The Fed and the Great Pillaging

Commentary

There are many ways to measure the amount of dollars that exist today, but let’s choose the M2 measure of the money supply because it seems the most reliable for now. There’s now $21.3 trillion extant. That’s $6 trillion more than existed just three years ago.

For perspective, the entire U.S. dollar money stock just 10 years ago was $6 trillion. That means that in just three years, the Federal Reserve has enabled the creation of 40 percent of the whole of the existing dollar-based money stock. That’s how much the economic landscape has shifted, entirely because of Congress’s dangerous and crazed spending frenzy and the Fed’s willingness to accommodate it.

The rate of creation is currently flat, which is good as far as it goes. That’s due to a shift in monetary policy in an attempt to tame inflation. But there’s nothing to be done about the floods that already exist. Those $6 trillion have to become part of our daily economic reality, which is to say that prices absolutely must adjust upward. They have, and they'll continue to do so.

One way to measure price increases is to delete the most volatile sectors of food and energy and examine that which more clearly reveals the extent to which upward pressure is embedded. Looked at this way—through the lens of the so-called sticky rate of inflation—we see no evidence of taming. The sticky rate in December 2022 was higher than ever before.

The direct causation of the Fed’s money pumping is undeniable. There’s no reason to blame Putin or climate change or greedy corporations. The underlying cause is as plain as day: Prices chase the money. There’s still tremendous potential for rising prices, and the Fed knows this. For this reason, there will likely be no pullback in quantitative tightening for a long time.

Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker

There’s another piece of this puzzle called velocity, which is to money as transmissibility is to infectious diseases. It measures the pace at which money changes hands. The faster the money moves, the greater the upward pressure on prices. In a crisis, velocity tends to fall as people become more risk-averse. That would typically mean more in savings, all else being equal. With fast-rising prices, that might not be possible. Velocity can fall or stay low even as money resources become ever thinner.

Velocity has been mercifully low since the lockdowns. That has kept a lid on prices. If we had the same amount of velocity today that we had in 2000, prices would be moving dramatically up at a much faster pace. Nonetheless, the potential is still there. Velocity has been rising slowly over the past two years, but we’re nowhere near where we were in normal times. Should that change, look out! Faster velocity feeds inflation.

However, given the prevailing disaster of corporate and household balance sheets, it will likely stay quite low. By historical standards dating back to 1960, existing money velocity is running at about half of its long-term average.

Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker

It’s now dawning on most Americans just how grim the existing reality is. It took a long time for it to sink in simply because we’ve had it so good for 40 years. Despite some interruptions along the way, we’ve mostly experienced a rising standard of living and continued opportunities, as well as steady and predictable price levels. But 2020 was indeed a great reset. It’s just now becoming very obvious.

We face a remarkable situation right now. Consumer spending is weakening. Usually, that happens because people have decided to save more of their income. But savings have never been lower. What can this possibly mean? To put it plainly, it means that most people in the middle and working classes are getting poorer by the day, with no end in sight. The financial candle is burning at both ends.

Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker

This situation is starting to strike terror in the hearts of average people. It’s tragic because they’re seeing their economic prospects shrink. Retirement for many people is looking impossible. For young people, many are wondering if they have any prospects for living better than their parents; students in college are just now coming to terms with the reality that a degree gets you nothing on its own.

Finally, The Wall Street Journal is starting to get it, running an article with the implausible title “The US Consumer Is Starting to Freak Out.”

“It’s a stark turnaround from the second half of 2020, when Americans lifted the economy out of a pandemic downturn, helping the U.S. avoid what many economists worried would be a prolonged slump,“ the article reads. ”Consumers snapped up exercise bikes, televisions and laptop computers for schoolchildren during lockdowns. When restrictions were lifted, they rushed back to their favorite restaurants and travel destinations.

“And they kept spending, helped by government stimulus, flush savings accounts and cheap credit, even as inflation picked up. Faced with four-decade-high inflation last year, Americans outspent it. Through most of 2022, consumer spending growth exceeded price increases by about 2 percentage points.”

All that has changed, and quite dramatically. Adding to that are new fears among professional classes that job opportunities are drying up. Indeed, they are. The change in the yield curve, with rising short-term rates, has shifted the attention of big capital toward more immediate payoffs and away from long-term speculation. That means that there are plenty of jobs available in hospitality and food service but ever fewer jobs that credentialed people actually want: getting paid the big bucks to do nothing.

As an example, the openings for remote work have pretty much dried up. The salad days of 2020 and 2021 are likely gone forever.

The feeling of being economically trapped is sweeping over vast numbers of people. Tragically, most people have no idea who to blame or what to do about it, in any case. The entire system feels rigged these days, with far-distant elites running the world and utterly uninterested in what average citizens are going through. This isn’t only true in the United States but all over the world.

We’ve lived through a great pillaging, not only of our prosperity but also of basic rights to freedom itself. These days, we see a few victories in the courts here and there, but it’s not nearly enough to compensate the people or disempower the bloodless elites who have done this to us. There’s a path toward restoration, but it means doing exactly what the ruling class fears most: restore the Constitution and take away all power from the globalized bureaucratic elites who have so mismanaged the world.