Inflation: An increase in the money supply, (which typically manifests itself as a general increase in consumer prices, due to a devaluation of the currency and a decrease in purchasing power.)
Between business closures and record inequality, the Fed is having a hell of a time trying to spark inflation. But who the hell wants to deal with inequality?
Wait — why on earth would we want prices to go up? For you and I, we obviously don’t — at least not for consumer goods. We’re already seeing prices that are a nickel or a dime higher every few visits to the grocery store, particularly as of late.
We’re not international bankers though. We have our personal debts, but they’re certainly not in the damn trillions. If they were, the prospect of inflation isn’t just tasty — it’s necessary — because borrowing $1 million today means when they pay it back it’s worth $975,000.
This is because our current monetary system enforces face value at par, regardless of the actual value. For us, instead of our dollars physically going down in value while in our wallets, prices go up.
Low interest rates are used by the Fed to stimulate economic activity via more borrowing from banks. When banks earn less on interest from loans, you can bet they aren’t going to pay you crap on your savings. Hence, striving for inflation means subtly encouraging you to either spend your money sooner, or else to seek more risky, higher return investments, over saving.
See how that works?
While deflation may be good to bring us lower prices, the concern of economists is a Deflationary Spiral: prices go down, so consumers spend less, businesses lay off workers because productivity needs are lower, and on and on it goes.
A Deflationary Spiral is not a foregone conclusion. In 2015, Switzerland went through a period of several years of economic deflation during which they experienced very low unemployment, and their economy actually grew. This was able to happen because there are a multitude of factors influencing the forces of inflation and deflation. in Switzerland’s case, their currency was a bit overvalued, so their central bank lowered the interest rate below zero, hoping that other countries wouldn’t bother holding the Swiss Franc, since it would offer a negative yield. Due to instability in Eastern Europe at the time, investors didn’t care — they’d rather pay interest for the privilege of holding something safe. That was unexpected.
In the US today, interest rates are already at zero. 2020 has been a hell of a year, and despite how badly we screwed up the handling of COVID-19, the US Dollar is still the reserve currency of the world, and as such it’s been the safe-haven for investors.
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Why the Fed can’t hit their target
So why exactly hasn’t the Fed been able to hit their inflation target regardless of the trillions of dollars they’ve created?
Well, other than the dollar being a safe-haven, there are two other main reasons, and an oppositional force:
1 — Inequality. The US already has an extremely top-heavy economy. Not only do the majority of gains go to the top, but much of this newly created money never leaves the hands the wealthy and the giant corporations. When they make investments, it stays at the top; when a corporation performs a stock buyback, it stays at the top: when a wealthy individual saves (hoards) it, it stays at the top. As millionaire Nick Hanauer told us in his famous “The Pitchforks Are Coming…”, article, that he “earns 1,000x more than the median American”, but his family bought three cars in recent years — not 3,000.
Consumer spending by a handful of extremely wealthy individuals is not enough to grow the real economy. If that money doesn’t make it to the real economy where most of us operate, it does absolutely nothing to stimulate growth or inflation.
2 — Money destruction. In the wake of this COVID-19 pandemic, we are seeing record numbers of business closures, personal bankruptcies, and defaults on debts. Because of the way our currency is literally born as debt, when a mortgage or a loan cannot be repaid and has to be written off, that amount actually disappears from the US money supply.
In fact, even if you are a good steward and you pay off your debt, the same exact thing happens — the money gets canceled out on the balance sheet.
Beyond that, for those of us lucky enough to be financially stable during this tumultuous time, if you took that $1,200 stimulus check and squirreled it away as savings, it obviously does not circulate into the economy — and therefore provides no growth, let alone count toward inflation.
The only thing that causes economic growth is spending. When people are scared, they save. When people are broke, they cannot spend. When people are worried about their debts and they pay them off, nothing measurable comes from it in the eyes of economists.
So because of the tremendous inequality that persists and is getting worse in the United States, coupled with the tsunami of bankruptcies, foreclosures and business closures canceling out a big chunk of the money supply, Big Daddy Fed simply can’t keep up — it can print and print to no avail. All that money might as well be going into a hole in the ground.
Add to that the hoarding of cash by the rich and the mega-corporations, and you have the icing on the cake.
Ultimately there are two battling forces today: money printing, and technology. Technology is naturally a deflationary force — it increases efficiency and brings down the cost. It’s the reason that you are waiting another month to buy that sweet 75” flatscreen. The opposing force is the fact that central banks need tomorrow’s money to be worth less because of the debts they owe.
But here’s the thing: Technology has expanded to become part of virtually every industry, and we are only just beginning to see its effects on efficiency and prices. Just as the Fed should recognize that the CPI is no longer a meaningful measurement of the increase in consumer prices, so should governments and economists around the world come to the realization that GDP is no longer a solid measure of economic growth. The introduction of technology has quite simply changed the rules of the game; the Fed’s tools of simply raising or lowering a lever to control the economy, and printing a shit-ton of money when it doesn’t seem to be working, are outdated.
“the Fed’s tools of simply raising or lowering a lever to control the economy, and printing a shit-ton of money when it doesn’t seem to be working, are outdated.”
Tech has been taking over the economy, and is about to take over the monetary system itself. Central banks are finally aware of this, and are attempting to embrace it; however, one of their primary motivations is that with a Digital Dollar — such as the one that’s actually in the works right now — they’ll have the ability to lower interest rates below zero, as has been mentioned in several IMF papers, possibly even to a “deeply negative” rate. This unfortunately means that their embrace of technology — if only to try to perpetuate the currently failing debt-based monetary system — is ultimately doomed to fail. Economics itself is changing.
After all, why should we face exponentially increasing prices at the store just because they took on more debt than they could handle?
A move to negative interest rates may backfire, as it did in Switzerland, because many of the conditions are the same with investors and central banks using the Dollar as a safe-haven amidst global turmoil. Additionally, lower rates equals even more borrowing — and we know you can’t dig yourself out of a hole. It will exacerbate inequality.
If you think for a moment that the Fed isn’t seriously considering breaking the Zero Lower Bound, perhaps you should read this IMF White Paper literally titled “Breaking Through the Zero Lower Bound” which contains this gem:
“The zero lower bound has proved to be a serious obstacle for monetary policy, as shown by the recent efforts of central banks to stimulate economic growth in the wake of the Global Financial Crisis. In this paper, we discuss how a transitional electronic money system — with paper currency still in use, but electronic money as the unit of account — can allow policymakers to break through the zero lower bound.”
That document is from October 2015 — they’ve been working on this issue for awhile, and a coming Central Bank Digital Currency (CBDC) is not far off. In fact, Appendix I contains an 18-step plan to transition from a physical paper dollar to a digital unit of account. (Today, we are at about step 8 if you’re wondering.)
My personal favorite is this step:
16. Implement the contingency plans for government agencies.
See, they aren’t quite sure what will happen if it costs money to simply hold money on a large scale — you know, sort of like when they first turned on the Large Hadron Collider.
Reasons Given for a Digital Dollar (CBDC)
In financial news, you’re likely hearing phrases like “The use of the dollar is dwindling”. But it’s actually not dwindling, according to the San Francisco Fed’s own conclusion from July 2020 in what they refer to as their “Diary of Consumer Payment Choice”, which reads:
The 2020 Diary findings were consistent with the prior year as the share of cash usage was consistent and the changes for debit and credit cards were not statistically significant. Such stability in the share of cash use suggests that consumers continue to value cash even as payment instrument choices continue to expand. (emphasis mine)
The other reasons we are being given as to why we’ll need to switch to a Digital Dollar are A) to reach the un-banked and under-banked, and B) to get stimulus money to people faster and more efficiently. Fair enough, I can buy that. But it doesn’t change their main motivation of (probably) spinning their wheels with negative rates.
This is obviously a huge thing — I can’t tell you how many times I’ve read statements indicating their concern of “disintermediation” of the banks. To translate that — banks are considered intermediaries, so you can guess what disintermediation means. They have no clue what US banks will do if they pull this negative rate crap — and in fact, their goal of sending CBDC money (Digital Dollars) directly to consumers may well be to bypass commercial banks altogether.
In fact, their plan is to ensure that your local Post Office offers banking services and an ATM for your “FedAccount”, and FinTech companies such as PayPal are being offered a special banking charter. So, even if the banks bail on a Digital Dollar or negative rates, the Fed has contingency plans.
But what if negative rates don’t work as expected — as in, they don’t light a fire under your ass to convince you to spend your money instead of saving it? One swell idea they’re kicking around is from section 2.2 of a fresh report from just a few days ago (10/10/2020) — The BIS (Bank for International Settlements) “Central bank digital currencies: Foundational principles and core features”:
“Beyond bearing interest, there has also been public discussion about CBDC use to stimulate aggregate demand through direct transfers to the public (so-called “helicopter drops”), possibly combined with “programmable monetary policy” (eg transfers with an “expiry date” or conditional on being spent on certain goods). However, a key challenge for these transfers is identifying recipients and their accounts.” (emphasis mine)
Don’t worry — for that last part, they’ll have a National Digital Identity Database, so the helicopter money they send will get to you just fine. Just be sure to spend it before it expires, and to only spend it on the approved things.
Welcome to the future of negative rates and programmable money.
Other articles in this series below, with more to come. Stay tuned.