50 Years Later : Federal Reserve Is Debasing As Fast As It Can
It was August 15. 1971 US President Nixon announced that the United States would no longer convert dollars into gold, and thus ended the era of gold backed money.
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| August 15, 1971 Nixon takes the US dollar off the gold standard. |
As a result of this action the US defaulted on its debt obligations as it would no longer repay it debts in terms of gold backed notes, but instead offered a rapidly debased fiat currency as repayment.. It was the start of an era of huge spikes in inflation while lowering of the standard of living of the American people.
In the years to follow the US dollar dropped in value and by 1980 the dollar was only worth a fraction of what it was in 1971. The Federal Reserve failed and/or ignored its mandate to sustain the value of the dollar.
While the US population was made to struggle though this period, the US government went on a massive expansion of spending to pay for its military infrastructure and even larger expansion of its bureaucracy. The result of this over the decades since 1972 is the US government is now so deep into debt, it is unable to keep up with its obligations.. without monetizing debt. Today the Federal Reserve has the US government on life support through its QE forever program, but we will get to that later.
Inflation really ramped up after the dollar was taken off the gold standard. The was no hard limitations of money printing. As the dollar lost its purchasing power the issue became a hot button subject by the mid to late 70's. It took an incredible effort by Paul Volcker to slay the inflation beast, which the Federal Reserve in the first place, by rapidly inflating the money supply.
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Consumer Price Index for All Urban Consumers (1972 - 1982) Source: U.S Bureau of Labor Statistics, fred.stlouidfed.org |
We can see the consumer price index rose above 10% multiple times over this period and peaked above 18% in 1974 and 1980.
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| M1 Money Supply (1972 - 1982) Source: Federal Reserve System, fred.stlouisfed.org |
While the consumer price inflation during the 1970s saw the peak of the loss of purchasing power of the US dollar once off the gold standard, today we are witnessing the return of double digit consumer price inflation numbers, using the 1980 calculation of CPI.
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| Consumer Inflation Official vs Shadowstats (1980 Based) Source: ShadowStats.com |
From the chart above we can clearly see consumer price inflation shooting up into double digits today and has been hovering around the 10% mark since 2005. It is pretty certain that income of the majority of people is did not keep up to these consumer price inflation.
Even more concerning is the massive inflation of the money supply over the past 18 months and a significant loss of purchasing power of the dollar as a result. This has many people in the middle and lower income levels struggling to maintain their standard of income once again. We see from the chart above that the CPI shot up to near 14%.
Unfortunately the Federal Reserve uses altered formulas to understate the inflation. They are also suggesting the CPI is transitory, as if that makes it better for the people struggling to afford their lives. What they often say is transitory is proved to be permanent. Added to this debt financed government spending is rapidly expanding. President Biden is suggesting that a new massive 3 billion dollar infrastructure program, will not create inflation, even while the head of the Treasury suggests otherwise.
The Federal Reserve has now painted themselves into a corner and have no flexibility. They have flooded the economy with cheap money. They have promoted misallocation of capital and resources. They have created a zombie economy full of nonviable entities kept alive with free money. They have destroyed the price discovery mechanism within the free markets and have inflated the largest debt bubble mankind has ever seen. In the process they have inflated asset prices to extraordinary levels, as a result passed a massive amounts of wealth to a very select few, while leaving the rest of the population to deal with the crippling consequences of these actions.
Taxpayers will never be able to climb out of the mountain debt their governments have incurred. Granted these governments were elected by a naïve population who thought government spending was free money. This massive mountain of debt now ties the hands of the government and the Fed, and will leave the majority of the population exposed to extreme economic adjustments.
If you look at things from a different point of view, and assume the Federal Reserve is not as blind as they pretend to be and they can actually see prices are jumping higher than there modified CPI, but refuse to state the obvious as not to spook the markets, you have to ask what can they do at this point? The truth is the Fed has no ability to restrain consumer price inflation at this point, even if they wanted to. They are trapped. If they raise rates, even slightly, they risk popping the giant debt fuelled bubble in the equity markets and even more devastating they risk of popping the bubble in bond markets and sending trillions of dollars in debt instruments crashing. Imploding markets are a very real risk, but there are further limitations. Today the US government is saddled with massive levels of debt, which is currently sitting above 28 Trillion Dollars, which is over 125% of GDP(1). usdebtclock.org
There is no way the US government can afford higher interest rates at the current levels of debt. The government can barely afford the current free money rates. That being interest rates below the rate of inflation (free money in real terms). Furthermore many cities and states are in equally or worse positions. So with an understanding of the debt limitations of government due to extremely poor fiscal management, we know that higher rates are completely off the table at this point. They simply can not occur. The only choice the Federal Reserve has is to monetize debt and debase currency at an ever quicker rate, while trying to convince the markets that they are still being responsible. Passing on calming statements by saying such things as "it will be like watching paint dry" or "its on auto-pilot" and other such ridiculous messages. They must keep the appearance alive in order to keep the house of cards from collapsing.
So yes the tall foreheads at the Federal Reserve will talk a good game and try to keep the sheep of Wall Street from getting too distracted by the big scary numbers. "No no, look over here. Free Money!!!" It has worked very well over the past couple years. Even as the economy cratered, we witnessed the markets rocketing to all time highs. Almost as if it were the perfect conditions. Endless QE has been taken to be perfect conditions. It is understood the Powel put is in place. Price discovery is completely gone. Its all about monetary stimulation ... or what economists call inflation and debt monetization. What could go wrong with that? The truth is it is now a race. Air is coming out of the bubble and Fed needs to monetize faster and faster. This will not end well.
The markets are being guided by a misunderstanding of many factors including basic economics, the consequence of monetary inflation (also known as Keynesian economics), the cost of run away debt and the devastating results of monetary debasement. The future of fiat currency is looking dire. It is a huge issue moving forward and needs to be taken into full account.
Notes:
(1) Debt to GDP, source: US Federal Reserve , U.S. National Debt Clock, usdebtclock.org
