The Truth About Inflation
Last year, the Federal Open Market Committee (FOMC) announced adjustments to its Longer-Run Goals and Monetary Policy Strategy. This included reinforcement of its long-run inflation target of 2%.
After reading this, the first question that comes to mind is why the Federal Reserve would target inflation in the first place? For much of history, it was considered a good thing to have prices decrease over time because that meant people could buy more goods and services with the same amount of money.
But in today’s world, the Fed claims this inflation target helps maintain its maximum employment and price stability goals. This narrative of achieving price stability through inflation has become widely accepted by most in the media and public. However, further research and a bit of critical thinking may reveal a different motive from our trusted institution of money.
The unspoken truth, hidden behind many layers of nonsensical bureaucratic rhetoric, is that the U.S. Government is the largest debtor in the history of humanity. And to bail out the government for its out-of-control spending, the Fed creates inflation to pay back the debt with devalued dollars.
How do they ensure there will be inflation?
Before the Cerveza sickness, the commercial banking system was responsible for the creation of new dollars by lending to individuals and entities in the real economy. This changed in 2020 when the Federal Reserve began buying US Treasuries from the Federal Government, ushering in a new hybrid banking system where commercial banks, the federal reserve, and the federal government are creating new dollars.
Before this new banking activity from the Fed and US Government, the M2 money supply experienced many years of consistent growth, with the only new dollars being created coming from real economic activity in the private sector.
As long as the money supply increases without a corresponding increase in the number of goods and services in the economy for that money to chase, inflation is all but guaranteed.
So far, this new hybrid banking system has been excelling at its job as inflation numbers have come in well over the 2% target rate throughout most of 2021.
Whether these high prints will continue is unknown.
Will Fed Coin Trigger Stagflation?
As if manipulating the money supply was not enough, many folks have begun trying to wrap their heads around the idea of the Fed getting even deeper into the pockets of the American public with a Central Bank Digital Currency. What many are affectionately referring to as a Fed Coin.
Here’s how a Fed Coin might work. Private citizens would download an app that would automatically create an account for them at the Federal Reserve. Through this app, they would receive stimulus checks, Universal Basic Income (UBI), or other incentives from the government.
And now that you have an account set up directly with the Federal Reserve, you will be able to bypass the commercial banking system for loans and other banking activities that you would have historically performed at your local bank. This is a worrying scenario for a couple of reasons.
First, commercial banks typically operate under lending constraints. They only lend out money to people or entities they believe will pay back the loan.
On the other hand, the Fed would not operate under these constraints because the money they lend out would be created with an accounting stroke without worry for-profit or losses.
Without these worries, the Fed would be able to participate in targeted lending to specific groups or individuals favored by the government. This would include individual interest rates based on a social score. Something the world is already seeing in China.
So how would this lead to Stagflation?
If loans to individuals and entities are not being made to increase economic activity, this will create economic distortions and misallocation of resources.
Wealth, as defined by the number of goods and services an economy can produce efficiently, would decrease with these lending practices as fewer goods and services are created by the real economy.
While this is happening, the Fed will be printing more dollars to create inflation to bail out the Federal Government.
To recap so far, we have high rates of inflation from dollar printing and slow economic output from inefficient capital deployment. Historically, the last part of the equation for stagflation is high unemployment rates.
However, with many politicians and central planners following the playbook of Modern Monetary Theory, a guaranteed job program may fill the economy with a high level of unproductive jobs.
This would increase the number of economic distortions and decrease the standard of living for our society.
Is Stagflation Inevitable?
Although this scenario is not certain, the Fed and our central planners are running out of options to deal with the massive amount of debt they have accumulated.
There is no such thing as a free lunch and a Fed CBDC would streamline the process of inflation paying off the debt at the expense of society.