Inflation Target or Keynesian Manipulation



As per the Federal Reserve online material, "The Federal Open Market Committee sets U.S. monetary policy in accordance with its mandate from Congress: to promote maximum employment, stable prices, and moderate longterm interest rates in the U.S. economy."

Under current conditions  the Federal Reserve believes they are doing a good job fulfilling this mandate. Interest rates remain at extremely low levels, unemployment rates, as the Fed tracks it, are at extremely low levels. If there is one element that vexes the Federal Reserve it is the inflation rate, as measured by the Fed, can not reach the Fed's inflation target of 2%. Janet Yellen often points out that current inflation rate is not high enough. This is odd because by definition inflation is not price stability.

Looking back to 2012 the Federal reserve changed their inflation mandate from keeping inflation below a maximum rate of 2%, to targeting a 2% inflation rate. This was announced without much fan fair. While it was a quite move, it holds a significant meaning to the broader economy in many ways, including how quickly the US dollar loses purchasing power over time.

Since the creation of the current Federal Reserve in 1913 and especially since president Nixon announced the US dollar's exit from the gold standard on August 5th of 1971 the US dollar has been hammered while the purchasing power of the dollar has plummeted.


This is price stability??







It seems that the Fed has a different definition of price stability than most. If I told you that the current monetary system is orchestrated  to see the dollar lose half its value every 20 years, would you consider that stable? Of course not, but the fact is this is how the system is designed. The system is not designed for stability at all, but instead it is a crafty way to achieve inflationary redistribution of monetary value.

This inflationary redistribution of monetary value occurs in various ways. First, the devaluing the dollar is used in order help those people and entities carrying high levels of debt. If the value of the debt owed declines in real terms into the future due to inflation, the repayment of that debt becomes cheaper the further that debt repayment is pushed off. Consequently this explains why the federal government is never concerned with repaying debt. Inflation will eat away at the national debt over time. The problem is currently the national debt is growing at such a rate that 2% inflation is no longer able to keep up.

The second form of inflationary redistribution is  seen in the reduction in the purchasing power of money from savers who are watching the value of their hard earned money disappear. If we truly had price stability this would not be an issue, but of course this is not the reality under the Federal Reserve. Historically interest rates paid to savings accounts were suppose to offset inflation, but that concept has been cast aside in the current artificial economic environment. I am unaware of any basic savings account that is paying at or above the rate of inflation. Therefor storing wealth in US dollars is a losing proposition, since the US dollar does not protect purchasing power over time.

The third form of inflationary redistribution occurs by reducing the purchasing power of those who on fixed incomes, mostly retired folks who receive a set amount of money every month to live. As inflation eats away at the purchasing power of money their standard of living drops each and every year. This is also true of the millions of workers who do no see there income keeping up with the rate of inflation. Inflation is a great thing if you are a massive debtor but everyone else pays a dear price for this inflation, but it is a cost the Fed is willing to let you pay.

Lets further examine the impact of inflation. The current Keynesian model used by the Federal Reserve has pushed interest rates below the rate of inflation, in effect allowing certain parties to borrow money for free in real terms. For example, if you can borrow at 1.5% and inflation is 1.7%, the real cost of borrowing is less than zero. Inflation will devalue the debt faster than the interest rates will add to it, in real terms. This is a form monetary manipulation by definition. If the Fed wanted to have a stable currency they would aim for an inflation target of 0 to 0.5%, but of course this gets in the way of massive expansion of debt fueled by the Fed's easy monetary policy. The largest debtor in the world is the US government who look to borrow trillions of dollars while also wanting the opportunity to repay that debt with devalued currency in the future. The devaluing of the US dollar suits them just fine, just don't tell Joe and Jane Public why their money is losing so much value.

Federal Debt: Total Public Debt
Source: US Department of the Treasury

The same goes for all debtors across the land. The more inflation eats into the dollar  the less valuable the dollar becomes in the future and the cheaper it will be to pay back debt. Today many of the strongest economic entities (eg: big business, government) are able to borrow money below the CPI inflation rate of 1.7%. In addition corporate entities that can borrow near the rate of inflation, have in essence access to free money, if you consider that interest expenses are tax deductible. Tax expense deductions reduce some of the cost of borrowing, while inflation can mitigate the remainder of the cost of carrying debt, for those entities has access to these very low rates.

Now here is the issue at stake. Moving forward, as the Federal Reserve feels more and more pressure to tighten its monetary policy we will see a shift of higher interest expenses taken on by an economy carrying a massive debt burden incurred since the last debt bubble collapsed  a decade ago. As interest rates climb these high levels of debt will become more cumbersome to manage across the economy, as the cost of carrying those debts increase. As the added interest expense weighs on the economy the Federal Reserve will be pushed towards allowing higher levels of inflation as a means of devaluing the dollar to take the sting off of these higher debt expenses. In the end it becomes a form of stagflation.

These days the Federal Reserve seems to be opening up to the idea of raising the inflation target again. During her press conference, in response to a question about raising the Fed inflation target rate, on June 14th Janet Yellen stated:

"So it’s that recognition that causes people to think we might be better off with a higher inflation objective, and that’s an important set—this is one of our most critical decisions and one we are attentive to evidence and outside thinking. It’s one that we will be reconsidering at some future time." (1)

At the end of the day the Fed knows what it is going to have to do to protect its debt fueled bubble. It will come down to choices. It is going to have to choose between allowing inflation to rise significantly to offset the rising costs of debt, or watching their debt bubble collapse. They can not have it both ways. One has to ask if the dollar is really the best place to store value moving into the future.





(1)  Transcript of Chair Yellen’s Press Conference June 14, 2017 : page 14
https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20170614.pdf







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