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The Dying Dollar

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That’s a hell of a title for an article but it’s hard to argue with the points made in it, especially when you consider the games played with the Consumer Price Index (CPI) over the years:

The methodology of the Consumer Price Index used to be a fixed basket of goods, now the basket is dynamic, allowing them to take out goods that increased significantly in price and replace them with substitutes that have more modest price increases or even price declines. According to economist Peter Schiff, the original CPI methodology would today show an inflation rate of around 15 percent. 

That last figure seems correct when you look at the price increases of ordinary things in the USA that people buy every day, as opposed to iPads. And it’s ordinary people who get screwed the most and the fastest by inflation, which is a tax you can’t avoid:

The wealthy hold assets and debt so they’re relatively protected, but the middle and working classes face penury. Remember the World Economic Fund slogan “You Will Own Nothing and Be Happy”? That dystopian vision is what runaway inflation is accelerating us towards. Wage workers won’t be able to afford down payments on property, credit will be tightened and rates will be raised to combat inflation. 

I think we’re seeing that here in NZ also. One of the many reasons the young friends of my kids gave for voting Labour in 2017 was that they saw little hope of being able to afford a house much before they hit their forties. Now they don’t even want to talk about it, so bleak have the prospects become, although their parents assure them they’ll help out.

Back in the USA there are some geo-political realities that must be accounted for because of the US dollar’s status as the ultimate reserve currency:

It backs all but a handful of other currencies around the globe and as such, its depreciation can lead to depreciation of other countries’ currencies, compounded by those countries’ own central bank inflation. The reserve currency status of the dollar is chiefly responsible for America’s standard of living being as high as it is. The entire American economic model is built on the dominance of its currency. We are able to sustain a perpetual trade deficit with the world because of it. We export dollars and we get cars and electronics and food in return. On the fiscal side, inflation is a tax paid not just by Americans who hold dollars, but by dollar-holding foreign countries, companies, and citizens as well. 

Countries tolerate this trade-off because of the anti-inflation credibility built over the past 40 years by hawks at the Fed like Paul Volcker.

Ah yes. The Federal Reserve of the USA. With them lies the solution. There’s just two huge problems with them providing a solution.

First is that they’ve enabled this bullshit to happen in the first place. Sure, the Federal government, especially in the hands of the Democrats, have reached unseen levels of insanity with spending. But it would not be possible for them to do this were it not for the Fed. When it comes to inflation, it’s the Fed, stupid:

Figure 2 (below) shows Real M2, adjusted for inflation (with 1982-84 dollars serving as the base), from 1959 to the present day. Here too, we see the line take a vertical turn in 2020. If those graphs do not alarm you, they should.

There are other equally scary graphs in that link, of things like the Fed Balance Sheet and Funds Rate, covering the infamous Quantitative Easing and Zero Interest Rate Policy (ZIRP) of the last decade since the GFC. The QE back then did not cause inflation, despite fears that it would. Why the difference now?

That [2008-2014] money never entered the real economy and did not even count as part of M2.

By the end of Bernanke’s term in January 2014, M2 was $11 trillion. In over five years’ time, the money supply increased 42%.

Powell’s Fed, since March 2020, has superintended a 37% increase in M2 – in only a third of the time that it took Bernanke’s Fed to witness similar growth.

Second, all this is piled on top of an already terrifying debt level of $28 trillion, more than 100% of GDP, which means that it’s going to be almost impossible to repeat what Volcker did starting in 1979:

Despite historically low interest rates, the federal government is projected to have spent $300 billion this year on interest payments on the national debt. Even a mild increase in interest rates would increase government expenditures on interest payments by hundreds of billions of dollars. 

The Federal Reserve’s hands are tied, as evidenced by their decision to keep interest rates between 0.00 percent and 0.25 percent, even while removing “transitory” from their vocabulary. Increase interest rates quickly and significantly enough to curb inflation and the entire market melts down along with the federal government’s fiscal budget.

What then will Fed Chairman Powell do? My bet is nothing for at least another year:

[He} faces a Sophie’s Choice scenario: continue to allow inflation to spiral out of control by keeping interest rates low—which would result in all manner of civil unrest and possibly even a real insurrection—or raise interest rates, which would crash the stock market and force Congress to cut spending, ensuring the complete and total destruction of Congressional Democratic majorities, the likes of which the country has never seen.

So wait until the GOP takes control of Congress in 2022, possibly with large majorities, and let them take the hits along with Biden. But the Democrats might not care; Biden – and their own policies – are millstones around their necks that are drowning them right now. Perhaps losing in 2022 will be the best thing that can happen to the Democrat Party? Promise an end to the pain in 2024 with lots of soothing government programs and win it all back?

The first article ends on an even more cynical note than I’m capable of:

The more 3D printed suicide pods I see the less I believe in mere coincidence. What I do know is that the ultra-wealthy and the banks have the most to gain from this and they are the ones who have most encouraged the policies that have brought us to this. It seems that they are well-positioned to buy up the remaining assets of middle and working class Americans at fire sale prices, after they have finished setting fire to the economy. But then again, it could just be incompetence. That is one commodity that there is no scarcity of among those who occupy the commanding heights of power in America. 

One thing I can say with confidence is that the government will not act. It will do too little, too late. There isn’t the courage left in our political class to make hard decisions. There are no more Jimmy Carters. We have to begin thinking about what comes next. 

Lastly this article has more up-to-date figures, and a better way of framing the impact on the US fiscal budget from increased interest rates:

The federal government will spend around $413 billion in 2021 on debt interest alone, according to the Congressional Budget Office. Debt service was a comparably reasonable $197 billion in 2010.

But remember that is at about one percent interest. Each one-percent interest-rate increase costs another $413 billion. More precisely, each one-percent interest-rate increase costs American taxpayers another $413 billion (and climbing.)

If the Fed was serious and raised rates to five percent—which still may not be enough—that would be close to $2 trillion in interest the federal government would need to pay annually. That’s half of the entire federal budget. Americans will be outraged to discover that Social Security, Medicare, defense spending, infrastructure, and everything else will need deep cuts in order to pay interest on money long spent by craven, irresponsible politicians. 

Meh. Let the GOP deal with that; they’re always boasting about being better with budgets and spending than the Democrats. Let them cut all those areas in 2023 when they’re in charge of Congress. By the same token the GOP will have to hope that Biden refuses to sign such cuts, going against his grain as it would be, as well as letting him be the fall guy for those millions of Americans who think the President is in charge of this stuff.

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Written by Tom Hunter

December 30, 2021 at 1:03 pm

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