The American people are going to be paying a high price for the 2024 U.S. presidential election and probably for years. I’m not speaking of the results which astonished the world; I’m speaking of the attempt to game the intended results that began more than a year earlier.
It won’t come in the form of higher taxes. It will be inflation, which is another form of taxation.
The problem of dollar devaluation could have been over by now but no. All evidence is that the Biden administration, in service of larger interests and in accommodation of Congressional spending, deployed the printing presses starting in 2023 as a means of assuring its reelection chances. It did not work and now we are stuck with the bill.
To be sure, there was never an overt policy but what I said above is a reasonable interpretation of why the Federal Reserve reversed its stance on the money spigot in 2023 and following.
There was never an excuse to do so. Inflation had already ravaged producers and consumers. The first priority was getting it under control. Instead, they went the other way, thus risking a second wave, which might just be getting going.
The latest producer and consumer price reports look simply awful, a full-on reversal of downward trends to reveal a renewed problem.
Now that Trump is taking office, the corporate media and the Bureau of Labor Statistics is suddenly being more forthcoming about the problem. Inflation is running at 3 percent or 50 percent above target. The low-end estimate of purchasing power losses since 2020 is 23 cents on the dollar. The real-time estimates are closer to 30 cents. The reality depending on what you buy is far higher.
Let there be no confusion about the source of the problem. It is not gouging grocers. It is not greedy consumers. It is not opportunistic suppliers. It is not even restrictions on energy production.
It is the money printers in D.C. who have deployed their powers to print in service of a Congress that has spent without limit, as if the resources will all appear just like magic. The flood of debt has granted the Fed an enormous portfolio available for playing politics.
Again, one only needs to observe the relationship between M2, the most accurate rendering of the money stock we have, against the CPI. The relationship is impossible to deny both in terms of the data and also the theory. It’s not complicated really but requires just a bit of thought.
Thomas Massie gives the example of 10 apples and 10 dollars, in an economy where all money is spent. Each apple costs a dollar. If the money stock is doubled, each apple costs two dollars. And so on. It’s a simple example but gets the point across. In the real world, there is a lag of the effect, between 12 and 18 months. In this case, the lag hits the 12-month mark almost exactly.
- “I know not why we should be so fond of paper money; it has no intrinsic value, and is not money, but a promise to pay money.”
- “Paper money is like dram-drinking, it relieves for a moment by deceit.”
- “The evils of paper money have no end. It is a swindle upon the people, and the foundation of all other swindles.”
For a long time, between 1933 and 1974, it was illegal even to own gold for investment purposes. That changed and then the United States started minting gold coins again but not as part of official money. They are collectibles, very beautiful but not usable as legal tender. The link between U.S. monetary policy and gold is entirely broken.
Ideally it would be restored. Problem: no one really knows how this could happen. There is no real viable plan to get from here to there. The United States would have to own vast quantities of gold and there would need to be a fixed ratio of exchange, and this would have to pertain not only in the United States but also abroad. The decision alone would cause a mass repatriation of dollars and exhaust the gold stock in a day.
In short, the practical problems associated with restoring a genuine gold standard are inconceivably huge. An even bigger problem is mustering the political will to do it. Both parties benefit from the paper-money system and the flexible monetary policy, for which the U.S. citizen ultimately pays the highest price.
There are other paths toward sound money. The money stock could be instantly frozen, but that would induce deflation on a scale that would be seen as intolerable. I happen not to think this would be a bad thing. A growing purchasing power of money would benefit the people. But the expert class disagrees, warning of a terrible recession. And the reality would likely back that prediction.
The trouble is that the U.S. economy and, really, the world economy, are deeply addicted to debt finance. Putting a stop to that would be very painful. The political will to do that simply is not there.
The genuinely constitutional solution would be to return all responsibility for monetary policy to the states alone, abolishing the central bank entirely. The U.S. Treasury could mint its own currency but that poses dangers of its own. Whether and to what extent those dangers would be as bad as the Fed now is another question.
In the near term, the solution is simply to force the Fed to stop playing politics with its monetary powers. The interest rates should be completely set free from Fed intervention. Open market operations and debt buying and selling should stop entirely. The rest would take care of itself.
Economists I respect suggest a quantity rule that would tie monetary policy to output. While that solution looks good on paper, measuring output accurately is no longer such an easy task. The GDP numbers as they stand are very sketchy and so are the numbers on the inflation rate itself. Without accurate numbers, the capacity of the Fed to conduct monetary policy in any scientific manner pretty well evaporates.
Let us hope that the new Trump administration eventually gets around to dealing with the problem of paper-money inflation. It might have to do so given the genuine risk of a second wave of inflation that could literally doom its political legacy.
I hope someone in the Trump administration is listening: at minimum the Fed must stop its quantitative easing and commit itself to a policy of monetary stabilization at the very least. Yes, we could face a technical recession and that is politically dangerous. But a continuation of inflation is even more so.
