at the cost of mounting debt and disrupted supply chains. Essentially, the economic gains realized today represent borrowed capital from the future, and GDP growth itself becomes an indicator of rising debt levels.
This continuous injection of fabricated credit not only pushes the economy into unstable territory but also exacerbates wealth disparities and fosters inflation. Eventually, the global economy becomes heavily reliant on this artificial boost.
In its efforts to stabilize the boom-and-bust cycle, the Fed has inadvertently amplified these fluctuations. Workers, savers, and retirees each face severe repercussions as the current financial structure strains to maintain the status quo, leading to progressively desperate policies.
From negative interest rates to the elimination of cash and direct money printing under modern monetary theory, every conceivable option is exhausted.
Recently, Powell indicated that it might be time to consider reducing the pace of asset purchases.
This implies that the current rate of money printing could be scaled down from $120 billion a month. However, the past 13 years demonstrate that once the ZIRP and QE mechanisms are set in motion, they are challenging to rein in. The economy and financial systems become accustomed to this easy credit, leading to dependency.
Ultimately, it’s increasingly improbable that the Fed will ever fully cease its printing activities or effectively unwind its substantial balance sheet, let alone permit interest rates to naturally adjust.
The reality is that the Fed may continue this printing spree until every trace of the dollar’s value has been eroded away.
Sincerely,
MN Gordon
for Economic Prism
