MarketWatch.com a subsidiary of The Wall Street Journal recently published an article entitled “American is being damaged by low rates, weak dollar.” If that argument is true, we might reasonably ask why is the Federal Reserve willing to “damage” America?
According to that article,
“Five years after the beginning of the economic recovery, after rock-bottom interest rates and trillions of dollars of quantitative easing by the Federal Reserve, the economy is growing about 2%.
“No country has attained prosperity by printing money and weakening its currency, and the United States appears to be no different. Monetary stimulus might be useful in the initial stages of a recession and recovery, but zero percent interest ratesfor years on endare a different matter altogether. Under Fed Chairman Ben Bernanke and his successor, Janet Yellen, the dollar has fallen about 15% against the euro.”
But the euro’s value is also falling, so we’re measuring a falling dollar against a falling euro. That measurement has to understate the dollar’s actual loss over the past six years.
If we compare the price of gold in 2008 (about $800/ounce) to the price of gold today ($1,300/ounce) we see that the dollar has lost about 62% of its value as compared to gold. That’s an average of about 10% a year.
“According to Columbia University professor Charles Calomiris, . . . if the Fed expands its balance sheet by buying bonds from banks, but those banks simply increase their reserves at the Fed—and fail to increase loans [to consumers] and depositson their balance sheets—thenmonetary policyhas little effect through its traditional channels of expanding deposits and loans.
“Even worse, if the Fed fails to remove liquidity fast enough once the expansion takes hold [i.e., when the recession ends and the “recovery” begins],then aggressive monetary policy [Quantitative Easing] can spark inflation, which slows economic growth.”
In other words, hyper-inflation is both hard to start—and hard to stop. If Quantitative Easing finally sparks some significant inflation, the Fed will have to work quickly to prevent that inflation from growing at an unreasonably fast level.
“This [inflation] may be happening already. The Bureau of Labor Statistics said Wednesday that theProducer Price Index jumped by 0.6% in April, well above expectations of0.2%. Core Producer Price Index (CPI), which excludes food and energy, rose 0.5%.Over the past year, the price of food has risen 2.7% — and inflation often starts with increases in food prices.”
Bunk. I buy groceries every two weeks. I can see prices rising measurably on a monthly basis.
I wanted to buy a dozen limes last week. They were 99 cents each at two different stores. Last year, I could buy limes for 25 cents each. I won’t argue that the only reason limes are so high is inflation. But I am arguing that anytime you or I go grocery shopping we can see measurably higher prices than we saw two weeks or a month ago. Inflation is happening in the grocery stores. Everyone knows it–except the government officials who track inflation.
I might believe that the prices of food rose 2.7% per month for the past year, but there’s no way that I’ll believe that food prices rose by only 2.7% over the past entire year.
“The unemployment rate is 6.3%, 1 percentage point higher than the average rate at this point in the previous four recoveries. Butthe only reason it has declined to 6.3% is because the labor force participation rate has fallen to 1978 levels.
“After recoveries are under way, labor force participation gradually increases, as people gain confidence, resume searching for work and eventually find jobs. This has yet to happen [in our current economic “recovery”]. Instead, labor force participation has dropped from 65.7% in June 2009 to 62.8%.
“The share of the unemployed who have been without work for over six months is 35%. In September 2006, this rate was 18%, and it was 16% in January 1996. Compared with past recoveries, the current level of long-term unemployment poses serious problems for the economy.”
“Food stamps also indicate the quality of recovery. The number of people enrolled in the Supplemental Nutrition Assistance Program — also known as food stamps — has grown by 37% since the recovery began, from 35 million to almost 46 million (which is 15% of the population). After prior recessions, food stamp usage declined.”
Implication: The alleged “recovery” did not begin in A.D. 2009 and, in fact, has not yet begun. Claims to the contrary are mistakes or lies.
Current Fed Policy
“When the Fed took a different policy [in the past], recovery was faster. Between February 1994 and February 1995, the Fed increased interest rates from 3% to 6%, strengthening the dollar.”
When the Fed’s policy is to raise interest rates, it also raises the value of the dollar. As the value rises, more people want the dollar. When the Fed lowers interest rates, it also lowers the dollar’s perceived value (purchasing power) and people want to get rid of the dollar by trading it for other currencies, buying gold or other tangible forms of wealth like farmland, tools, etc..
I’ve warned readers for several years that, by reducing interest rates, the Federal Reserve has:
1) Reduced the local banks’ incentive to lend to American consumers. (Why should banks want to lend to anyone if they only stand to earn 1% or 2% on the loan? Why risk losing the $100,000 principal in a loan if the only potential reward is $2,000 in interest—especially when the real inflation rate might 5% or more?); and,
2) Increased the banks’ incentive to lend their capital foreign countries that pay higher rates of interest–but thereby reduce the currency supply in this country).
Result? By lowering interest rates close to zero, the Fed drives capital out of the country. If you can get a loan, it will be comparatively cheap. But, for many Americans, getting a loan may be difficult or nearly impossible because there’s less currency available to be loaned.
Q: If the headline (“America is being damaged by low rates & weak dollars”) is true, why does the Federal Reserve have economic policies conducive to national “damage”?
A: Because those economic policies—while harmful to the American people—are beneficial to our government and/or the special interests it represents.
First, thanks to low interest rates, government can borrow more money to allegedly “stimulate” the economy without incurring significant interest rate costs.
Second, thanks to a falling value of fiat dollars, the US government can repay some of its enormous national debt with cheaper dollars.
Implication? The US economy is being run for the benefit of the government and those institutions deemed “too big to fail” rather than for the “general welfare” (as mandated in the Preamble of the Constitution) of the American people. The people are being intentionally exploited, abandoned and impoverished, while government and its special interests are empowered and/or enriched.
The Federal Reserve’s current economic policy seems ideal for building a police state. The people grow weaker and increasingly impoverished while government’s powers expand.
These changes aren’t happening by accident or mistake. These changes are intentional and persistent and therefore evidence of Federal Reserve policy that’s contrary to general welfare of the American people.
They’re not here to help us.