What occurs when the chickens finally return home to roost?
This is our pressing question for today. What might the answer be? We will explore a range of insights shortly, but first, let’s review the current state of affairs.
This week, the Bureau of Labor Statistics revealed that the consumer price index rose by 5.4 percent year-over-year in June, marking the most rapid increase in consumer prices since 2008. When excluding food and energy, prices still increased by 4.5 percent year-over-year—the quickest surge since November 1991.
However, the reality of inflation is even more alarming. The “unofficial” inflation rate, calculated with methods used in 1980, stands at approximately 14 percent. This level of inflation is particularly detrimental for retirees, savers, and wage earners.
Yet, the Federal Reserve seems unconcerned. On Thursday, Federal Reserve Chair Jay Powell stated to the Senate Banking Committee that he’s “not worried” about the escalating cost of living. He maintains that inflation is only temporary, anticipating a drop in prices for used cars and a return to below the Fed’s 2 percent annual target.
We have heard Powell’s reassurances before. Recall that the Fed’s much-touted normalization efforts in 2018-19 ultimately proved to be misleading. Although $700 billion was trimmed from the Fed’s balance sheet in that period, it followed a $3.5 trillion expansion, quickly followed by another $4.3 trillion increase from September 2019 onward.
So, how should we interpret all of this?
Layers of Complexity
Price inflation, much like a pandemic or a drug crisis, is a man-made affliction. It is a consequence of the central bank’s manipulation of the money supply and is fundamentally supported by a debt-based monetary system.
The dollar—or any fiat currency—when not anchored to a commodity like gold, is susceptible to excessive issuance. It becomes malleable to the desires of politicians and central planners who inflate the money supply to finance wars, social programs, and other misguided initiatives.
Without a solid foundation to regulate its quantity, what value does a dollar hold?
It becomes intangible, uncertain, and arbitrary. The Federal Reserve can create it at will. One day, a pocket full of dollars suffices for all your purchases; the next, those same dollars may have diminished to the point of being nearly worthless.
When a carpenter measures a cabinet at three feet, he knows that measurement is definitive. Conversely, when a saver stashes away a dollar, there’s no guarantee that its value will remain intact. According to the Bureau of Labor Statistics’ CPI inflation calculator, a dollar in 2021 holds the same purchasing power as 15 cents did in 1971—the year the last gold standard was abandoned. Where did the remaining 85 cents disappear?
In truth, it has been covertly taken from workers and savers and redistributed by the government to agencies, large banking institutions, and affluent asset holders. This is, without question, a national disgrace.
More Chickens
Over the decades, the baseline—the dollar—used to assess the value of products and services has become distorted. The quantity of dollars circulating has reached staggering levels. Consequently, the value of each dollar has significantly declined.
It’s important to note that the prices of individual goods and services will naturally vary due to fluctuations in supply and demand. However, when currency is linked to a stable reference point, as seen in the gold standard of the 19th century, prices tend to remain relatively stable.
The dollar’s convertibility to gold previously limited U.S. Treasury expenditures and the Federal Reserve’s ability to create credit indiscriminately. This changed when Nixon severed the dollar’s tie to gold and initiated the dollar reserve standard.
Before 1971, foreign banks could exchange $35 with the U.S. Treasury for an ounce of gold. After that, foreign banks received only $35 in return.
At the G-10 meeting in Rome in late 1971, Treasury Secretary John Connally simplified it for his European counterparts, saying: “The dollar is our currency, but it’s your problem.”
Unlike gold, which carries no debt obligations or counterparty risks, dollars can become worthless if their promissory obligations are not honored. Alternatively, they can be inflated to irrelevance when a desperate Fed decides to ramp up money creation and floods major cities with cash.
More Complexity
If the concept of “helicopter drops” is unfamiliar to you, rest assured it isn’t a joke. Former Federal Reserve Chairman Ben Shalom Bernanke explicitly stated that the Fed would resort to this in times of financial crisis in his November 21, 2002 speech, Deflation: Making Sure “It” Doesn’t Happen Here.
As a Federal Reserve Governor, Bernanke clarified:
“The U.S. Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. Government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the price in dollars of those goods and services.”
Later in this speech, Bernanke referenced Milton Friedman’s “helicopter drops,” evoking an image of a central banker distributing cash from above.
But when the financial markets collapsed in 2008, largely due to the Fed’s overly accommodating policies, Bernanke didn’t drop suitcases full of cash to the struggling populace. Rather, barring the @exception of Dick “the gorilla” Fuld, he showered trillions upon Wall Street bankers.
When the coronavirus panic shook financial markets in March 2020, the Federal Reserve made a critical misstep. Rather than opting for small government and sound monetary principles—essentially letting over-leveraged enterprises fail—they inundated financial institutions with liquidity.
These bailouts spared failing companies, transforming them into “zombie” entities. Now, with an economy populated by these lifeless firms, America is on the brink of a significant economic downturn.
What Happens When the Chickens Come Home to Roost?
What the Fed may not have anticipated is that the public is aware of their machinations. The 2008–09 bailout of Wall Street through AIG awakened many to the possible consequences. So as the Fed engaged in extensive corporate bailouts in 2020, the public began to question: where is the bailout for the people?
Moreover, there existed a moral case for such assistance. Through no fault of their own, many lost their jobs due to state-sanctioned actions in response to the pandemic. Therefore, it seemed reasonable that the citizens deserved a bailout, too, right?
Numerous rounds of stimulus checks and generous unemployment benefits were distributed extensively. Many individuals have become reliant on this support, to the point where they find it more profitable to remain unemployed.
Furthermore, the Fed and Treasury are now inextricably linked. They cannot reverse their course without sparking widespread discontent. Consequently, the Fed’s balance sheet is expected to exceed $10 trillion as it supplies funds to the Treasury. The national debt is on track to surpass $40 trillion as it continues issuing monthly payments of “funny money” and funds various misguided initiatives.
Eventually, however, the consequences of inflation will manifest. In fact, they are already becoming evident. What might follow?
Consider this partial list: America in the 1860s and 1930s, France in the 1790s, the Crisis of the Seventeenth Century, Europe from 1914 to 1945, Soviet Russia from 1922 to 1992, the Great Chinese Famine from 1959 to 1961, Mexico from 1994 to 1997, contemporary South Africa, and much more.
Each nation has its own characteristics and challenges. However, when the chickens return home to roost, history shows that a profound reckoning often follows.
Sincerely,
MN Gordon
for Economic Prism
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