I have always had my reservations about the Federal Reserve, and who doesn't?
They have power, ideas, and economic strands that have affected our economy is such ways its hard to count. In this article, I expose three secrets they don't really want you to know about.
I study inflation and deflation since the 1800s and dive deep to understand why we have the idea that deflation is the bogeyman and that inflation is a good thing, but most importantly, I answer the curious one's question:
Who owns the Federal Reserve?
Secret #1: Deflation Is Good
Secret number one: deflation is actually good. Let’s begin by looking at the United States dollar chart.
As you can see, it goes back to 1865, and all the way to 2017.
This is a chart of the United States dollar, it shows the purchasing power, how strong the dollar you have in your savings account is, and how many goods and services it buys.
The graph started at a dollar, and by the time it got to 1900, it's almost doubled in value, meaning the cost of goods and services went down by almost 50%.
In 1913, the Fed came and the year was an epic fail. Not only did we get the Fed, but we got income taxes as well. If we just eliminate that one year, think about how much better our lives would be today.
Since the Fed came in, the dollar has gone straight down. I would also like to point out when we have steep declines in the dollar, it's always around the time of war.
You can see that in the same chart, but, going back to 1800, because the Federal Reserve or the government have to print up funny money to fight these battles.
But if we just had hard money, if we could eliminate the Fed and the government's ability to print funny money, we'd not only have a lot less inflation, but we'd also have much fewer wars, definitely a good thing we should all hope for.
I know right about now, your friend and family member Fred is saying, “yeah, George, I get what you're saying, but that's crazy talk, if we had deflation today, it would be terrible. The prices would come down, the cost or the burden of debt would increase and the whole entire economy would come crashing down.”
But what they don't understand is it's not deflation that's the boogeyman, it's the way our economy is structured.
If we didn't have an economy that was built on asset prices, debt, and confidence, deflation prices going down would increase demand, therefore, it would be a good thing.
When you're thinking about deflation, you just have to ask yourself…
Is it the type of deflation that decreases demand or increases demand?
Prices going down because the market is more efficient at producing goods and services creates more demand, but a debt deleveraging reduces demand because people have borrowed to consume.
I always say the drug addict's problem isn't the heroine, it's the fact he's addicted to heroin in the first place.
To continue digging into this secret that deflation is a good thing, let's take a look at the 1800s.
First, look at deflation from 1865 to 1900. This is a really cool calculator. I'm using it from 1865 to 1900 because it was after the civil war, so I think the number's a little more accurate.
This chart shows that prices went down by over 48%, that's really staggering, an average deflation rate of 1.88% per year.
According to the Bureau of Labor Statistics consumer price index, prices in 1900 are 48.47% lower than average prices since 1865. The U.S dollar experienced an average deflation rate of -1.88% per year during this period, causing the real value of dollar to increase.
-CPI Inflation Calculator
In other words, in the year 1900, 52 cents could buy you what a dollar bought in 1865.
Now, look at wages. Whenever I talk about deflation and the benefits, I always have people responding that it would be the worst thing because wages would go down and we can't have that.
Well, look at the facts. Here is a report I found from the BLS and the Fed.
It analyzes wages throughout the 1800s into the early 1900s. It's incomplete, the data back then wasn't as good as it is today, but we can take different sections of this and get an idea of what happens.
Here is a chart of Bricklayers from the year 1890 to 1903.
Notice their hours per week, whether it was Atlanta, Birmingham, Boston, or Chicago, all of them went down. In Atlanta, they started working 60 hours a week, and by the year 1903, it was down to 57.7.
Chicago started at 48 and by 1903, they're down to 44 hour work-week, very consistent with what we would see today.
Now, look at the hourly rate In Georgia.
It started at 23 cents per hour, but in 1903, it went to 38 cents an hour, an increase of over 50%, and to make sure I'm not cherry picking the data, here is Bakers from a similar timeframe, 1890 to 1904.
Their hours, again, went down from 64.6 to 61.3, but the hourly rate went up from 25 cents to 27 cents.
It was even more dramatic in the South Atlantic, hours went from 67 down to 60 per week, while the rates went from 19 to 26 cents an hour.
I'm not going to analyze the entire chart, but you get what's happening. Hours per week are going down and wages are going up.
Imagine this can happen in a free market without the micromanagement of the government.
What was going on with the overall economy?
You may say, “yeah, George, those two professions could have seen wage increases, but maybe the economy was really struggling because of the deflationary doom the Fed and the Keynesians always talk about.”
Let's look at GDP.
In the year 1865, it was $9,977 billion, but in the year 1900 it went up to 20 billion, 766 million. An increase of over 100%, while the cost of goods and services are going down by 50%.
As shown at the beginning of the article. Let's not forget that's nominal GDP. If we looked at real GDP because there was so much deflation, that number would be much better.
Based on the data I gave you, let's go through a few rough numbers, so we can really put this into terms that we can apply to our everyday life.
Expenses went down by 50%, wages went up from 1865 to 1903 timeframe by 20%, GDP was also up, doubled in nominal terms, but in real terms, who knows?
I'd also like to point out that, if you see at the following chart, nominal interest rates were right around 4%.
Take the following example of a person with these earnings.
294k / 1.2Mill
This means that if you're making $2,000 a month right now, and your bills are $2,000 a month, in 35 years, if you just keep doing what you're doing, you're going to go from making $2,000 to $2,400 a month.
Even if you don't get any big promotions or you don't have any ambition whatsoever.
But your expenses are going to go up from $2,000 down to $1,000.
On the left side you don't have any money left, while on the right, you have $1,400 a month that you can save and invest.
Just back to the napkin math, that averages out to be about $700 dollars a month, over 35 years, that means you'll have almost $300,000 in savings.
If you're able to get even a 7% real rate of return, you'd make at least 6%, keeping in mind interest rates are 4%, and you have 2% deflation per year, so real rates just putting in the bank.
But if you were able to do that over 35 years, you'd have almost $1.2 million.These aren't exact numbers, but you get the concept.
The free market has improved the standard of the person of the example's living dramatically.
They don't need social security to retire, they don't need the government to come in with a minimum wage or to micromanage everything in the economy, the free market handles the problem.
In fact, I would go so far as to any of the naysayers out there, I'm sure there's a lot of them, show me the government, the program, the task force that can produce these types of results in any country throughout history.
The only thing that's produced this type of results for everyday people, is free market capitalism, and that is definitely something the central planners don't want you to know.
Secret #2: Inflation Is Bad
The first dark secret the Fed doesn't want you to know is that deflation is good, but the second dark secret is that inflation is bad.
The Fed and the government have an inflation target, if we can only get to 2% per year, all our problems would be solved.
So they try to brainwash everyone into thinking deflation is the boogeyman that we should all be concerned with, and we should really hope and pray for more inflation.
Let's look at a chart of inflation going back to 1866 all the way to 2016, and a drawing I did of that same chart.
I tried to simplify it, but I think what I did in the process has made it 10 times more confusing, so bear with me.
Like I said before, the timeframe in the late 1800s was deflationary. Then when the Fed stepped in, we had some inflation, then came World War with a lot of inflation.
We had deflation that was caused by an economic depression in the early 1920s. Then inflation went back up, of course, we know what happened in the Great Depression.
But I'd like to point out that the Great Depression wasn't all deflation, it was just the first part of it. Look at the latter half of the 1930s.
Inflation went back up, then in World War II, we had price controls and they pegged the yield curve. Inflation shot up in the 1940s.
The main thing I wanted to point out with the lines on the original chart (USD Inflation), blue being inflation, red being deflation, is that 1934 it's like a heartbeat, it goes up and down, up down and down, it pretty much evens out.
But since the middle of the 1930s, we've had pretty much nothing but constant inflation.
What has this done to the economy and the purchasing power of the average Joe and Jane?
We know that wages go up with inflation, but they lag, and this is very apparent when you start looking at the data.
We can see that for a lot of Americans, their real wages adjusted for inflation have gone down since 1980, and keep in mind those are the inflation figures the government is willing to admit to, but this doesn't tell the whole story.
Here is another chart of real wages in the 1970s.
In the 1970s, real wages went down faster and had a steeper decline than at any point in time, going back to the mid-1930s.
We have to ask the question, what happened in the 1930s?
Well, we had:
- Social security
- Minimum wage
This is important because it gives the government a transfer mechanism, to transfer purchasing power, to the everyday person out on the street if we go into a recession. The more purchasing power they have, it keeps inflation higher than it otherwise would be.
A minimum wage would create an environment where more businesses would go bust in a downturn.
If we have a recession, there is a supply shock, and while demand is sustained, inflation increases.
I'm not saying this is why we've had consistent inflation since the mid-1930s, but I am saying social security, welfare, and minimum wage are things that have changed and it's an interesting thought experiment.
They definitely added to the inflation, whether they were the total cause or not, I don't know.
The whole point is we've had an inflationary environment for almost 100 years and this forces people and entities to speculate, to take on more risks, go further out the risk curve.
Why? Because if the individual's wages aren't staying consistent with inflation, if it's not improving, the only way they can get ahead is by speculating with financial assets.
They have to go to the market, have a 401k, and get rich by owning their own home.
To the point where nowadays, all the financial advisors out there tell people that's what they should do.
”If you're smart, you start a 401k, an IRA. If you're smart, you buy your own home, so when you retire, you can have this wealth accumulated.”
But remember going back to the 1800s, we didn't have to speculate in financial markets or financial assets, all we had to do was save money and by the time we retired, we were all set without the government's interference.
To frame this argument even better, here is a piece from an interview with Danielle DiMartino Booth and Jeffrey Gundlach, where they talk about their best advice for getting rich.
Jeffrey G: The problem is people don't understand the concept of saving money before you buy something.
I've talked about this in my webcasts, there's an incredibly funny, but just a golden nugget of a clip from Saturday night live from years ago when Steve Martin was on the show.
It's absolutely perfect. This couple is in the kitchen table fretting over their credit card bills, saying “what are we going to do with all this debt?”
All of a sudden, this guy shows up on camera and he goes, “Read my book, it's called, Don't Buy Stuff You Cannot afford.” And they're like, “what? what does that mean?”
He continues… “Look at page one, save money before you buy something.” They would go “save money? Well, wait a minute, if I don't have the money, but I want something I can buy it, right?”
He goes, “No, you can't buy it.” Then they said, “But where are you supposed to get all of this saved money?” It's absolutely classics skits.
At one point when I was a kid, we were really scratching to get by. We were at the supermarket, we didn't have enough money and we had to put stuff back. There were no credit cards before the 1970s.
So here we are, credit cards had just kind of come around and I said, “Why don't you just put it on the credit card?”
She just looked at me and she said:
“Let me tell you something, never ever put food on a credit card. Never borrow money to buy food because that's a slippery slope, which ends potentially very badly.”
I never forgot that.
Also when I was a kid, there were no auto loans. It's one of the things where everyone knows is a bad way to go, but it's all those things where, in the short-term, there's a payoff.
It's just like our national debt, it's just like so many things.
People might say “Yeah, you've been saying that this is a problem for years, and look everything's fine.”
Yes, it's a problem in the long-term, everybody says, but that could be a long way away.
What happens is you glue enough short-terms together and all of a sudden the long-term is today.
(End Of Transcript)
Inflation creates an environment where it's very difficult to save money and the value of the savings is always going down.
If it's difficult to save money to Jeff and Danielle's point, it's going to be very difficult to get ahead.
- When we have a deflationary environment, savings are good, but debt is bad.
- When we have an inflationary environment, savings are bad, and debt is good.
Think about how badly this distorts the economy.
Can you even imagine teaching your kids that savings are bad and debts are good?
Nobody is going to do that, other than maybe the Keynesians. Paul Krugman probably does.
Can you imagine Paul Jr, “we found a piggy bank in your room, you're in big trouble mister that's for sure, your mom and I are going to have to think of an appropriate punishment.”
This is what people have to do in today's society in order to get ahead. If you save money, you're going to be losing purchasing power.
But if you take on debt because the dollar is going down in value, you're gaining purchasing power, it's a totally perverse system that we've set up through this inflation and it all goes back to the Fed and government intervention.
What ends up happening is the only people that get ahead are the people who own assets. The rich get richer and the poor get poorer. This isn't because of free-market capitalism, it's because we have a lack of free-market capitalism and hard sound money.
I would challenge you to crunch the numbers, look at the data. Don't take my word on it, do the thinking for yourself and connect the dots.
And also look at the data from 1970 to 2019 or to today, then go back to the same thing for the late 1800s.
During what period of time did the standard of living improve the most for the poor and middle class?
Secret #3: Who Owns The Fed?
The third secret they don't even want you thinking about is, who owns the Fed?
To dive into this deeper, look at these facts on the internet. According to the Institutional Investor website, the number one shareholder in the New York Federal Reserve bank is Citibank.
Number two, JPMorgan.
Number three, Goldman Sachs.
While those three might not come as a surprise, I think the next two will shock you…
HSBC and Deutsche Bank.
Of course, as you can see in this chart I drew, our friend and family member Fred is saying, “George, that's no big deal, they only get a 6% dividend and they give all of their profits to the treasuries. We should want the Federal Reserve to make a lot of money because the government gets it and it's a good thing for all of us, it helps us pay down our debt.”
But he is not realizing the Federal Reserve even admits that they have a surplus account. I don't want to go too far down this rabbit hole, so, I've done that on a separate video, but look at this fact.
There's money stored there even after they pay the dividend and the government.
How much? Who knows.
But regardless of what's going on with the direct profits, the owners of the Federal Reserve, the banks themselves are making huge profits without having to get any distribution whatsoever.
How is this?
Because of the Feds money printing, they've increased bank reserves based money. They've come in with a Fed put.
Whether it's legit or it's just a psychological game, the bottom line is it has made investors go further out the risk curve, it's made the market go up.
While at the same time, it has capped their downside.
If they take on too much risk and need a bailout, no problem, the Fed will step in and print as much money as they need, or the government will come in and say, they're too big to fail.
We have the repo markets spike up to 10%, which would wipe out most of the banks, no problem, the Fed will come in, print the money, increase their balance sheet and “fix the problem.”
Then we have a global pandemic that could really affect the investment banks, no problem, the Fed and government come in with stimulus, quantitative easing, you name it, that sends the markets to all-time highs.
While at the same time, giving the investment banks, the shareholders of the Fed insane amounts of profit.
We can see this play out in this one chart of the Fed's Balance Sheet.
It goes back to 2004, all the way to 2020. It goes from 1 trillion, all the way to 7 trillion.
It began completely level under a trillion, around $800 billion. In 2008, when we had the global financial crisis (GFC), we needed the bailout and boom! It skyrockets up over 2 trillion.
It went up until 2016, then they tried quantitative tightening(QT), but the banks didn't like that at all.
The Repo spiked, and what do they do? They increased their balance sheet.
Then huge problems came with COVID-19 so they came in again, started increasing the balance sheet, monetizing the government's debt, and covering the backs of the banksters that own the Fed.
It's not just about the profits, it's about the risk-reward, they have all this upside, but they have a very little downside because, at the end of the day, the Fed will come in and print however much money they need to, to make sure they don't go bust.
Let's think this through a little go further and connect the dots. The Fed wants us to believe that deflation is bad and inflation is good, and they really don't want us to know who owns the Fed.
The entities that benefit the most from this smoke and mirrors system that's been set up are the big banks themselves, and that is the biggest secret they don't want you to know.