May 4, 2011
Incompetence is the Charitable Explanation of The Federal Reserve Board's BehaviorBy Fred N. Sauer
All who have a growing concern about a breakout of inflation may be happy to know that the Vice Chairwoman of the Federal Reserve, Janet Yellen, has some comforting words for you. Speaking at the Economic Club of New York, among other things she said U.S. monetary policy "continues to be appropriate." This means the Fed is going to continue purchasing the $600 billion of U.S. Treasury securities issue by the Treasury Department of the Obama Executive Branch of our government.
The academic name of this is quantitative easing. For working people, it is called printing money. This activity in lesser nations always results in inflation. If you need a definition of inflation, it is the most destructive tax that ever existed. It destroys the value of your labor and the value of everything you own that is denominated in dollars. And as income shrinks relative to selling prices, you get poorer and poorer. Then economic activity starts to decline just as it has in lesser nations.
For instance, Venezuela is the home of 30 million people with some of the largest oil reserves in the world. It is also, unfortunately for those people, the home of Hugo Chavez, an emergent socialist dictator who is printing a lot of Venezuelan "dollars" to pass out benefits to prospective loyal voters who have just given him dictatorial power for one year. Here are the rates of inflation for Venezuela for the last 5 years:
And the wreckage Hugo Chavez has created has even seeped into once growing areas of Venezuela's economy:
And so descends an economy with vast natural resources where all workers get poorer and poorer while their tyrannical government impoverishes their economy with inflation.
But, we don't have to worry about this, because Ms. Yellen is on the job: "Recent increases in prices of oil, grain and other commodities are 'unlikely to have persistent effects on consumer inflation' ... "
Let's see what the data shows. Here in America, we are provided with data that shows price increases in the first 4 1⁄2 months of 2011 as follows: Cotton has risen around 40%, Oil has risen around 20%, and Wheat has risen around 10%. These are reasonable proxies for food, energy, and clothing. They direct us to relevant parts of real personal consumption expenditures using 2010 data:
So in 2011 to date, we have extraordinary upward price pressure in Food, Clothing, and Fuel, which represent about 21% of personal consumption expenditures. And, here is what the CEO of the one of the world's largest companies by revenue had to say about this:
Our Ms. Yellen would only say that "...the key...is that the households and businesses don't expect inflation to take off in the long run."
And inflation today is a global phenomenon. Everywhere you go you will find it. It is rampant in what is now the world's second largest economy:
Here we find an excellent example how inflation causes its own acceleration. People think the prices are going up so they run to the store. The store anticipates they are coming so it raises prices some more. Just the expectation that prices are going to rise causes them to rise.
And the Chinese have their own opinion of exactly what the Federal Reserve's quantitative easing is doing to them:
As the Chinese grow frustrated the Fed's policy of quantitative easing, they agree with the rest of the world's belief that inflation is upon us.
So, have you heard people cursing when you were at the local gas station? Maybe you were the one cursing. My first experience was an HVAC repairman putting over $100 of gas into his van.
And consumers all over the world are getting clobbered by inflation:
Some well-placed institutional authorities here in the U. S. are also speaking out:
But unfortunately, Mr. Bullard does not have a vote on the Federal Reserve Board of Governors.
The head of the European Central Bank opines there is overwhelming evidence in every relevant corner of the world about inflation rising to unacceptable levels:
You don't have to be a genius or even a very practical person to process all this information and reasonably conclude that current and emergent inflation are a real problem. In fact, we can look at our own economic history during the period of 1970 to 1985 and see what painful economic events result from excessive inflation. This is the best road map for the Federal Reserve Governors to use in predicting what might be the impact of quantitative easing.
And the similarities between the current situation and the period from 1970 to 1985 have raised alarms with some influential investors. One of them operates the largest bond fund in the country. And what he has done is ominous:
But, the Fed doesn't seem overly concerned about other governments and private investors' reaction to the Fed's policies.
So, in the face of this torrent of information about inflation that the world media is reporting, the Federal Reserve Governors got it exactly wrong.
Instead of making a small hedge against actual and incipient inflation, the Fed will continue to make a huge bet against deflation, which no one sees as a threat. A rational and prudent person would recognize the risk of inflation, pursue a policy hedging against it by not printing money, and raise interest rates.
If they are wrong about there being no damaging consequences from the quantitative easing, they could ignite a 1970's-type inflation, or worse.
On the other hand, what damage could result from a small increase in interest rates and the termination of quantitative easing now?
Incredibly, as of the week ending April 6, 2011, U.S. Treasury Securities held outright by the Federal Reserve on the Fed balance sheet amounted to $1.345 trillion.
The Debt Held by the Public at the end of the last fiscal year of the Bush Administration (9/30/08) was $5.808 trillion. By 4/12/11, the Debt Held by the Public had increased to $9.652 trillion, a $3.844 trillion increase. Therefore, the Federal Reserve basically holds 35% of Obama's deficits on its balance sheet. This 66%, or $3.844 trillion, increase, in the amount of Publicly Held Debt in just 3 years is astounding in light of the fact that it took over 232 years of our nation's history to reach the $5.808 trillion level.
Who is doing this to us? Here are the current members (with two vacancies) of the Board of Governors of the Federal Reserve System:
These people have outstanding academic credentials and extensive institutional and governmental service. But in the aggregate, they are insulated from the real world that most people know. It is incomprehensible that such an extraordinary group of bright people can digest all the available empirical information, reach the wrong conclusion, and just press on with the huge bet against deflation and no small hedge against inflation. And to think, these five people have no superior oversight.
This is bizarre! But, perhaps they are just too beholden to some socialist ideology about our economy. For as Lenin said, "[t]he way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."
Fred N. Sauer is an American patriot, St. Louis resident, and businessman whose blog can be found at www.americasculturalstudies.com.